In the wake of outrage at excessive executive pay practices, firms are starting to allow shareholders to have their say on the issue, writes NIAMH COYNE

AT ITS recent annual general meeting, DCC plc took the innovative step of asking shareholders to vote in an “advisory” capacity on its directors’ remuneration report.

Although the resolution (which was passed) was not legally binding on the company, it allowed shareholders to have their say on directors’ compensation, and may point the way for other companies wishing to manage investors’ expectations in this area.

The financial woes of companies grappling with these recessionary times have turned a harsh spotlight on remuneration practices at the top of some of the world’s biggest organisations.

In one corner, investors and shareholders have been landing knockout punches at those who are deemed to have been rewarded for failure. In the other corner are the regulators, who have reacted to public pressure by revisiting legislation and regulations in this area and taken a swing at perceived excesses.

When 59 per cent of shareholders voted down Bellway Homes’s remuneration report in the UK in January this year, and the same percentage voted down Royal Dutch Shell’s remuneration report in May, it sent a stark message to boards of directors about what investors are – or are not – prepared to tolerate when it comes to remuneration practices.

Since then many other UK companies have been shaken at their agms by a significant minority of shareholders voting against directors’ remuneration reports. A consequence of this negative publicity for high-profile companies and their executives will invariably be more regulation on executive remuneration by the regulators.

More regulation does not necessarily lead to better regulation. Unlike in the UK, listed Irish companies are not legally obliged to present directors’ remuneration policies for shareholder approval.

However, most plcs have due regard for institutional investor guidelines and best practice when drawing up remuneration packages, particularly in respect of share-based incentives, which can have a direct dilution effect on investors.

This approach has considerable advantages, in that it recognises that companies have different needs and provides flexibility within certain parameters. However, it has also been exposed by the financial crisis as inadequate in reigning in excessive pay practices and protecting shareholders’ interests.

The US regulation-led approach subjects companies that have taken the biggest cash injections from the US government to pay caps and ongoing review by “compensation cop” Kenneth Feinberg. This is driven as much by political as economic considerations and is currently only targeted at those companies in which the US government has a stake. However, US legislation aimed at encouraging “say on pay” for shareholders and independence among remuneration committees is being considered, together with new disclosure rules for pay packages.

The EU has proceeded cautiously, issuing a European Commission recommendation on executive remuneration, rather than a directive that would bring about statutory change.

Clearly a balance needs to be struck between reward for success and excessive pay practices.

Goldman Sachs recently surprised Wall Street by reporting a net profit of $3.44 billion (€2.4 billion) for April to June. This result is on the back of significant losses reported six months ago.

Goldman’s success is remarkable and analysts say it should be celebrated in the current climate.

Goldman has set aside more than $6 billion for pay and bonuses in the first quarter. Such rewards, though large, may be justified in the context of these results.

The new Shareholders’ Rights Regulations (implementing an EU directive) signed into law by Tánaiste Mary Coughlan this week will also be of interest to investors in listed companies. The regulations give shareholders greater power to call emergency general meetings, to ask questions at meetings, and to put items on the agenda and table draft resolutions at agms.

As long as the recession continues, the spotlight will remain on the remuneration practices of many Irish companies, but management and employees need to be rewarded for success, and striking the right balance between shareholders’ expectations and keeping management incentivised is key.

The example given by DCC and the practical implementation by shareholders of the Shareholders’ Rights Regulations will play a part in how companies and shareholders in Ireland choose to fight back.

Niamh Coyne is a partner in AL Goodbody’s corporate department