Shareholders to have right to vote on directors' pay

In October 2001, the UK government announced that it would introduce new measures requiring quoted companies to hold annual shareholder votes on reports giving details of directors' remuneration arrangements.

On 19 October 2001, trade and industry secretary Patricia Hewitt announced that shareholders are to be given the right to an annual vote on director's pay. The minister said that the move was designed to improve accountability and strengthen links between pay and performance in the boardroom.

In March 2001, the government had announced its intention to require companies to produce an annual directors' remuneration report giving details of individual director's remuneration packages, the role of the board's remuneration committee, the board's remuneration policy and information on company performance.

In addition, the government now intends to require quoted companies to table a resolution each year on the directors' remuneration report. The Department of Trade and Industry (DTI) says that the vote will be advisory, and will not require shareholders to approve specific levels of remuneration. The procedure will, however, 'enable shareholders to express a view on matters such as the robustness of performance criteria and membership of the remuneration committee'.

The government has said it will introduce secondary legislation to implement these new requirements in the current parliamentary session. The DTI will publish a consultation document before Christmas 2001, inviting comments on draft regulations.

The Confederation of British Industry (CBI) gave what it called a 'cautious welcome' to the government's proposals. CBI director-general Digby Jones said in a statement: 'Failure should not be rewarded, nor seen to be rewarded. It is right that business leaders should show shareholders that are earning their rewards, which are often much deserved.' However, he warned against allowing 'judgmental approval' of individual directors by shareholders which, he argued, would be 'counterproductive'.

George Cox, director-general of the Institute of Directors said: 'Anything that makes remuneration policy clearer, strengthens accountability and enables shareholders to exercise their influence effectively and constructively, has to be welcomed.'

The Trades Union Congress (TUC) described the government's announcement as 'a very welcome move. Executives will now need to justify their pay rises. Companies that include employees on their remuneration committees, as the TUC suggests, are likely to get an easier ride at [annual general meetings].'