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ACCA warning over listed company pay
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There is sufficient justification for the government to regulate on listed company pay, the Association of Chartered Certified Accountants (ACCA) has claimed.
In its response to the Department of Business, Innovation & Skills’ consultation on high pay, the organisation warned that the connection between remuneration and performance is currently being lost.
ACCA is concerned that executive pay at the largest companies has achieved its own momentum, forcing a regulatory response.
This needs to reinforce the capacity of company shareholders to insist boards incentivise their personnel in sustainable ways, it stated.
But at the same time, regulators need to avoid impeding boards and remuneration committees’ ability to pay objectively justifiable rates for the right people.
John Davies, head of technical at ACCA, claimed that a "disconnect" has arisen between boards, their employees, shareholders, and the rest of the community.
"In principle, pay should be an internal decision for companies and there should be freedom to pay the prevailing market rate for talented people," he stated.
"However, today, high pay seems to justify itself, while shareholders seem to have little control over management decisions."
Mr Davies described this as "a structural problem which needs proper reform".
ACCA has argued that there is a structural inability of the ownership base of some listed companies to exert "meaningful control" over board decisions.
"This isn’t completely down to shareholder apathy: the fragmented landscape of share ownership and a lack of shareholder confidence in their right to insist on policies that pursue long-term growth are also at fault," the association stated.
It warned that switching from a retrospective shareholder vote on pay to a binding, pro-active one would change nothing by itself.
"Giving more rights to shareholders would not be a panacea as new powers won’t necessarily be used, as previous experience has shown," ACCA claimed.
"Equally, it would not prevent policy statements framed in broad, flexible ways being put to the vote."
ACCA suggested that reform needs to be part of a wider package, with the statement of directors duties in s172 of the Companies Act reviewed to impose a more explicit onus on directors to consider long-term shareholder value when setting pay policy.
Remuneration committees should also be encouraged to set criteria for assessing performance that reflect the board’s responsibility for stewardship, the body stated.
Meanwhile, the composition of remuneration committees needs to be considered, with too many current or former executive directors setting pay levels for their contemporaries.
And ACCA believes there must be "a fundamental improvement" in levels of engagement by shareholders, with investors given an express right of intervention on pay policy.
The association believes it is "crucial" to get the legal detail right, with regulation clear and any new shareholder vote prospective in nature.
Mr Davies commented: "Ideally, excessively high pay should be capable of being addressed by a combination of directors abiding by their fiduciary duties and shareholders exercising their supervisory rights.
"Unfortunately, the reality is quite different and so the time has come for regulation."
He said this regulation needs to be proportionate, allowing freedom for boards and encouraging shareholder engagement.
"We need to bridge the gap between companies, their shareholders, and the public, and regulation seems to be the only answer," Mr Davies added.
Posted by Stephen Wilkinson
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