- October 24, 2019
Getting in is easy. But are you sure you know how you are getting out?
The recent changes proposed by the FCA due to the Woodford Investments situation should be an important reminder to private companies as well as listed ones
Recently, the FCA advised that it would finally be going ahead with a rule change that it proposed last October. Under this change of rules, a new investment category of ‘funds investing in inherently illiquid assets’ (FIIA) will be created. Funds that fall into this category will be subject to additional requirements, including increased disclosure of how liquidity is managed.
Whilst these changes will not come into effect until 30 September 2020, it is worth considering whether your business – and in particular any privately held, owner led businesses – would fall into this definition of a FIIA (despite being unlisted).
Without doubt, long term incentive plans (“LTIPs”) are important in all companies and businesses as a tool to assist with both long term retention and productivity. Studies undertaken into this area show that the mere act of having some form of LTIP increases retention by about 1/3rd.
However, it is the prospect of a meaningful pay out under an LTIP which can be the motivating factor for many executives and employees.
Unfortunately, over the past few years, we have seen many LTIPs which are ultimately ineffectual because there is no practical and cost effective way for payments to be made – the most typical example of this is where a private company issues shares but there is no subsequent sale of the business to third parties. The individual is left holding a share which will not have any value unless the existing shareholders (directly or via the company or an EBT) purchase the shares – methods which may not be popular due to the increased costs involved.
Should you consider that your LTIP might have fallen into this category, there are incentive structures that could still deliver your key commercial aims.
For further information or to discuss any questions you may have, please contact Stuart James.
- October 24, 2019
New UK Stewardship Code comes into force on 1 January 2020
The Financial Reporting Council (FRC) has made significant changes to the UK Stewardship Code which will come into effect in January 2020. The Code will then require Investment Companies to report annually on their “stewardship activity”.
Changes to the code include:
• Extending the Code to include asset owners (pension funds and insurance companies) service provides and asset managers
• Annual reporting on stewardship activity (including voting records in their investee companies)
• Particular emphasis on environmental, social and governance factors during decision making
• Asset owners laying out their stewardship across different asset classes (including investments outside of the UK)
• Setting out stewardship practice within the organisation including how they have demonstrated this in the previous year
The full code can be downloaded from the FRC here
Nigel Mills will be giving his views on how this may effect asset owners including in particular Private Equity Fund Managers in our November newsletter. To sign up for our newsletters please click here.
- September 30, 2019
Board Effectiveness: the next lever of value creation
Increasingly investors look into how organisations are governed and how effective the top decision-making bodies of organisations really are. In this white paper, Dr Sabine Dembkowski of better Boards Ltd, sheds light on research findings and reveal the seven hallmarks of effective boards. The seven hallmarks are proven to create more effective boards and are set to be the next lever in the value creation process. Read more or contact Paul Norris for further information.
- September 27, 2019
Issues which are of most concern to investors and how they are dealing with them
MM&K is the UK member firm of the Global Governance and Executive Compensation Group (GECN), a consortium of independent advisory firms specialising in executive compensation and corporate governance and jointly serving clients in more than 30 countries.
As investors are demanding more today than ever before from the companies in which they invest their capital, successful engagement between corporates and investors is an essential element of good corporate governance. GECN is about to publish a report on Global Trends in Corporate Governance: Investor Expectations in Corporate Governance and Executive Compensation, which examines investors’ perspective on these and other issues that are important to them, and how they are raising these issues as part of their engagement with their portfolio companies.
The report’s contents are based on feedback obtained from 25 comprehensive interviews with some of the largest asset owners and managers, including both active and index investors, as well as organisations which advise them.
In addition to direct quotes from participants, the report also includes an analysis of quantitative data relating to corporate governance practices and the differing approaches investors take when they feel management and the board fail to address their concerns.
Using the interview feedback, the report identifies seven approaches companies can adopt to help ensure that their investor engagement is both constructive and successful.
This research provides a global and regional perspective on the issues of greatest importance to investors and suggests how corporates can anticipate these issues and respond to them in the most effective manner.
To obtain a copy of the report or to discuss corporate governance and investor engagement in general, please contact Paul Norris.
- September 24, 2019
The World of Private Equity and Remuneration Therein
The private equity world continues to come up with ever more impressive and somewhat surprising stories.
In the last few days EQT, the Swedish private equity fund management group has IPO’d on the Swedish Stock Exchange, valuing the business at an astonishing €7bn. The shares made an impressive debut, gaining more than 30% in their first day of trading. The offering, more than 10 times oversubscribed and priced at the high end of its range, is one of the largest—and most successful—involving a private equity firm in years. The firm raised close to €1.3bn from the public listing.
EQT manages around €40bn of assets on the behalf of investors, and reported €295m of revenue for the last six months to end of June.
In another story, the word on the private equity street is that Blackstone’s eighth flagship buyout vehicle has raised a record $26 billion – yes $26billion!
And in another story that came out this month, US private equity firm Advent International has won their takeover bid to acquire the FTSE 250 defence and aerospace group Cobham for $5bn (£4bn) after months of negotiations.
There certainly seems to be no slowing down of private equity activity, whatever the doom-mongers are saying about the world economy. The same can be said also for the world’s venture capital community which is also thriving, with record numbers of deals being done and fund raising too.
And to add even more excitement to the alternatives fund management space, a recent headline in an alternative assets’ news publication stated that “A ‘Golden Age’ of infrastructure fundraising is upon us”.
In our minds, all this activity in the PE, VC and Infra space can mean only one thing for remuneration levels in these industries. They are going up and quite a bit faster than the average rate of wage inflation.
With the raising of more and more and larger and larger funds, the fund managers themselves will be receiving greater revenues from management fees. No doubt they will also be looking to recruit more investment professionals.
But perhaps more importantly, these entities will also be in a position to offer larger amounts of carry at work to their partners and managers.
So there is likely to be a dual impact on pay and incentive levels in the industry. Many firms will have more to spend on remuneration. But there will be a scarcity in the supply of talent, especially at the junior partner and investment director levels.
MM&K will be publishing the findings from our PE and VC compensation survey in October. We are pleased to report that we have had the largest number of firms participating that we have had since 2008. We are sure that this is in some part to do with the fact that firms are concerned about their pay levels, particularly for their senior and mid ranking investment professionals.
We look forward to summarising some of our findings from this survey in our next newsletter.
For further information contact Nigel Mills.
- September 24, 2019
“Diversity is not just a female issue”. Are you missing easy opportunities to improve performance and productivity?
In the summer, as part of its wider remit on governance, the Financial Reporting Council (“FRC”) launched the Female FTSE Board Report, created in conjunction with Cranfield University. The central theme was the advantages of diversity for everyone.
As the Director-General of the CBI, Carolyn Fairbairn states in the Report:
“The case for workplace equality is watertight: companies with diverse boards perform better. Embracing diversity is one of the greatest opportunities available to businesses today”.
However, obtaining diversity needs to be more than just having an underrepresented group on the short list for a particular role. All too often, there are wider structural considerations which make hiring on a diverse basis more difficult and expensive.
Areas which are often overlooked can include:
– Recruitment policies. Has the need for “ease” or “efficiency” in the recruitment process meant that the talent pool you are choosing from is less diverse from the outset?
– Working practices. Rigid working structures, focused on “being present” may stop people (both men and women) applying for roles as they require more flexibility to meet their wider commitments.
– Performance reviews. Are you measuring for diversity?
Changes made within an organisation that encourage a more diverse workforce will assist greatly in creating a diverse leadership team in the future.
For further information or to discuss any questions you may have, please contact Stuart James.
- August 28, 2019
Updates to the GC100 Directors’ Reporting Guidance for 2019
The GC100 is an industry group for general counsels and company secretaries working in FTSE 100 companies. As part of their work, they produce the “GC100 Directors’ Remuneration Reporting Guidance”.
The Guidance is a useful tool for anyone in a mid-sized or large listed company who has to produce a Directors’ Remuneration Report. Despite a substantial revision in 2018, there have been further changes in 2019 – following to the introduction into UK law of the Shareholder Rights Directive (SRD II).
Key changes to the guidance include:
• Extension of coverage to include those considered to be CEO or Deputy CEO, even where they are not appointed as directors (paragraph 2.1).
• Regulatory definitions for the employee comparator group and directors that are required when calculating percentage change in pay (paragraph 3.8).
• Discussion of the measures which may be taken to avoid or manage conflicts of interest in relation to determination, review and implementation of the remuneration policy (paragraph 4.2).
For further information or to discuss any questions you may have, please contact Stuart James.
- July 30, 2019
Latest statistics for all-employee share plans
ProShare issued its Save-As-You-Earn (SAYE) & Share Incentive Plan (SIP) Report in respect of the 2018 calendar year on 25 June 2019. HMRC published its latest statistics on tax-advantaged share plans for the tax year 2017-18 on 27 June 2019.
This article extracts details from the two data sources about current practice for these two tax-advantaged all-employee share plans. Figures differ between them due to differences in the time periods and samples of companies.
Number of companies operating SAYE
Both sources give three sets of figures about the number of SAYE schemes in place. But both show that about 300 companies actually granted SAYE options during the latest year. (This represents a substantial fall from the more than 1,000 SAYE schemes operated throughout the 1990s.)
Terms of SAYE offers (ProShare)
Although SAYE legislation allows a qualifying period of up to five years, most companies either have no eligibility period at all or only require up to three months of service. They apparently take the view that a commitment to save for three or five years is more relevant than past service.
During the year, 82% of companies offered an option exercise price at the maximum permitted 20% discount.
3-year versus 5-year options
64% of companies offered 3-year options only, with the remainder offering a choice of 3-year and 5-year options. In practice, 86% of options granted during the year were for three years.
Employee participation in SAYE (grants during the year)
The higher number of grants from the ProShare figures suggests that some of these options may not have been tax-advantaged or were granted to overseas employees.
We estimated monthly savings from the HMRC data assuming the same division between 3-year and 5-year options as reported by ProShare.
Number of companies operating SIPs
The figures show that about 80% of the companies awarded Partnership Shares and about two-thirds of these also awarded Matching Shares. Just over a quarter of the SIPs awarded Free Shares.
HMRC figures show that more companies awarded Dividend Shares than other types of award because entitlement to Dividend Shares continued for past awards even if companies made no new offers in the current year.
Terms of SIP offers (ProShare)
The SIP legislation allows an eligibility period of up to 18 months before the award date for Free Shares. This enables companies to make awards only to employees who were employed for a complete financial year. Despite this, more than 60% of companies either have no eligibility period at all or set it at less than 12 months. This suggests that most companies use Free Shares as a future retention tool, as opposed to a profit share which rewards past performance.
ProShare does not report eligibility periods for Partnership Shares. In our experience, as for SAYE, there is usually either no eligibility period or a maximum of three months.
The SIP legislation allows companies to match each Partnership Share (bought with employee contributions) with up to two Matching Shares. The ProShare report shows the following range of market practice.
70% of SIPs with Partnership Shares either offer no Matching Shares at all or a matching ratio of less than 1 for 1.
Employee participation in SIPs
In the above table, the HMRC figures for annual awards of Partnership and Matching Shares have been divided by 10 on the assumption that most (but not all) awards of these types of shares are made monthly. However, the ProShare participation levels suggest that a higher proportion of Partnership Shares are now acquired only once a year and that the HMRC figures should only be divided by, say, 5. (An alternative explanation is that the ProShare figures include some non tax-advantaged awards and those made to overseas employees.)
ProShare reports that 26.5% of companies offering Partnership Shares allow lump sum contributions and 12% operate an accumulation period, instead of monthly purchases. This may suggest a trend towards awards being made less frequently than once a month.
The HMRC figures in £ above for Partnership and Matching Shares represent the average value of shares awarded on each award date (whatever the frequency). Nevertheless, the average Partnership Share award value of £100 is close to ProShare’s average monthly contribution of £99.
For further information please contact Mike Landon.
- July 29, 2019
Government response to BEIS Select Committee
The Business, Energy and Industrial Strategy Committee of the House of Commons (the BEIS Select Committee) published on 26 March a further report on Executive Rewards. It contained 16 recommendations to Government.
The Government’s response to the report (HC2306) was published on 13 June
The Select Committee comprises six Labour MPs (including the Committee Chair, Rachel Reeves) five Tory MPS and one SNP MP. Not surprisingly, the Committee’s conclusions and recommendations on executive pay and corporate governance reflect the political balance of its membership. It starts with an acceptance that executive pay is disproportionate and not linked to performance and that differentials are growing; it looks for measures to control and reduce executive pay, particularly using new powers to be given to the new Regulator due to replace the FRC.
The Government’s response is measured and, whilst it “welcomes” the Committee input, it accepts practically none of the recommendations. Its position is that a lot of corporate governance changes have been introduced in the past 18 months: a revised UK Code, a new set of corporate governance disclosures including the pay ratio publications; most recently changes to the Directors’ Reporting Regulations to comply with the requirements of the Shareholder Rights Directive II. In parallel the IA “name and shame” register has been introduced as have the Wates principles for private companies. It wishes to allow these measures to bed down and be appraised before introducing any new measures. It also takes the view that the requirements of companies and shareholders vary widely and changes are principally a matter for shareholders, not government prescription.
MM&K believes this is a sensible response.
Particular recommendations and responses include the following:
Further recommendations for change (e.g. on pension contribution alignment and revisions to the Stewardship Code) appear to be already under way.
For further information, contact Damien Knight.
- July 29, 2019
2019 Global Trends in Corporate Governance– progress update
GECN is a group of independent firms, specialising in advising corporate clients on executive compensation and good governance. GECN member firms have offices in London, Geneva, Zurich, Kiev, Singapore, Melbourne, Sydney, Los Angeles and New York. MM&K has been the UK member firm since 2015
For a few years now, GECN has conducted annual research on trends in corporate governance and published reports on its findings.
Our reports address such topics as executive compensation, board structure and composition, and shareholder rights and give a truly global outlook on the trends in corporate governance. The 2018 Report covered 19 countries across six continents and we are aiming just as high this year.
The 2019 Report will focus on investor perspectives about executive compensation and corporate governance, and on where investors will be directing their attention in 2019 and beyond. GECN member firms have already completed 25 in-depth interviews with leading institutional investors, proxy advisers and investment funds to identify current investor concerns and trends for the future.
We are preparing the first draft of the 2019 Report and aim to publish the 2019 Global Trends in Corporate Governance Report by the end of August or early September.
To request a copy of previous Global Trends in Corporate Governance Reports or for further information please contact Margarita Skripina.
- 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 firstname.lastname@example.org
- 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?
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.
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:
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.
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
- 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 email@example.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 firstname.lastname@example.org
- 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
- 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
- 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 email@example.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
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- 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.