SHAREHOLDERS across the EU will get more power over executives’ pay packages, after the European Commission backed rules for a binding vote on remuneration.
The move brings the rest of the EU more closely in line with British practices – in the UK, investors were given a legal say on pay last year.
Listed companies will also have to give more detail on how the pay package will improve a business’s long-term performance.
European commissioner Michel Barnier said the new rules should make businesses focus more on long-term performance rather than short-term payouts.
Asset managers, who own shares on behalf of investors, will also face new rules making them consider long-term goals for their customers, rather than short-term targets.
However, some of the rules trample over previous decisions made by the UK’s authorities.
“In the UK the government originally proposed a ratio to be set between the pay of directors and the pay of employees but decided against it as it would produce very different results depending on the company’s sector and its employee base,” said Alexandra Beides from law firm Linklaters.
The Commission proposals also bring in the principle that – in areas except for directors’ pay – firms can either comply with corporate governance guidelines, or explain why they are not following them.
Governance analysts welcomed the decision to increase flexibility in the regime.
“There will at times be legitimate reasons for departures from the requirements of corporate governance codes, but such departures must be considered and well explained,” said the Financial Reporting Council.
“The focus on the company’s specific characteristics and situation and ensuring clear, accurate and comprehensive explanations will ensure that investors receive the information they require.”
KEY EU CHANGES TO CORPORATE GOVERNANCE RULES
■ Investors will get a binding vote on executives’ pay policies every three years.
■ The EU is not trying to cap pay, as it is in the banking sector, but giving listed firms’ shareholders a louder voice.
■ Similar rules were introduced in the UK in October 2013.
■ Asset managers who run institutional investors’ share portfolios will have more legal responsibilities.
■ The managers will have to vote on areas like pay in the firms they invest in.
■ If they do not, the investment managers will have to explain why they do not.
■ Those institutions will also have to publish more information on how their equity investments match their firm’s assets and liabilities.
■ They must detail how asset managers’ pay gives incentives to meet the institutions’ goals.
■ And institutional investors will have to publish information on how they pay fund managers to invest based on firms’ long-term performance and on non-financial performance.