The Conference Board Releases Handbook on Executive Compensation Rules Across Europe

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Feb 23, 2012, 03:00 ET

NEW YORK, Feb. 23, 2012 /PRNewswire/ -- The Conference Board, in collaboration with seven leading European law firms, today released Executive Remuneration across Europe: A Handbook on Design, Disclosure, and Enforcement Rules, a comprehensive review of the regulatory framework for executive pay in eight key European Union states: Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, and the United Kingdom.

The EU Commission and other European institutions have enabled and encouraged harmonization among member states, facilitating the convergence of rules across the continent. However, noteworthy differences remain and continue to impose a significant compliance cost on companies with cross-border business activities. To help bridge the any knowledge gap of a corporate board's oversight responsibilities, The Handbook provides a comparative analysis of the following subjects:

The process for setting executive remuneration.
The disclosure of remuneration program and policies, including ongoing and ad-hoc disclosure, disclosure in connection with public offers and takeovers, and disclosure of price-sensitive information.
The specific issues and regulatory solutions envisioned for executive remuneration in the financial sector.
The remedies against excessive executive remuneration, including judicial remedies and the non-judicial relief available to shareholders or employees.
Regulatory oversight and public enforcement measures.
Pending legislative and regulatory initiatives.

"Social pressure within the European Union has favored a consensus on the inordinate risks that could result from inadequately designed or excessive executive remuneration, and the need for effective public and corporate policies to tackle these issues," said Geert Raaijmakers, a partner at NautaDutilh in Amsterdam and co-executive editor of the study with Matteo Tonello, Managing Director of Corporate Leadership at The Conference Board.

"Four years after the onset of the financial crisis, The Conference Board offers companies operating in Europe a tool to navigate the intricacies of multi-jurisdiction regulation on the subject," Tonello concluded.

Following are the Handbook's key highlights comparing national systems:

Performance-related remuneration Performance-related remuneration has, since the crisis, come under scrutiny. While the (now superseded) U.K. Combined Code explicitly provided that performance-related elements of remuneration should form a significant proportion of the total remuneration package of executives and be designed both to align their interests with those of the company's stakeholders and give them incentives to perform at the highest levels, the provision was eliminated in the U.K. Corporate Governance Code of May 2012. One of the lessons of the crisis was, after all, that this form of remuneration had created inappropriate incentives and encouraged excessive risk taking: for this reason, the U.K. Corporate Governance Code emphasizes non-financial performance as a criterion for granting bonuses. Other countries have been introducing similar restrictions. Under the Swedish Code of Corporate Governance, for example, variable remuneration paid in cash must be subject to predetermined limits: these limits may take the form of maximum amounts but may also be expressed in other ways, including as a percentage of the fixed remuneration or based on the total dilution resulting from equity awards. According to guidelines adopted by the Swedish government, senior executives of state-controlled public companies have no right to any variable remuneration at all.
Comparable analyses Although the corporate governance codes of most of the countries discussed in the Handbook allow the remuneration levels in comparable companies to be taken into account when determining executive remuneration, the Spanish Unified Good Governance Code is an exception. The Spanish code rejects this form of benchmarking on the grounds that it risks driving up remuneration levels and, as shown by empirical research, almost never results in a downward adjustment.
Disclosure requirements The comparison reveals that all of the countries covered have far-reaching disclosure requirements. At the very least, a company's annual report must provide information about its remuneration policies. In addition, in the case of a merger or takeover, the offer document must contain detailed information about the remuneration granted to the directors of the acquiring and target companies.
Judicial remedies The study also shows that in most of the countries covered, employees and trade unions lack the legal tools to challenge excessive remuneration. This is different for shareholders: at least in theory there are various judicial remedies they can use to oppose excessive or otherwise improper executive remuneration. In the Netherlands, for example, remuneration policies can be one of the elements taken into consideration in mismanagement proceedings initiated before the Enterprise Chamber of the Amsterdam Court of Appeal. In Belgium, Germany, and France, a special expert can be appointed to investigate executive remuneration in a particular case. In the latter two countries, criminal sanctions can also be imposed for the abuse of corporate assets through excessive remuneration. In some countries, an individual shareholder can bring a civil action to recover damages for a loss in the value of his or her shares as a result of excessive remuneration (a so-called derivative action).
Non-judicial remedies In practice, however, these judicial remedies do not always prove effective due to the complexity and delays of the judicial systems. By contrast, non-judicial remedies appear more successful: for example, shareholder discontent often causes companies to think twice about proposed remuneration packages, even if shareholders have only an advisory vote. The European Union's Capital Requirement Directive III may also help to reduce excessive bonuses at credit institutions and investment firms without judicial intervention. In the even of disappointing or negative performance of an enterprise the directive requires that the variable remuneration be substantially reduced, including through malus and clawback arrangements. This requirement may also have a deterrent effect.

The Handbook is the result of the collaboration among The Conference Board's Corporate Leadership research team and executive remuneration experts from seven leading European law firms: NautaDutilh (for Belgium and the Netherlands), Bredin Prat (France), Hengeler Mueller (Germany), Cleary Gottlieb Steen & Hamilton (Italy), Uria Menendez (Spain), Mannheimer Swartling (Sweden), and Slaughter and May (United Kingdom).

About The Conference Board

The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. For more information, please visit www.conference-board.org

Source:
Executive Remuneration across Europe: A Handbook on Design, Disclosure, and Enforcement Rules
R-1490-12-RR
The Conference Board, Inc., 2012.

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