EU strengthens shareholder control of executive pay

The European Union has reached a deal to give shareholders at listed companies a greater say on directors' pay, saying it wants to counter "harmful" short-termist thinking in boardrooms.

Executive pay became a totemic issue for the EU in the wake of the 2008 financial crisis amid public outrage over bankers’ pay packets and potential bonuses. The issue contributed to acrimony between Brussels and London in the years after the crisis, as the European Commission moved to rein in the City of London and assert far more control over the continent’s financial regulations.

Officials involved in the talks said key aspects of the proposals mirror measures already existing in Britain, which now has one of Europe’s strongest systems of shareholder oversight of executive pay.

Under the deal struck between negotiators from the European Parliament and Slovakia, which holds the EU's presidency, shareholders will get a vote on companies' pay policy at least every four years.

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The agreement will leave individual nations to decide whether to opt for a system of binding shareholder votes on pay, or to allow votes to be advisory. However, even an advisory vote against pay structures would require companies to present a revised policy for another vote at the next general meeting of shareholders.

Investors will also get an advisory say on listed companies' annual remuneration reports, which provide a breakdown of pay and benefits given to each director over the last financial year.

Sergio Cofferati, the European Parliament member in charge of guiding the proposals into law, said the measures would "steer investments towards a more long-term approach and will ensure more transparency for listed companies and investors".

The new rules will lead to changes in many continental European countries. According to a 2014 European Commission study, shareholders have a say on pay in only 13 of the bloc’s 28 member countries. In three of these countries the vote is only advisory.

Performance-based

The European Commission, which proposed the rules in 2014, said the agreed standards would “ensure a stronger link between management pay and performance”.

Theresa May, the UK prime minister, has said British rules should be toughened even further, with a suggestion that shareholders should have an annual binding vote on pay policies.

In addition to pay transparency, the new law will also set rules for asset managers and other institutional investors, encouraging them to disclose more information on how they manage their shareholdings.

They would be expected to publish an “engagement policy” explaining how they “monitor investee companies on relevant matters including strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance” – though they would not be forced to do so.

Another aspect of the law will give companies stronger rights to obtain information on who their shareholders are, even when the holdings are looked after by intermediaries.

BusinessEurope, the main EU lobby group for employers, welcomed the deal, saying it was "in tune with the reality of the markets".

The new rules are set to come into force two years after they have been formally signed off by the EU.

– Copyright The Financial Times Limited 2016