In new calls for strengthened accountability, transparency and alignment in non-executive director pay, the International Corporate Governance Network (ICGN) is specifically calling for pay to consist solely of a combination of a cash retainer and equity based remuneration. The ICGN also calls for the elimination of perquisites for non-executive directors.
Commenting on the new Guidelines the ICGN Chairman, Christianna Wood says,
As the shareholder’s representatives, non-executive directors are elected by the owners of the company and must have a strong alignment of interest with the owners in the form of meaningful equity ownership while serving on the board. Furthermore, directors have a conflict of interest in that they set their own pay and as a result need to provide the utmost transparency and clearly state the board’s philosophy behind the director remuneration programme.
These principles were crafted over the last several years in a consultation that included many of the largest global shareowners. Ted White, Chairman of the ICGN Remuneration Committee responsible for developing the new Guidelines also commented,
These principles were hotly debated by our members from around the world. While practices differ from country to country, continent to continent, we all agreed that this was an important policy and that the principles of accountability, transparency and alignment of interest were agreed upon principles that should exist in the setting of all non-executive director remuneration programmes.
The ICGN acknowledges that remuneration practices differ around the world. Carl Rosen, ICGN Executive Director added:
Among the agreed upon themes are that non-executive director equity remuneration should be immediately vested and not performance-based. The ICGN believes that directors should have solely cash retainer and equity ownership remuneration, with a preference against the use of options.
The Guidelines aim to help communicate investors’ perspectives on this critical issue and are primarily addressed to companies and their non-executive board members. Since remuneration policies are set by the board, it is important that they be transparent, address shareholder expectations, and those setting them be held accountable. Accordingly, three principles underpin these guidelines: transparency, so investors can clearly understand the program and see total remuneration for non-executive directors; accountability, to ensure that boards maintain the proper alignment of interests in representing owners; and alignment of interest between non-executive directors and shareowners. The cornerstone of non-executive director remuneration programs should be alignment of interest through the attainment of significant equity holdings in the company meaningful to each individual director. Key aspects of the Guidelines are as follows:
- Places an emphasis on non-executive director alignment of interest with long-term owners.
- Draws a distinction to differences to executive remuneration, particularly related to performance-based remuneration.
- Opposes the use of performance-based remuneration for non-executive directors.
- Examines the tools of remuneration, and favors solely cash retainer and equity, with a preference against the use of options.
- Provides flexibility for companies to implement the principles in ways consistent with their unique circumstances.
- Calls for clear disclosure including the philosophy of the non-executive director programme.
- Calls for equity to be vested immediately but subject to holding periods.
- Suggests companies establish ownership guidelines for non-executive directors.
- States non-executive directors should not be eligible for retirement benefits.
The Guidelines are intended to be of general application around the world, irrespective of legislative background or listing rules. As global guidelines, they need to be read with an understanding that local rules and structures may lead to different approaches to these concepts. The ICGN will also seek change to legislation, regulation or guidance in particular markets where we believe that this will be helpful to generating corporate governance improvements and particularly where such change will facilitate dialogue and accountability.
The ICGN Non-executive Director Remuneration Guidelines has been developed by the ICGN Remuneration Committee in consultation with ICGN members. A consultation paper on the subject was sent to ICGN members for comment and a wide range of responses were received and contributed toward the final draft. The Guidelines will be launched at the ICGN Conference, being held on the 24 – 25 March at London’s Guildhall, entitled ‘Will shareholders rise to the ownership challenge?’ The event is hosted by the City of London and supported by the Department for Business, Innovation and Skills, among other partners.