As a consequence of the separate legal entity and limited liability doctrines within the UK’s unitary based system, company law had to develop responses to the ‘agency costs’ that arose. The central response is directors’ duties; these are owed by the directors to the company and operate as a counterbalance to the vast scope of powers given to the board. The benefit of the unitary board system is reflected in the efficiency gains it brings, however the disadvantage is clear, the directors may act to further their own interests to the detriment of the company. It is evident within executive remuneration that directors are placed in a stark conflict of interest position in that they may disproportionately reward themselves. The counterbalance to this concern is S175 Companies Act 2006 (CA 2006) this acts to prevent certain conflicts arising and punishes directors who find themselves in this position. Furthermore, there are specific provisions within the CA 2006 that empower third parties such as shareholders to influence directors’ remuneration.
In order to analyse the consequences of the two proposals the current law will be summarized so that an analysis of each can be advanced. The essay will then examine other available options. The essay will conclude that neither of the proposals is appropriate in that the theoretical consequences outweigh the practical benefits, moreover, provisions already exist that if strengthened would provide more effective solutions.
Currently, directors have no prima facie entitlement to be remunerated for their work (Hutton v West Cork Railway Co 1883), but Article 23 of the Companies (Model Articles) Regulations 2008 establishes that it is for directors to decide the level and form of remuneration. Thus a clear conflict of interest arises and the law must respond to this to protect third parties.
Since 2002, shareholders in the UK have been entitled to an advisory vote on directors’ remuneration, as established in the directors’ remuneration report regulations it is currently incorporated in the CA 2006. However, recently it was announced certain measures were to be introduced to tackle the perceived failings in the corporate governance framework for executive remuneration. The government intends to address the shortcomings of the system by giving the shareholders a binding vote on remuneration.
The change would be reflected in the majority required to pass the remuneration report from a 50+1% to higher threshold of between 50- 75%, (consultation paper) the benefit of this is that companies are encouraged to improve shareholder engagement so as to secure adequate support yet it still ensures one shareholder with 25% or more of the votes cannot reject a special resolution (Norton rose). However, if a majority cannot be reached then there will be harmful cost and administrative consequences. These will detract from the efficiency gains that exist as a result...