successful period of office in terms of the profitability of
the company.
So far as UK corporate law is concerned, the board
has a largely unsupervised freedom to fix the incomes
of the board. This would not be the case if directors
took their remuneration by way of fees because the
articles normally provide the mechanism for dealing
with this and it is usually necessary for directors’ fees to
be approved by an ordinary resolution of the members.
However, directors’ remuneration is normally dealt
with by the issue of a contract and articles normally
provide that contracts may be made by the board with
individual directors and no member vote is required.
There are now in place two main methods of control-
ling directors’ pay but these apply only to companies
listed on the Stock Exchange.
1 The Combined Code of Best Practice
This code of practice is the result of separate reports
over a period of years by the Greenbury Committee and
the Hampel Committee as amended to include certain
of the recommendations of the Higgs Committee and a
Committee chaired by Sir Robert Smith. It is enforced
extra-legally as a code of best practice that is now part of
the Listing Rules. It must therefore be complied with as
part of obtaining and retaining a quotation for the com-
pany’s shares on the Stock Exchange without which they
would not be readily saleable. It requires listed com-
panies to set up remuneration committees of independ-
ent non-executive directors to make recommendations
to the board on the executive directors’ remuneration
packages. The remuneration of non-executive directors
is envisaged as being set by the board or, if the articles
require it, by shareholder approval. The company’s
annual report should contain a statement of remunera-
tion policy. The code also states that the notice or con-
tract period for directors should move towards one year.
This is designed to cut down the compensation required
where a director of a failing company has his contract
withdrawn with, say, two years still to go.
2 The Directors’ Remuneration Report
Regulations for listed companies
The Directors’ Remuneration Report Regulations 2002
(SI 2002/1986) apply to listed companies with financial
years ending on or after 31 December 2002. Under the
regulations, quoted companies must publish a report on
directors’ pay as part of their annual reporting cycle. The
report must be approved by the board of directors and
copies must be sent to the Registrar of Companies.
Companies must hold a shareholder vote on the report
at each AGM. The Report must include:
■details of individual directors’ pay packages and justi-
fication for any compensation packages given in the
preceding year;
■details of the board’s consideration of directors’ pay;
■membership of the remuneration committee;
■names of any remuneration consultants used, whe-
ther they were appointed independently, and whether
they provide any other services to the company;
■a forward-looking statement of the company policy
on directors’ pay, including details of incentive and
share option schemes, an explanation of how pack-
ages relate to performance, and details and explana-
tions of policy on contract and notice periods;
■a performance graph providing information on the
company’s performance in comparison with an ap-
propriate share market index.
Comment.The shareholder vote is advisory only and
the company is not legally bound to act upon it.
Nevertheless, the government takes the view that any
company that defies such a vote will face considerable
criticism and pressure for change. The regulations fly in
the face of calls from investor groups, such as the Associ-
ation of British Insurers and the National Association
of Pension Funds, for the matter to be addressed only by
means of corporate governance codes rather than what
they regard as inflexible legislation.Statutory requirements on disclosure of
remuneration
New requirements for the disclosure of directors’ re-
muneration were introduced by the Company Accounts
(Disclosure of Directors’ Emoluments) Regulations 1997
(SI 1997/570). They apply to all companies listed and
unlisted for accounting periods ending on or after
31 March 1997.
The regulations amend provisions of companies legisla-
tion relating to the disclosure of directors’ emoluments
or other benefits in the notes to a company’s annual
accounts in respect of any financial year.
Under the regulations:
■companies will be required to show aggregate details
of directors’ remuneration under four headings –
emoluments (i.e. basic salary and annual bonuses); gains
made on the exercise of share options; gains made
under long-term incentive schemes; and companyPart 2Business organisations