The cost of living crisis means that investors and consumers are scrutinising businesses' ESG credentials more closely, especially over executive pay. Despite public support for curbing excessive remuneration, legislation has been slow to catch up.
In the UK, most standards on executive pay are found in best-practice guidelines and codes published by shareholder advisory and industry groups. The advantage of this for investors is that guidance can be updated quickly to reflect changes in sentiment. The disadvantage for companies is that the risk of easy change can create uncertainty.
Remuneration legislation has been reformed relatively recently. In 2013 the rules over which topics companies had to include in their reports became more prescriptive. These reforms focused on legislating for enhanced disclosure, largely to increase transparency. The premise was that having to show any inequity between executives and their workforce would change behaviours.
The UK's disclosure-based regime adapts better to changing attitudes and conditions, especially when it is coupled with investor stewardship. It also allows companies to fit their pay to their stakeholders. On this basis, rather than relying on legislation to control pay, perhaps the focus should continue to be on investor stewardship.
The most recent EU legislation on the topic, the Corporate Sustainability Reporting Directive (CSRD), formally adopted in November 2022, will impose mandatory ESG-related reporting requirements on in-scope EU and relevant "third country" companies. In particular, companies will have to disclose the ratio between the remuneration of their highest-paid individual and the median employee compensation. Purely from a remuneration perspective, the legislation does not significantly change the obligations placed on companies but it adds to the list of tick-box disclosure requirements.
One area where there is arguably a gap in remuneration legislation is large private companies. Most rules and guidance on remuneration apply to public companies. Private companies can set executive remuneration as they see fit; there is no need to make such policies public or to seek shareholder approval. This can create difficulties for any private company that wants to go to an initial public offering: the adjustment to market expectations can be hard.
The 2023 AGM season will be interesting from a remuneration perspective. The corporate governance committee of the OECD has flagged concerns that some boards might have rearranged the terms for executive compensation to evade or mitigate reductions in executive pay resulting from the pandemic.
Investors already want companies to disclose the steps they have taken towards supporting low-paid staff. High-level pay outcomes are likely to receive greater investor and stakeholder scrutiny, particularly in the context of rising inflation as well as windfall gains.
White & Case LLP has partnered with the Financial Times on the publication of its Moral Money Forum reports, which explore key issues from the ESG debate. This article has been reproduced with permission from the Financial Times.
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