MM&K news 2019

  • June 25, 2019

    Update on the changes to the taxation of termination payments

    Background

    A series of reforms have been introduced to the taxation of termination payments from 6 April 2018 following technical consultation. Although the reforms started out as simplification measures, they now “clarify and tighten” the taxation of such payments. In other words, the legislative changes effectively enlarge the scope of taxation of termination payments.

    Position prior to 6 April 2018

    Termination payments (which were not taxed under any taxation provisions) made to employees as compensation for loss of office were free of income tax and national insurance contributions up to £30,000.

    The tax treatment of a PILON (payment in lieu of notice) depended on the contract of employment. If the employment contract provided for the employer to make a PILON, then the PILON was fully taxable. Conversely, if the employment contract made no provision for PILON, a PILON payment effectively constituted a payment of damages for breach of contract and could therefore be paid tax-free up to £30,000.

    Foreign Service Relief was available to employees who have spent periods working abroad and were non-UK tax resident for part of the period covered by the termination payment. The Foreign Service Relief is effective after taking into account the £30,000 exemption.

    Position from 6 April 2018

    All PILONS, whether or not there is a PILON clause in the contract of employment, are taxed as earnings.

    Termination payments are now split into two elements: (a) Post-Employment Notice Pay (“PENP”), and (b) the remaining balance. PENP represents the amount of basic pay the employee would have received had their employment been terminated with full and proper notice being served, to be determined by a statutory formula. This is subject to income tax and NICs.

    The remaining balance, to the extent not subject to tax as remuneration or payment for restrictive covenants, is considered for tax relief (as statutory redundancy payment or compensation for loss of office, etc.). The £30,000 exemption is still available to relieve against the payment of the remaining balance. Any payment in excess of the £30,000 (“Excess Remaining Balance”) is subject to income tax but not national insurance contributions (NIC) as was the case prior to
    6 April 2018.

    The exemption from tax for payments for injury and disability does not apply to injury to feelings, whether on or before termination of employment, except where the injury amounts to a psychiatric injury or other recognised medical condition.

    Foreign Service Relief has been removed for employees who are tax resident in the UK in the year in which their employment is terminated. However, the Foreign Service Relief continues to be available for employees who are non-UK resident in the year of termination.

    Changes from 6 April 2020

    Another significant proposed change to the taxation of termination payments is the alignment of income tax and NIC liabilities.

    The government had announced that the NIC legislation would be changed so that employer’s Class 1A NIC would apply to the Excess Remaining Balance (see above). This change was initially intended to take effect from 6 April 2019.

    The government recently announced that this major change will be delayed and will now take effect from 6 April 2020.

    For further information contact Michael Landon.

  • June 20, 2019

    MM&K partners with The London Stock Exchange, First Flight and Board Excellence in a seminar for AIM companies on directors’ pay, governance and board effectiveness

    On 20 June, MM&K Chief Executive, Paul Norris made a presentation at The London Stock Exchange (LSE) to an audience of AIM companies and advisers on designing fit-for-purpose remuneration policies. He was joined by Naomi Scott-Mackie a consultant in First Flight (non-executive search) and Kieran Moynihan (Managing Partner in Board Excellence) to reinforce the message that developing and maintaining a successful remuneration policy requires an independent, robust and well-functioning Board, operating within a sound governance framework.

    An effective Board and a sound governance framework are essential to the overall success of any business, but independent non-executive directors (NEDs) and good governance are particularly important in the context of executive remuneration. AIM companies are not “quoted companies” and so are not bound by the Companies Act strict remuneration disclosure requirements. As AIM companies are not listed on the main board of the LSE, the UK Corporate Governance Code does not bind them. However, AIM companies are required to adopt a corporate governance code (many adopt the QCA code) identify it on their web-site and explain how they have complied with its principles. Instances of non-compliance and the reasons for it, must also be identified.

    Corporate governance is catching up with AIM but with a lighter touch than for quoted companies listed on the main board. In an environment of lighter regulation (in which AIM operates) it becomes even more important to demonstrate to investors and other stakeholders  how the Board takes account of their interests and that the company is being run sustainably for the benefit of all its stakeholders.  This includes developing a remuneration policy that is demonstrably fit-for-purpose because it is competitive, supports the business strategy and is affordable (taking account of the economics of the business and stakeholder requirements).

    There are more than 1,400 AIM companies. Some of them are large corporations, which could (there are those who might say should) be listed on the main board. Many are early-stage, growing companies with large appetites for cash to fund their growth but few of the resources available to their larger peers. They all need good relations with their stakeholders. What amounts to fit-for-purpose remuneration for one AIM company will not necessarily be fit-for-purpose for another. Fortunately, flexibility exists to tailor a good result.

    The seminar was well-attended and there was a lively discussion after the three presentations concluded.  It is clear that this combination of complementary presentations struck a number of chords with the audience. MM&K is pleased to have participated in this event in partnership with the LSE, First Flight and Board Excellence and looks forward to repeating the experience. The seminar slides are available here.

    MM & K Limited advises extensively among AIM companies. For more information about executive remuneration, please contact: Paul Norris

  • June 20, 2019

    Do your malus and clawback provisions need updating?

    Introduction

    Malus and clawback provisions in incentive plans were originally introduced for financial institutions, mainly in response to the financial crash in 2008.  However, they have now become common for LTIPs and executive bonuses in all sectors.  They originally applied in very limited circumstances, such as misstatement of financial results or gross misconduct by the participant, but the range of events which trigger these provisions has been gradually expanding.

    Meaning of Malus and Clawback

    The term “malus” (except in the context of gardening) has become used broadly as an opposite to “bonus”.  It refers to the downward adjustment of incentive awards before they become payable – or before they vest or become exercisable in the case of LTIP awards or share options.

    In contrast, “clawback” means that participants are required to pay back all or some of an amount they have already received, for example the shares transferred on vesting of an LTIP award.

    Regulatory requirements

    Certain companies regulated by the FCA or PRA are required to include provisions which make variable remuneration awarded to material risk takers subject to clawback.

    The July 2018 version of the UK Corporate Governance Code, which applies to all companies with a premium listing, states (paragraph 37) that “Remuneration schemes …… should also include provisions that would enable the company to recover and/or withhold sums or share awards and specify the circumstances in which it would be appropriate to do so”.

    The November 2018 Investment Association (IA) Principles of Remuneration (section 4) require remuneration structures to “include provisions that in specific circumstances, allow the company to:

    • Forfeit all or part of a bonus or long-term incentive award before it has vested and been paid (‘performance adjustment’ or ‘malus’); and/or

    • Recover sums already paid (‘clawback’)”.

    Directors’ remuneration reports must set out the company’s policy on malus and clawback and, of course, the actual provisions need to comply with that policy.

    Typical circumstances

    The relevant regulations do not spell out the circumstances in which malus and clawback provisions should apply.  The most common triggers used by companies are:

    • material misstatement of the company’s results; and

    • gross misconduct by the participant.

    The IA now states that “remuneration committees should establish a more substantial list of specific circumstances in which the malus and clawback provisions could be used”.

    In practice, the additional reasons differ depending on the companies’ sectors and individual circumstances.  The ones which we see most often are:

    • material error in the information on which the size of awards or the extent of achievement of performance conditions was based;

    • material corporate failure;

    • material risk management failure;

    • serious reputational damage or material loss caused by the participant’s actions; and

    • material contravention by the participant of a company’s ethics and values.

    How clawback works

    Malus provisions are relatively easy to implement because no amount has been paid to the participants, and so the size or nature of the existing awards can be adjusted.

    In the case of clawback, however, amounts need to be recovered from participants.  For those who remain employed, this may be done by reducing other amounts due to them, for example by reducing future bonus payments or the size of unvested LTIP awards.  If the participant has been dismissed, it may be very difficult in practice to recover anything.  Moreover, the participant must give written consent to any deductions from wages.  For these reasons, it is advisable to require employees specifically to agree to the malus and clawback provisions in writing at the time when an award is first granted.

    Where an amount is clawed back, it may not be possible for a participant to recover tax from HMRC for the repayment – there is still uncertainty about the tax law in this area.  Many companies therefore only seek to recover the net of tax benefit received by the participants.

    Period of clawback

    UK financial institutions are required to make variable remuneration awarded to material risk takers subject to clawback for a minimum of seven years from the date of the award, or 10 years for certain senior managers.

    For other companies, the period varies considerably.  Some companies do not express a time limit, which may lead to a successful challenge based on proportionality.  Where a time limit is stated, clawback periods vary significantly from three years after the original grant date of an award up to five years after an award has vested or become exercisable.

    Many LTIPs now provide for a two-year period after the vesting date, during which the participant is obliged to continue to hold the shares acquired, at least the net number after deducting any exercise price or tax liability.  For many companies, it would be convenient for the potential clawback period to coincide with the holding period, as implementing clawback would be made relatively easier.  However, in others it may take many years for true financial performance to become certain, and in these cases the clawback period should be rather longer.

    Procedures

    Companies should ensure that malus and clawback policies, including principles behind the use of discretion, are clearly documented.  The IA Principles also state:

    “It is also very important that the documentation for the LTIP and bonus rules, the remuneration policy and employee contracts are all consistent. Any communication around the payment of bonuses or LTIPs should also be consistent with and not contradict the malus and clawback provisions. Remuneration committees should develop clear processes for assessing executives against either malus and clawback criteria or how they will exercise discretionary clawback. Demonstration of process and evidence of decision-making is very important in the event that clawback is contested.”

    We recommend that companies should review their current malus and clawback arrangements to ensure that they are fair and consistent and are clearly communicated to the participants potentially affected by them.

    For further information contact Michael Landon.

  • May 29, 2019

    Top Dogs and Fat Cats

    This new book from the Institute of Economic Affairs was published on 8 May 2019. It is a collection of essays on executive pay, providing fascinating insights into the nature of high pay and making a compelling contribution to one of today’s most contentious issues.

    The book is edited by Professor Len Shackleton of the University of Buckingham who has written the introduction which provides a critique of the top pay debate and summarises the individual contributions to the book.  He has also personally contributed an article on the consequences of “getting tough” on top pay. The contributors are a mixture of academics, practitioners and leaders of institutions.

    Below is a synopsis of each contributor’s essay.

    Why free marketeers should worry about executive pay

    Why free marketeers should worry about executive pay,  by Luke Hildyard, Director of the High Pay Centre. The HPC has a view that the greed of executives in large corporations has led to ever increasing pay differentials which are unjustifiable and damaging to society.

    This article begins the discussion by setting out the indictment against excessive CEO pay. Hildyard points out that executive remuneration in the UK has risen far faster than that of ordinary workers in recent decades, and claims that this has occurred without any corresponding improvement in company performance.  He dismisses the idea that international competition for rare talent justifies high CEO pay, pointing out that most firms promote their CEOs from within the company. His analysis suggests that long-established successful businesses (as opposed to entrepreneurial start-ups) are built on effective organisational systems rather than the abilities of the current incumbent CEO, who therefore has in many cases little influence over a company’s success. He draws attention, too, to elements of ‘crony capitalism’ that give many big businesses protected markets through their strong links to government.

    Hildyard suggests that the ultimate providers of capital – the beneficial owners of company shares – would like to see more modest levels of executive pay, but they are separated from the operation of corporations by a web of financial advisers, asset managers and pension funds. These intermediaries are themselves highly paid and see no problem in paying company executives generously.

    Listed companies are required to have remuneration committees which are independent of the company’s management structure, but members of these committees are themselves well-remunerated, are from similar backgrounds to company executives and often hold, or have held, executive posts at other companies. The committees are advised by consultants who (he claims) devise complex remuneration schemes to justify their existence, and act to bid up pay.

    In Hildyard’s view, this unsatisfactory situation is undermining the case for capitalism. Free-marketeers should be worried about this, and he supports reforms including worker representation on boards and remuneration committees, more detailed disclosure of pay structures and a requirement for institutional investors to consult ultimate beneficiaries on pay issues.

     

    Understanding the facts about top pay

    Understanding the facts about top pay,  by Damien Knight and Harry McCreddie, of MM&K.  This essay draws from the findings of a previous article we have published in our e-news.  The text of the article can be found here.

     

    The right and wrongs of CEO Pay

    The right and wrongs of CEO Pay,  by Alex Edmans, Professor of Finance at London Business School. Drawing on his own and others’ academic research, he demolishes a number of myths associated with the case against CEO pay. For example, he shows that, contrary to popular belief, CEOs who perform badly do suffer financially – though he points out that it is their wealth rather than their income which is affected, because much of their remuneration is in company shares and share options which lose value with poor performance. While Edmans believes strongly in the reform of company pay, he argues that disclosure of CEO/average pay ratios (a feature of the Government’s policy) can lead to inappropriate conclusions and have unintended consequences which may harm workers. For example, firms may outsource low-paid work to improve their showing. Edmans argues that reform efforts should focus on the structure of pay schemes, rather than the level of chief executive pay. Current pay schemes are complex, opaque and encourage short-termism. In particular, he argues that the use of LTIPs (Long-Term Incentive Plans) allows for ‘gaming and fudging’. He advocates instead that pay should simply be in cash and shares with a long holding period. If shares can at the same time be awarded to employees, they will gain in line with CEOs, which will help address concerns about fairness.

     

    What conclusions can we draw from international comparison of corporate governance and executive pay?

    What conclusions can we draw from international comparison of corporate governance and executive pay?  by Vicky Pryce, Chief Economic Adviser at the Centre for Economics and Business Research.  In her chapter, Vicky Pryce examines high executive pay in an international context. She points out that the phenomenon of rising pay for top executives is found in many countries, not just in the US and the UK. In continental Europe she highlights Germany. Large German companies are often held up as a good example of corporate governance, with wider stakeholder interests, including employees, represented on supervisory boards. Many British commentators argue that such representation will tend to inhibit excessive pay awards.

    However, as Pryce points out, CEOs of some leading German firms are paid extremely generously. She puts this down to the need to compete for international talent. Pryce also notes that, while the make-up of remuneration (the mix of salary, bonuses, shares and share options and so on) seems to differ in different parts of the world, high executive pay is also becoming a feature in Asia and Africa. She further points out that in some countries, for example China, recorded pay may understate the advantage executives enjoy from employment, as they also have access to a range of other benefits.

    Pryce notes that there is considerable opposition to excessive executive pay in many countries, although opinion polls suggest that antipathy is, perhaps oddly, rather less marked in those countries where executive pay is highest. Governments have been inhibited in their responses, she suggests, because they are concerned that precipitate action might produce little gain. International cooperation might encourage them to overcome their scruples, but so far this has been limited to some minor European Union initiatives.

     

    Two kinds of top pay

    Two kinds of top pay,  by Paul Omerod, an economist, author and entrepreneur, who is currently a visiting professor in computer science at UCL. In his chapter, Paul Ormerod tackles the differing reasons for the high pay received by entrepreneurs, top sports and entertainment stars (which is in his view acceptable) and by executives of large corporations (which isn’t). Entrepreneurs provide a product or service which did not previously exist, and are thus able to secure monopoly profits, at least until competitors produce something equivalent or superior. These high returns (whether in salaries or in personal wealth through share ownership) are a necessary stimulant to invention and innovation. Top athletes, artists and performers possess unusual talents which have been increasingly rewarded in recent decades as advances in communications technology have created worldwide markets for their services. But their highly visible achievements typically require exceptional personal effort and are not subject to great popular resentment. By contrast, Ormerod argues, executive pay has risen for reasons which have little to do with improved performance and exceptional individual effort. Drawing on network analysis, he argues that board opinions in favour of high pay have spread for reasons which defy traditional notions of rational, optimal behaviour. Networks of non-executive directors, management consultants and remuneration experts have in effect facilitated successful rent-seeking by CEOs.

     

    Top pay for women

    Top pay for women,  by Judy Z. Stephenson and Sophie Jarvis. Stephenson is the David Richards Junior Research Fellow at Wadham College Oxford; Jarvis is Head of Government Affairs at the Adam Smith Institute.

    Stephenson and Jarvis discuss the position of women in the top pay debate. While they recognise that women appear to be under-represented among top earners, they resist simplistic explanations in terms of discrimination and victimhood. They point out that the gender pay gap is widely misunderstood to involve women being paid less than men for the same work, when it is rather that men and women do different jobs, or work different hours, or have less continuous work experience. While this is partly the result of different choices and preferences, these are themselves gendered and reflect social, family and cultural expectations which are difficult to change. In an illuminating analysis, Stephenson and Jarvis see the labour market as essentially an ‘information market’ concerning job opportunities and workplace behaviours. Improving the flow of information to women is an essential element in improving employment trajectories and the possibility of higher pay. This may also be an analysis which has relevance to ethnic pay gaps: many ethnic groups are similarly under-represented in high-paying jobs. Stephenson and Jarvis welcome publication of gender pay gap data as a step towards improved information flows, while cautioning against ‘positive discrimination’ policies such as board quotas. The end goal should always be equality of opportunity rather than forced equality of outcome.

     

    Public service or public plunder

    Public service or public plunder,  by Alex Wild, a Director at Public First, a research and campaign consultancy, previously Research Director at the Tax Payers’ Alliance. Wild opens the discussion on the public sector, where the arguments for limiting high pay are apparently clearer. Wild points out that, particularly taking pensions and other benefits into account, lower-paid workers do markedly better in the public sector than in the private sector. But top earners in the public sector are paid substantially less than top earners in the private sector. However, few public sector jobs are directly comparable to those in the private sector. There are very limited opportunities in the public sector for independent judgement and actions, as politicians inevitably determine broad policy. There is also much less risk for people working in the public sector, as in most cases predetermined revenue comes from the government rather than the consumer. Senior civil servants, local authority chief executives and similar functionaries face many problems, but they do not operate in the same sort of competitive environment as that faced by company CEOs. It is therefore appropriate that they are paid less, though there should probably not be strict pay ratios or upper limits on public sector pay. Wild recognises, though, that the distinction between public and private is not as clear-cut as is often assumed. There are public sector leadership roles which do face competition, and private sector jobs which nevertheless have a close symbiotic relationship with the public sector. Here it may be appropriate to apply different criteria when determining pay.

     

    Are vice-chancellors paid too much?

    Are vice-chancellors paid too much?  by Rebecca Lowe, the Director of FREER, and liberal thinking think tank, and a Research Fellow at the Institute of Economic Affairs.  Lowe enlarges the public/private debate by looking at the specific problem of the pay of university vice chancellors, who straddle the two sectors. As so many people now have experience of university, and there is great concern over the levels of debt which graduates have accumulated, it is not surprising that the pay of vice-chancellors and other key staff has attracted considerable (perhaps disproportionate) attention, with the Office for Students now having a virtual power of veto over the pay of senior staff. Rebecca Lowe examines the issues in her chapter. Lowe points to the considerable range of institutions in the UK higher education sector, and suggests that they should not all be treated the same, whether in pay terms or anything else. She would prefer a formal segmentation of tertiary education as is found in some other countries. She notes that vice-chancellors are not particularly well paid in relation to their counterparts in the US, Canada or Australia, but points out that the roles in different countries may not be completely equivalent. Vice-chancellors are, however, paid reasonably well in relation to other staff in their institutions and Lowe argues against letting pay rip at the top end. While UK universities are less directly dependent on the public purse than they used to be, so long as significant government funding supports higher education it is reasonable that we should have special expectations about the way they are run, and how their staff are remunerated.

     

    Getting tough on top pay: what consequences

    Getting tough on top pay: what consequences, by Len Shackleton.  Professor Shackleton draws the themes together by considering the appropriate response to calls for action to rein in high pay in UK business.

    He looks at various proposals.  First Government policies to use “naming and shaming” as a soft pressure for companies to reduce pay – in particular the reporting of the pay ratio between CEO pay and employee pay quartiles (required of quoted companies with 250 or more employees by the 2018 disclosure regulations), and the publicising by the Investment Association of shareholder resolutions which obtain less than 80% of votes at the AGM.  The regulations also require companies to report the reasons behind increases in the ratio and explain how the ratio is justifiable.  Shackleton is not opposed to these measures, but feels that the majority shareholders will have little interest in them and they could have negative consequences such as outsourcing, delisting or going private, or changing the structure of CEO pay by reducing the proportion of variable pay or increasing benefits.

    Next he reviews proposals to put workers on the board.  He says that this has not been effective in restraining top pay in Germany and France and Labour Party plans to require one third of board positions to be reserved for employees are as much about introducing trade union influence to the board.  He thinks the measure will curb company growth.

    He turns to the idea of executive pay caps.  Already public sector salaries above £150,000 have to be signed off by the Cabinet Office.  The Labour Party is planning a cap on salaries in companies which benefit from Government contracts.  Shackleton questions the practicality of this and points out the negative impact for Government procurement.

    He believes that squeezing top pay will have a negative motivational effect on middle management, especially in organisations which employ scarce professional skills.  It could also have a serious effect on the UK’s ability to recruit top talent from aboard.  He points out that in 2017, 40% of FTSE-100 companies were headed by non-UK nationals.  The UK and France had less than 10% of top companies with non-national CEOs.

    He sees great danger in the general perception that top pay needs to be curbed and a risk that any control will creep into other aspects company management.  Governments need to be careful in how they react to populist calls for action, and giving governments the power to fix pay ratios or even pay caps brings dangers which are not sufficiently discussed by those demanding action.  He finds it disappointing to see so many of those ostensibly favouring free markets and limited government intervention joining the clamour against high pay.

  • May 29, 2019

    The effect on NEDs of proposed reforms to IR35

    Some non-executive directors (NEDs) also provide consulting services to the companies on whose boards they sit and to others. How will the proposed changes to IR35 affect the provision of those consulting services?

    HMRC published a consultation paper Off-payroll working rules from April 2020 on 5  March 2019. The consultation period closed on 28 May and the results will be taken into account when the Finance Bill is published in the summer. It seems likely, based on the consultation document, that existing public-sector legislation (Chapter 10, Part 2 of ITEPA 2003) will be the starting point for legislation governing the private-sector, but we will have to wait for the Finance Bill to find out for sure.

    Since 2017, public-sector companies have been responsible for determining whether those they engage to provide services are employees or independent contractors. Private-sector companies have been spared this responsibility, which hitherto has fallen on the service provider. From April 2020, however, medium-sized and large private-sector companies will also be responsible for determining whether an agreement to provide services amounts to a deemed employment. No new tax is being introduced; only a change to the person responsible for determining if a deemed employment exists and for accounting for income tax and NICs.

    Many individuals provide their services through a personal service company (PSC) which receives the fees paid for the services provided and from which the individual may receive a salary and possibly dividends. From 2020, private-sector companies will have to disregard the existence of a PSC and decide if the individual should be treated as an employee for tax and NIC purposes if engaged directly.

    From next April, if a private-sector company decides that its agreement for the provision of services amounts to a deemed employment, it (and not the PSC) will be required to deduct income tax and NICs from the fees it pays, for those services.  This change is likely to mean more work for in-house HR teams and their (internal and external) legal advisers and could involve a substantial increase in the fee-payer’s employer’s NICs liability. If the new legislation follows the public-sector regime, three key consequences will flow from the requirement to make an assessment as to whether, for tax and NIC purposes, an employment relationship exists between it and an individual contractor:

    • the company must inform its contracting party (agency or PSC) of the outcome of its assessment when the contract is made and may also have to inform the individual contractor of its decision;

    • if any questions are raised about the company’s assessment, it has 31 days in which to respond; and

    • the company must take reasonable care when making its determination as to whether a deemed employment exists.

    This will affect NEDs who are also contracted to provide consulting services in the same way as it affects other contractors. A directorship is separate from an engagement to provide consulting services. Fees for carrying out the office of director are subject to income tax and NICs, payable through the PAYE system.  However, whether consulting fees are subject to the same deductions depends on the nature and terms of the agreement and on whether a deemed employment exists. It would, therefore, seem sensible for any agreement to provide consulting services to remain separate from an agreement to carry out the office of director.

    For further information, contact Paul Norris.

  • May 29, 2019

    FRC publishes a guide on financial reporting for smaller listed and AIM companies

    The Financial Reporting Council (FRC) together with the Chartered Institute of Accountants have recently published a guide to help improve financial reporting within smaller listed and AIM quoted companies.

    It is specifically aimed as a guide for Audit Committee members and provides top tips for the members to consider and ask themselves (including questions which should be put to the external auditors and the management team) during each of the following stages:

    • Planning the audit

    • Production of interim and annual reports

    • Review of performance

    • Formulating an action plan for next year

    For the full report and more information click here.

  • May 29, 2019

    Proxy advisers: proposed US regulations are misguided

    This is a summary of an article written by Robin Ferracone, CEO of Farient Advisors, MM&K’s US partner in the Global Governance and Executive Compensation Group (GECN).

    Proxy advisers, such as Institutional Shareholder Services (ISS), review company disclosures and provide cost-effective, independent research and voting recommendations to institutional investors, using the investors’ own voting guidelines.  This enables resource-constrained investors to cover hundreds, if not thousands, of companies and to engage with each as necessary to protect their investments.

    Certain companies have criticised the increasing influence of proxy advisers, claiming that they are not fair, lack transparency, do not understand the company and are difficult to engage with.  In response, the US Congress has proposed legislation to require the advisers to register with the Securities and Exchange Commission (SEC) and to subject themselves to audits for conflicts of interest.

    However, does it make sense to regulate organisations that provide voting recommendations to shareholders cost effectively?  The power of proxy advisers may be overstated: research by Glass Lewis has found that their investor clients vote differently from their recommendations 37% of the time.

    Farient recently examined Say on Pay (SOP) votes cast for S&P 500 companies by 1,200 institutional investors, testing the hypothesis that smaller investors, with fewer resources, are more likely to follow ISS’s voting recommendations.  It found that:

    • The largest 200 investors voted in line with the recommendations of ISS 84% of the time, while the smallest 200 investors voted with the recommendations 89% of the time.

    • In contrast, looking at “AGAINST” recommendations only, larger investors are more likely to vote with ISS compared to smaller investors, 74% to 56% respectively.

    • The top 20 investors, ranked by assets under management, vote very differently relative to ISS recommendations. For example, BlackRock voted in support of SOP resolutions 97% of the time, following ISS recommendations 90% of the time; while BNY Mellon voted in support of these resolutions 56% of the time, following ISS recommendations only 64% of the time

    This evidence shows that institutional investors consult research by their proxy advisers to inform their voting decisions but in the end make up their own minds in casting their votes.

    Farient, like MM&K, encourages its client companies to engage with their investors and proxy advisers, to help them to understand what is happening.  Directors should tell the company’s story and provide a compelling narrative to ensure that proxy advisers do their jobs while the directors take the opportunity to explain that they are doing theirs.

    For further information, contact Mike Landon.

  • May 29, 2019

    Creating successful bonus structures – five things to think about

    Whether you think in these terms or not, the way a company sets up, manages and then settles its bonus plans will have a direct impact on the behaviour of people within the organisation. Here are five thinking points in respect of creating successful bonus plans for 2019 and beyond:

    1. Be clear about the company’s real values
    This is the single most important element in achieving a successful bonus structure. Many companies in the “open communication” era will have a set of values describing how they want people to behave – these may be found on the walls of the office or in a handy booklet. However, underneath this will be the “real” values of the company – the values which may not make a good soundbite but which accurately describe how your enterprise functions most successfully. Taking the time to unlock this is crucial in all aspects of remuneration design – including bonuses.

    2. Make sure it is affordable
    Some might consider this obvious but it is crucial to make sure that payments are tied to affordability. There are few things more demoralising than bonus numbers having to be scaled back due to miscalculations or when a line manager has to revise down bonus levels due to wider company bonus issues. It is possible to put bonus plans in place where this issue is mitigated or even eradicated.

    3. Back up bonus plans with hard decisions
    If you have created a bonus structure which rewards people for ‘how’ they have done things as well as for ‘what’ they have done, then a potential management decision may arise when a “star performer” delivers results in a way that goes against the expressed values of the company. Will the leadership team be willing to risk upsetting the star performer by not paying out some or all of the bonus? If they are not then the company should reconsider the structure of the bonus plan, as a bonus plan which rewards “bad” behaviour will send a clear message that the values of the business can be ignored.

    4. Decide how widely the bonus plan should apply
    It is tempting, especially when money is perceived to be tight, to decide to reward only those who are “high performers”. However, research evidence on this point indicates that bonus plans created in this way may be more harmful than plans which provide bonuses across a wider range of performers. Consider ways in which your bonus plan could have wider applicability.

    5. Communicate regularly
    The most successful bonus plans should form part of the management tool kit of the business and not just be something that is pulled out at the end of the year. There are a number of things that can be done to embed the bonus plan within the review process in order to get the most out of it.

    For further information or to discuss any questions you may have, contact Stuart James.

  • April 29, 2019

    Launch of MM&K’s 2019 UK and European Private Equity / Venture Capital Compensation Survey

    This month MM&K Launched its 24th annual Compensation Survey for the European Private Equity and Venture Capital Industry.  The 2019 Survey will provide participants with information on both quantum and structure in respect of salary, bonus plans, carried interest plans and co-investment plans. Through participation in our survey, participants will obtain data which allows them to:

    • Make the best choices on remuneration structures for their businesses

    • Have meaningful conversations on remuneration with partners and employees

    • Improve staff retention and morale

    If you are working in a Private Equity / Infrastructure / Venture Capital House and you believe that your firm might like to participate, please contact Margarita Skripina or request your questionnaire here.

    To find out more about MM&K 2019 PE/VC Compensation Survey click here.

     

  • April 23, 2019

    Gender Pay Gap – three things for businesses of any size to consider

    Legally, the reporting of the Gender Pay Gap (“GPG”) is only required by companies that have 250 or more employees who are based in England, Scotland or Wales. However, there are some important lessons for all organisations in respect of remuneration and the issue of divergence on gender pay can become an issue for any commercial enterprise.

    Here are three points to consider with the passing of the second anniversary of reporting on the GPG.

    1. Every company will have a GPG
    Unless you have exactly the same number of people of each gender at each of the levels within your organisation, it is a mathematical certainty that you will have a GPG inside your organisation, based on the way that the reporting model is constructed.

    Nonetheless, establishing your GPG – and then analysing it in order to understand how it has come about – is likely to be the most productive first step that an organisation can take to review its recruitment and promotion policies.

    2. “Blind recruitment” may not be the answer
    There is a notion that, either consciously or unconsciously, people tend to hire people in their own image . In order to overcome the first hurdle to this – getting a more diverse range of candidates through the initial CV vetting process – some firms have started using “blind” copies. These are documents which remove any trace of a person’s gender, or indeed any other area of diversity which may be from the subject of bias.

    However, whilst there is some superficial logic to this, a number of studies, most notably a high profile one undertaken in Australia (see here for coverage**), indicates that this method does not always deliver the intended outcomes.

    In our experience, better recruitment can come from identifying the core values of the business itself and then using these as guiding principles to develop and establish everything from recruitment processes to bonus and incentive structures. Given that values are not gender specific, using this approach has the advantage of making the recruitment process fairer to all.

    3. Pay gaps may really be rewarding certain characteristics
    Whilst some GPGs (or even part of a GPG) may be explained by “structural” differences, such as the number of people of each gender at each level of the organisation, among people who do similar jobs, the difference may not be so much about gender but may instead reflect varying individual skill-sets.

    Discretionary pay awards might favour the most skilled negotiators but, whilst it would not be appropriate to ‘punish’ those who have strong negotiating skills, it would be appropriate to consider whether people who are hired for a different set of skills might need a different approach to their remuneration. There may be short term gains from supressing the remuneration levels of ‘quieter’ employees, but such an approach often leads to growing resentment and can become self-defeating. Once resentment over remuneration takes hold, it can lead to people making a “no way back” decision to leave a company for new pastures. It may, therefore, be more cost-effective for remuneration policy to take account of a person’s skill-set and motivators, as well as their job role.

    For further information or to discuss any questions you may have, contact Stuart James.


  • October 24, 2018

    Irish salaries beat UK salaries

    MM&K recently compared data from the Willis Towers Watson cross industry databases to find out how salaries compare between Ireland and the UK.

    The chart below compares UK and Irish employees’ salaries to their ‘Global Grade’ (the Willis Towers Watson Global Grading system assigns a job size to employees’ roles). We have analysed data across all job functions, producing a broad-brush comparison of Irish and UK salaries.

    Since the results of this analysis depend strongly on the exchange rate, and the Pound is currently fairly weak against the Euro, we have used a historically average £=1.25 EUR for the study.

    As you can see from our chart, the Irish junior staff workforce receive a slightly higher salary than their equivalents in the UK. At the middle management level, the gap begins to close, and for top executives, those in the UK are paid much more. The result is a 6% average differential* in Irish salaries over the UK. Analysing data we have from 2007, we found similar results – a 5% differential over the UK.

    Although the average differential between Ireland and the UK has not changed much since 2007, we see there has been a change for top executives. In 2007 we found that top executives in Ireland were paid more than their UK counterparts. Clearly this dynamic has now reversed, with UK employees at global grade 20 receiving on average just under 50% more than Irish equivalents.

    *the 6% average differential is a result of calculating the % difference in Irish salary vs UK salary for each Global Grade, then averaging those figures.

    For further information please contact harry.mccreddie@mm-k.com

  • October 23, 2018

    Are you taking full advantage of tax-exempt share plans?

    In last month’s newsletter, we explained why the Inclusive Ownership Fund (IOF), proposed in the September 2018 Labour Party Conference, may not be the best method of enabling workers to share in the wealth they create.  We agree wholeheartedly that employee ownership can help increase a company’s productivity and encourage employees to identify more closely with the business; but there is already a good range of tax-advantaged share plans available.  It is a shame that they are not more widely used!

    There has been support for employee share ownership from all the main political parties for nearly 40 years.  Their incentive effect is also recognised by institutional investors whose guidelines allow up to 10% of a company’s share capital to be issued for share plans every 10 years – the same percentage as proposed for IOF.

    We now have tried and tested share plans which are flexible enough to reinforce most companies’ business and HR strategies.  However, whilst 20 years ago (according to HMRC statistics) about 1 million employees participated in each of the approved Profit Sharing Share Schemes (now replaced by Share Incentive Plans) and SAYE Option Schemes, in 2016-17 participants in SAYE and SIPs had fallen to about 400,000 in each plan.  We think that smaller companies, in particular, may have been put off by the apparent complexity of the legislation; even though MM&K have found it is possible to design share plans which are simple to administer and to communicate to employees.

    Is your company taking full advantage of the opportunities to incentivise employees and provide them with valuable tax reliefs?

    Share Incentive Plans (SIPs)

    Using a SIP, every employee can participate up to the following annual limits:

    • £1,800 of contributions from their earnings before income tax and NICs (or 10% of PAYE earnings, if less) to buy Partnership Shares

    • £3,600 (2 for 1 match) in tax-exempt Matching Shares awarded by the company

    • £3,600 in tax-exempt Free Shares awarded by the company, for example as part of a profit share.

    In practice, only half of companies with SIPs award Matching Shares and only about a quarter award Free Shares.

    SAYE (or Sharesave)

    Employees can contribute up to £500 per month over three or five years.  At the end of this savings period, they can buy their company’s shares at a discount of up to 20% of the share price at the start.  The discount is exempt from income tax and NICs.

    Both SIPs and SAYE require all UK-resident employees who meet any qualifying period of service to participate and all must be offered the same terms (which can include the same percentage of salary).  If these conditions are too onerous, companies may be able to use one of two ‘discretionary’ tax-advantaged share plans for employees generally:

    Enterprise Management Incentives (EMI)

    EMI plans can be used to grant options over up to £3 million worth of shares to a company’s employees and the increase in the share value up to the exercise date is exempt from income tax and NICs and may qualify for entrepreneurs’ relief from capital gains tax.

    These arrangements are available for smaller companies, with fewer than 250 employees and gross assets not exceeding £30 million, except for some excluded activities.

    Company Share Option Plan (CSOP)

    Options can be granted over shares worth up to £30,000 per employee and the gain on exercise is exempt from income tax and NICs.

    Please contact Michael Landon if you would like to discuss in more detail how the above tax-advantaged share plans can be adapted to meet your company’s particular objectives.

  • October 23, 2018

    Value Creation Plans – genuine attempts at designing executive LTIPs or too complex to explain?

    Some years ago, I attended the AGM of one of the UK’s biggest supermarkets. A shareholder asked a question about the proposed new executive LTIP. After a pause, one of the non-executives stood up and replied “it is too complex to explain”. I was reminded of this recently when MM&K inherited two Value Creation Plans (VCPs) adopted by clients who had recently appointed us.

    In both cases, the client had been advised by the same firm and there was an apparent lack of appreciation among the Board and shareholders about the details of how the plans worked or the financial/economic consequences of having adopted them.

    The VCP concept is simple – in essence VCP’s are stock appreciation rights settled in shares (or nil-cost options):
    Stage 1: Award notional performance units to participants

    • Performance units are not equivalent to shares; they define an allocation of future value created

    Stage 2: Units convert into nil-cost options according to the value created

    • TSR is calculated at a designated future date or dates

    • If TSR exceeds a threshold compound annual growth rate, some or all of the units convert into nil-cost options

    • The number of shares into which units convert is a function of the number of units awarded, the company’s TSR performance above the threshold and the market price of a share in the company on the conversion date

    Stage 3: Nil-cost options vest and become exercisable

    • Nil-cost options are held until a vesting date or dates

    • On each vesting date, nil-cost options vest and become exercisable if the company’s TSR/share price growth has exceeded a specified minimum acceptable rate

    • Post-vesting, options remain exercisable up to 10 years after the award of units

    The above outlines the general principle but plans may vary in detail. For example, if units fail to convert (because TSR performance at the relevant date fails to exceed the threshold) VCP rules may provide for re-testing at a subsequent date. Re-testing performance and adopting LTIPs linked exclusively to TSR (share price growth, if there are no dividends) with no financial or operational targets are not the flavour of the month with investors in listed companies.

    As ever, the devil is in the detail and there was a lot of impenetrable detail in the plan rules we inherited. However, the purpose of this piece is not to dwell on this or that form of words or complex formula. Our inherited VCPs were almost identical, clearly hewn from the same block, and yet they had been adopted by two very different companies in terms of size, activity and market positioning. There are good reasons for standardisation and “working smarter” but an incentive should be tailored to the business for which it is being designed. Corporate governance now has a much higher profile in relation to executive pay than hitherto. Incentive plans must be technically sound, work for the business and take account of applicable good governance principles.

    But the most striking feature of our VCP inheritance has been the lack of appreciation about how the plans operate and potential outcomes. This emphasises the need for clear explanation. It also underlines the essential value of modelling a wide range of potential outcomes to minimise the risk of future surprises which might cause companies and their shareholders to regret their decision to adopt a VCP in the first place and there is the prospect of adverse publicity if payments are more generous that had been expected.

    As a concept, VCPs tick the box of aligning executives with shareholders, insofar as they are linked to TSR or share price growth. Added features such as awards of notional performance units, complex conversion formulae and consequentially impenetrable rules are not necessary. It is, however, critical that companies, their shareholders and remuneration committees fully appreciate the plan which they have adopted – and its potential consequences.

    As VCP’s attract no special tax advantages, it is hard to see what the added complexity brings to the table, when a similar result can be achieved with a much simpler share plan.

    Paul Norris, Chief Executive
    MM & K Limited

    paul.norris@mm-k.com

  • October 18, 2018

    How do not-for-profits design their long-term incentives?

    MM&K investigated the LTIP policies for 59 of the largest not-for-profit organisations to answer this question.

    Our sample consists of Charities, Housing Associations, Co-operatives, Building Societies, Mutual Insurance companies and Education Establishments (Universities and College Groups). It is important to note that the vast majority of these organisations do not operate an LTIP. Policy data is publicly available for 16 companies, which we have analysed.

    Firstly, we found that the performance measures are very specific to the individual organisation. This contrasts with what we see in many listed companies, which often have very similar designs of LTIPs within certain sectors, especially the performance measures. For example, Oil & Gas exploration and production companies will often place a heavy weighting on a TSR based target. In contrast, in not-for profit companies the performance measures vary greatly; examples include return on capital, revenue, profit and net debt to EBITDA ratio. There are a few measures we do see recurring – such as employee engagement and customer service, but even these only occur in just over half of the companies we looked at.

    This isn’t the only way in which the designs differ from listed companies. All the not-for-profit plans are cash-based (as there aren’t any shares available!) whereas it is much more common for listed companies to award shares through their LTIPs. Also, the earnings opportunity is generally more modest, with exceptions such as Liverpool Victoria offering a maximum opportunity of 300% of salary to its CEO.

    In all cases, awards are granted annually and vest over a period of three years, a paradigm often seen in listed companies’ LTIP designs. We found only two cases in which an additional deferral/holding period is required. This is where the company defers the award for a further period of time (usually between one and three years), with no further performance conditions, a practice that is rapidly becoming the norm among listed companies.

    For further information contact harry.mccreddie@mm-k.com

  • October 18, 2018

    Negative Feedback is Good for You

    It is curious how many technical expressions slip into the common language with a meaning entirely different from their true meaning – and often opposite.

    A couple of examples are “epicentre” and “lowest common denominator”.  People commonly use “epicentre” to mean the very heart of the centre.  The press might report “Tottenham was the epicentre of the London riots in summer 2011”. Users of the word clearly think that there is something especially central about the epicentre.  But the word is borrowed from seismology and refers to earthquakes.  The epicentre is the point on the surface of the Earth above (usually some miles above), the place deep underground, where the rock slip happened.

    The lowest common denominator of a set of numbers is the lowest number that all the numbers in the set will divide into exactly.  By definition it is as high as or higher than all the numbers in the set.  If it is borrowed as a metaphor it should mean the best in the set.  But people don’t mean that at all; they mean the lowest in the set, the slowest vessel in the convoy. lowest sounds appropriately disparaging.

    Another expression misused in management is “negative feedback”.  It is used to mean giving people performance feedback which criticises. as opposed to praising them.  “You did a great job in that project but (points one to ten…)”

    “Negative feedback has a very specific meaning in systems design.  A common example is in electronic amplification. By taking a small amount of the output of the amplifier, reversing the polarity and feeding it back into the input stage, the signal becomes stabilised. If ever you have held a microphone too near a loud-speakers you will know what positive feedback does – the system starts screaming.  Negative feedback damps down the system output and ensures a high quality output.

    It occurred to me that performance reviewers do, unconsciously, provide negative feedback in the true meaning of the expression. They tell the appraisee the opposite of the truth to keep them on the rails.  You don’t say “you did a total lousy job” even if they did.  You say, you missed your targets, but the strategy report you wrote was good.  Why? Because we want to keep them motivated.

    On the other hand, to the successful appraisee we don’t say “you did a fantastic job, the best we ever saw”.  We don’t want it going to their head.  So we tone it down – “you did well, but here are some areas you could improve”. In other words, we tell a few white lies – we give negative feedback.  We are not taught to do this – it’s something we pick up in the process of managing effectively.  The important thing, however, is not to overdo it.  Otherwise the appraisee will be confused.  There are some famous stories about people who went into a meeting with the boss where he (women don’t make this mistake) was supposed to be firing them, and who came out thinking they had been promoted, he was so lavish with his praise!

    For advice on Performance Management systems contact damien.knight@mm-k.com

  • September 27, 2018

    When is an employees’ share scheme not an employees’ share scheme?

    The answer is: when it’s an Inclusive Ownership Fund (IOF).

    Few would disagree that an engaged workforce delivers greater productivity or that offering shares to employees creates direct engagement with the financial and economic performance of the business. But proposals announced at the Labour Party Conference this week that would require companies employing more than 250 people to set aside up to 10% of their shares to be held in an IOF fall short of the mark. In common with many proposals from political parties, a shortage of detail raises a number of questions.

    Shares will be held collectively – who bears the cost of transferring shares to an IOF? Shares cannot be traded; individual employees will not enjoy the full benefits of share ownership – who will be the legal owner and who benefits from any capital growth? Voting will be in the hands of fund representatives – will they be subject to the same requirements to disclose how they have engaged with and taken account of the interests of the workforce as boards of directors will be under recent changes to corporate governance codes and regulation? The extent of an individual employee’s rights will be to receive dividends capped at £500 per year – any excess going to the Government.

    This has been variously described as part nationalisation of the private sector and a tax on private sector companies. The Guardian https://www.theguardian.com/politics/2018/sep/23/labour-private-sector-employee-ownership-plan-john-mcdonnell referred to the proposals as “a new levy on private business”. Concerns have been raised about the potential adverse effect on investment in the UK, on productivity and employment if businesses curtail recruitment, go private/private equity owned or relocate overseas.

    Whilst the upside is limited, it has to be said that there appears to be little downside for employees in Labour’s proposals. But if Labour’s motive is to promote wider share ownership, engagement and alignment, a framework already exists read more

    For more information about employee share plans, executive pay and corporate governance, please contact: Paul Norris paul.norris@mm-k.com or Damien Knight damien.knight@mm-k.com

  • September 27, 2018

    How will Remuneration Committees cope with their expanded remit?

    Changes to UK corporate governance guidance and disclosure regulations introduced this summer have expanded the remit of remuneration committees. The effects reach beyond quoted companies. We have designed a programme to help navigate through the added complexity.

    The UK Corporate Governance Code (UKCGC), applicable to companies with a premium listing in London, now requires remuneration committees to have delegated responsibility for setting remuneration for senior managers. It goes further, requiring remuneration committees to review workforce remuneration and related polices and the alignment of incentives and rewards with culture, and to take these into account when setting executive remuneration policy.

    Regulations made under the Companies Act, which govern the content of the Directors’ Report, Strategic Report and Directors’ Remuneration Report (DRR), will require enhanced disclosures. Some of the changes will affect all companies, depending on size but only quoted companies are required to publish a DRR. Most of the changes come into force for financial years starting on or after 1 January 2019, so their effect will not be seen until the annual reports published in 2020 are available. However, some committees may wish voluntarily to comply in their 2019 annual report to test the water.

    The objective is greater clarity about actions taken, the reasons why they were taken and their effect on key decisions made during the year to which the relevant report relates. Specifically in relation to the DRR, remuneration committees will have to make additional disclosures about read more

    For more information about remuneration committee training programmes, please contact: Paul Norris paul.norris@mm-k.com, Damien Knight damien.knight@mm-k.com or Stuart James stuart.james@mm-k.com

     

  • September 27, 2018

    Commons Committee on the tail of the fat cats again

    The Commons Committee is chasing a myth again. Its chair, Rachel Reeves, has told the Mail on Sunday that the Committee is going to ramp up its attack on fat cats this autumn. She believes that executive pay is increasing at a rate that vastly exceeds increases for ordinary employees and which seemingly is at odds with the value created in the Company. Damien Knight shows that neither part of this belief is true. But fat cat pay is too easy a target for the press to leave it alone. Read more or for more information contact damien.knight@mm-k.com

     

  • September 27, 2018

    Governance landscape at a glance “the most eventful year in history”

    2018 has been, probably, the most eventful year in UK history on remuneration governance. The year saw the culmination of the Government’s wide initiative on corporate governance reform, with a revised UK Corporate Governance Code published by the FRC in July and new corporate disclosure regulations approved by Parliament in June. This was supplemented by a revised corporate governance code from the Quoted Companies Alliance in April and the draft of new governance principles for private companies from the Wates committee.

    In addition we have had the reports on the first gender pay gap disclosure by companies, and a new AIM rule requiring all AIM-listed companies to publish by the end of September details of the recognised corporate governance code they intend to adopt and their level of compliance.

    Starting from last December we have now had two reports from the Investor Association of the voting “name and shame list”, showing AGM resolutions that fail to gain more than 80% of the votes. Read more

    For more information contact: damien.knight@mm-k.com

  • September 17, 2018

    SEC rescinds guidance providing regulatory support for using proxy advisors

    On Thursday 13th September, the SEC rescinded two guidance letters from 2004 in a move that will potentially reduce the influence that ISS has on, among other things, Say-on-Pay votes.

    These guidance letters informed investment managers that outsourcing their proxy voting decisions to proxy advisors would satisfy their obligations as fiduciaries to vote their shares while avoiding potential conflicts of interest with regards to companies whose funds they may be managing. For example, if Vanguard has proxies to vote for a company in one of its index funds, and that company also uses Vanguard in managing its pension fund, Vanguard could conceivably be influenced by its business relationship with that company to vote with management on the proxy matters. By essentially delegating to ISS or Glass-Lewis the votes on its shares in that company, Vanguard would be “cleansed” of potential allegations of conflict, based on the 2004 letters. With that guidance rescinded, Vanguard and others can choose to vote according to their own determination of the merits of each proxy resolution, which may or may not correspond to proxy advisor recommendations.

    Critics of these SEC guidance letters have argued that they effectively institutionalized proxy advisory firms, especially ISS, as de facto regulators without the oversight required of actual regulators, and that over-reliance on such firms may not be in investors’ best interests.

    ISS’s business model is arguably built largely on regulatory requirements, especially the 2003 SEC rule mandating that investment managers disclose their proxy voting policies (and votes) and the 2010 Dodd-Frank Act mandating Say-on-Pay, among other provisions. Many of the larger institutional investors have built internal governance expertise to guide voting decisions, using ISS data to help them screen companies to target, while smaller funds have generally found it more cost effective to meet these requirements by essentially outsourcing their votes to ISS. The larger firms, however, have also outsourced many of their votes due, in part, to the 2004 guidance letters because they are more likely to sell investment management to the companies that they also invest in.

    Research indicates that ISS has gained significant influence over shareholder voting and, consequently, on corporate governance policies. As their influence has grown, ISS’s dominance has been increasingly challenged by public companies and certain governance critics who have focused on ISS’s own potential conflicts of interest and the quality of the research and standards behind their recommendations.

    Following more recent SEC guidance for casting their votes in their client’s best interest should provide investment managers a strong basis for defending their voting decisions, even as they reduce their reliance on proxy advisors. The impact of this rescission is not expected to be very significant in terms of how investors generally oversee compensation governance. But it does portend continued push-back on ISS’s influence as the SEC prepares for its November roundtable on potential regulation of proxy advisors.

    However, the outcome is uncertain. Our advice from s UK proxy advisor is that the drafting of the original letters was poor, and the SEC may well issue new guidance.

    For more information contact: damien.knight@mm-k.com or paul.norris@mm-k.com