Chapter 5 +16. Directors – Duties, powers and Remuneration Flashcards
1
Q
List the 7 directors’ duties under the CA2006
A
- To act within their powers in accordance with the company’s constitution (and to use those powers for proper purposes) (s. 171)
- To promote the success of the company (s. 172)
- To exercise independent judgement (s. 173)
- To exercise reasonable care, skill and diligence (s. 174)
- To avoid conflicts of interest (s. 175)
- Not to accept benefits from third parties (s. 176)
- To declare any interest in proposed transactions or arrangements (s. 177)
2
Q
List 3 factors likely to be considered when adhering to s172 of the Act
A
- The likely consequences of any decision in the long term
- The interests of the company’s employees
- The need to foster the company’s business relationships with suppliers, customers and others
- The impact of the company’s operations on the community and the environment
- The desirability of the company maintaining a reputation for high standards of business conduct
- The need to act fairly as between members of the company
3
Q
What is the purpose of Directors’ and Officers’ insurance?
A
- The core purpose of a D&O policy is to provide financial protection for directors against the consequences of actual or alleged “wrongful acts” when acting in the scope of their duties.
These include:
– breach of trust
– breach of duty
– neglect
– error
– misleading statement
– wrongful trading
- The D&O policy will pay for defence costs and financial losses.
4
Q
Provide 4 reasons why remuneration is a CG issue?
A
- Companies need to attract and retain talented executives.
- Remuneration incentives can be used to motivate executives to achieve better results for the company.
- Those incentives need to be aligned with the interests of shareholders and promote the success of the company
- Directors should not be rewarded for failure.
- Directors should not be able to decide or influence their own remuneration.
- High levels of executive pay undermine public trust in large businesses.
5
Q
List 5 issues that might arise when linking reward to performance
A
- Selecting the right performance measures
- Setting the thresholds at which rewards are paid
- Deciding whether to place a cap on any rewards under the incentive and determining the level of that cap
- Ensuring that the targets used for short-term incentives like the annual bonus promote the long-term success of the company
- Ensuring that the targets used for incentive schemes do not promote bad behaviour
- Preventing executives who did not perform well from piggy-backing on the success of their colleagues
- Preventing the ‘legacy effect’
- Executives may develop an expectation that they should receive annual rewards regardless of the actual performance of the company
- Designing a scheme that will be satisfactory to shareholders
6
Q
Provide 3 drawbacks of using a share option scheme as part of a remuneration package
A
- Share options reward holders for increases in the share price, when this may not always relate to the executives or indeed the company’s performance (ie ‘Bull’ market )
- When the stock markets are in a bear run and prices are declining, share options lose value, and may even become worthless, irrespective of executives or company’s performance.
- Option holders do not benefit from dividend payouts.
- The market price of a company’s shares may fall below the exercise price for its share options (‘Underwater’)
- Executive directors may prefer a long-term incentive scheme involving the grant of shares, since the shares will always have some value once they have vested.
7
Q
List 3 items that should be included in the remuneration policy for a quoted company
A
- A table describing each component of the remuneration package
- A statement of the principles which would be applied by the company when agreeing the components of a remuneration package for a new director.
- A description of any provisions contained in any director’s service contract or letter of appointment which could have an impact on remuneration payments or payments for loss of office available.
- A bar chart which indicates the maximum and minimum amount which would be payable to each executive director under the policy in the first year and the amount that would be payable to them for on-target performance in the first year.
- An illustration, in relation to performance measures or targets, of the maximum remuneration of each executive director
- The company’s policy on notice periods under directors’ service contracts and the principles on which exit payments will be made, including how they will be calculated, whether the company will distinguish between different types of leaver (e.g. good leavers and bad leavers) or the circumstances of exit and how performance will be taken into account.
- A statement on how pay and employment conditions of employees who are not directors was taken into account in setting the directors’ remuneration policy,
- A statement on whether and, if so, how shareholders’ views expressed to the company were taken into account in formulating the directors’ remuneration policy.
8
Q
List 3 items that should be included in the implementation report for a quoted company
A
- For each director, a detailed summary of any performance conditions to which any entitlement of the director to share options
- An explanation as to why performance conditions were chosen
- A summary of the methods to be used in assessing whether any such performance conditions are met and an explanation as to why those methods were chosen
- If any such performance condition involves any comparison with factors external to the company a summary of the factors to be used in making each such comparison
- If any of the factors relates to the performance of another company, of two or more other companies or of an index on which the securities of a company or companies are listed, the identity of that company, of each of those companies or of the index
- A description of, and an explanation for, any significant amendment proposed to be made to the terms and conditions of any entitlement of a director to share options or under a long term incentive scheme
- If any entitlement of a director to share options, or under a long term incentive scheme, is not subject to performance conditions, an explanation as to why that is the case.
9
Q
What are the rules relating to the remuneration policy of a quoted company?
A
- The annual rem report of a quoted company must be put to an annual vote by shareholders at the general meeting at which its report and accounts are laid (usually the AGM) (CA2006, s. 439).
- If resolution defeated, the directors must put the existing directors’ rem policy or a revised policy to a vote at the next meeting at which accounts are laid, if they have not already done so earlier (CA2006, s. 439A(2)).
- A quoted company cannot make any payments to a director unless they are consistent with the latest policy approved by shareholders or the payment has been specifically approved by shareholders (CA2006, ss. 226A and 226B).
- The directors must invite shareholders to approve their policy at least once every three years whether or not it has been revised and must obtain shareholder approval for any revised policy before they can make any payments under that new policy. (CA2006, s. 439A)
- If the annual advisory vote on the directors’ remuneration report is defeated, the directors must put the directors’ remuneration policy (which could be a new policy or the existing policy) to a vote either at the next meeting at which accounts are laid or an earlier meeting (CA2006, s. 439A).
- The policy that shareholders are invited to approve must be a policy that has been approved by the directors either as part of the directors’ rem report or separately as a revised policy (CA2006, s. 422A).
10
Q
Explain the principles of malus and clawback
A
- Remuneration schemes and policies should enable the use of discretion to override formulaic outcomes.
Include provisions that enable company to recover and/or withold sums or share awards and specify when appropriate to do so
Provision 37, UKCG code
- ’malus’ provisions allow the company, in specified circumstances, to forfeit all or part of a bonus or long-term incentive award before it has vested and been paid (also known as ‘performance adjustment’); and
- ’clawback’ provisions allow the company to recover sums already paid.
- the current market standard triggers for malus and clawback are gross misconduct or misstatement of results (Investment Association’s Principles, Nov 2020)
11
Q
What must the (Annual) Directors remuneration report include?
A
- Rem Policy
- Annual remuneration report/ implementation report (must be audited)
12
Q
What is a quoted company?
A
Includes any UK company whose equity share capital:
* has been included in the official list (includes UK
companies with either a premium or standard listing whose shares are traded on the main market of the London Stock Exchange);
- is officially listed in an EEA state (for example, a UK company whose shares are quoted on the Paris Bourse); or
- is admitted to dealing on either the New York Stock Exchange or the exchange known as Nasdaq
13
Q
Requirements of a remuneration policy (development and implementation)
A
- Part of Annual ‘directors’ rem report if wants to approve new policy or renew existing policy-If omitted, must state when policy approve and where copy of policy can be found (website)
- Directors must be paid in accordance with directors remuneration policy
- SH must approve rem policy at least once every 3 years + if any revisions
- SH must approve policy that has been approved by directors as part of rem report or as revised doc
- Rem policy available on companies website
14
Q
Content of directors remuneration policy
A
- Table describing components of rem package
- Statement of principles applied when agreeing components of rem package
- Provsions which may impact remuneration payments
- Maximum and minimum paybale to directors under polucy
- Performance measures/ targets, max remuneration assuming 50% share growth
- Policy on notice periods
- How pay and conditions of employees were taking into account
- If and how SH views were taken into account
15
Q
Content of annual remuneration report/ implementation report
(declarations/ reporting that must be made in relation to remuneration)
A
- Annual vote is advisory
- Strategic rationale for executive directors remuneration policies, structures and performance metrics
- Why remuneration is appropriate using internal and external measures including pay ratios and pay gap
- Summary of major changes and the exercise of discretion
- Single total figure table (total figure for annual remuneration compare to previous year)
- Total pension entitlements
- Scheme interests awarded
- Payments made to previous directors
- Director’s shareholdings and share interests in the company
- Performance graph and table
- Percentage change in remuneration of the CEO
- Relative importance of spend on pay
- Description of how the company intends to implement the approved remuneration policy in the following year.
- Details regarding the membership of the remuneration committee and any advisers.
- Statement on voting (votes for and against last rem resolution)
