BREAKINGVIEWS – Shareholders can’t do board’s work on U.K. bank bonuses

March 25, 2010

— The author is a Reuters Breakingviews columnist. The opinions expressed are his own —

By Peter Thal Larsen

LONDON, March 25 (Reuters Breakingviews) – The British government may have stopped short of regulating bank pay. But it is sparing no effort in encouraging others to rein in excess bonuses. Non-executive directors have already been handed a checklist for scrutinising pay. Now ministers want shareholders to make their voices heard as well.

During the boom, investors occasionally grumbled about pay for executive directors. But they almost never worried about remuneration of bankers below board level. They were free to earn as much as they could get away with.

Ministers want those pay packages to become more controversial. Draft regulations published earlier in March will force banks to disclose the number of employees earning more than half a million pounds. These “executive remuneration reports” will be submitted to shareholders for approval.

Now Paul Myners, the UK’s City minister, has suggested giving shareholders the power to vote on pay packages before they are approved. This seems sensible: it would allow investors to influence bonuses before they were awarded, rather than registering an empty protest afterwards.

However, Myners’ other ideas have less merit. He wants shareholders to have direct input to boards’ remuneration and nomination committees. But this confuses the roles of shareholders and directors.

Few investors in large public companies have big enough holdings to push corporate managers around. When things go wrong, it usually makes more sense to sell shares than to mount a protest. This problem cannot really be addressed without making it hard or expensive to sell. Also, it is unclear why banks should be treated differently from other public companies.

Besides, boards are not entirely unaccountable: just ask Wolfgang Berndt, chairman of the remuneration committee of Lloyds Banking Group. He recently stepped down rather than face a shareholder revolt over the decision to award chief executive Eric Daniels his full bonus for 2009 — a bonus that Daniels subsequently waived.

Even shareholders who have enough voting power to matter do not generally have the time or expertise to get involved in detailed compensation discussions. That is a job for the board.


— Shareholders in banks may be given further powers to approve executive remuneration in banks, the UK government said on March 24. In documents published as part of the UK’s budget, the government said it planned to consult on “whether further practical measures can be identified to facilitate the consent, by owners, of executive remuneration in the financial services sector”.

— Paul Myners, the UK’s City minister, said on March 25 that the government would consider giving shareholders the power to vote on pay packages before they are awarded; getting investors to contribute to remuneration and nomination committees; and putting compensation consultants under a clear liability to the owners.

— Owners “have and continue to let some executives get away with too much and are failing to demand of CEOs and remuneration committees that they find better ways of managing senior executives than simply throwing ever more money at them,” Myners said in a speech to the ICGN conference on corporate governance. “They have failed to find satisfactory explanations for why the pay of the most senior executives and traders has become so detached from that of their middle and junior colleagues.”

— On March 10, the government published draft legislation that will require banks to publish an “executive remuneration

report”. The report forces banks to disclose the number of executives who earn more than 500,000 pounds, divided into bands that rise by increments of 500,000 pounds.

— Banks must also put to the executive remuneration report to shareholders for approval at the annual meeting.

— Myners speech:

— Budget documents:

— Draft regulation on Executives’ Remuneration Reports:

(Editing by Edward Hadas and David Evans)



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