We are writing on behalf of the European Corporate Governance Service (ECGS), registered in London, to comment on the CONSOB consultation regarding disclosure rules for listed company management remuneration.
The ECGS is a partnership of independent local market experts who have come together to provide specialist governance research and proxy voting advice, offering institutions access to unrivalled experience on corporate governance and responsible investment issues. The Managing Partner of ECGS is Proxinvest, based in Paris.
Other active ECGS Partners include DSW (Düsseldorf), Ethos Services (Geneva), and Shareholder Support (Rotterdam). Frontis Governance, based in Rome, recently joined ECGS, and is also associated with local governance experts in Montréal and Melbourne. ECGS acts solely in the interests of all shareholders and is free from conflicts of interest in the production and sale of its advisory services.
ECGS considers that, in view of the globalisation of the markets and the frequent objections to national reforms in the name of equal footing competition, fair financial market rules are necessary for the efficient allocation of capital. We consider at ECGS that the fair treatment of shareholders, resulting from improved corporate governance, is the cornerstone of financing new investment and therefore new employment.
ECGS, together with its Italian local partner Frontis Governance, considers that the transparency of information is fundamental for the fair functioning of the market itself and that listed companies should be expected to provide full information on director remuneration.
ECGS therefore commends the Consob for this public consultation, which enhances market transparency by providing a higher level of public disclosure on remuneration policies and compensation effectively paid to Directors. At the same time, we support the rationalisation and simplification of current procedures.
Based on the analysis provided by Frontis Governance and in line with the ECGS guidelines, we submit the following comments:
- Attachment to financial statements concerning directors’ remuneration. ECGS supports the choice to rationalise and simplify disclosure duties. On the other hand, minority shareholders should benefit from the same simplification effort. As the reference document carrying the financial statements is the main informative document for the entire market, we recommend that the Remuneration Report be necessarily attached to the Financial Statements to be voted at the Annual General Meeting. An English version of the Remuneration Report should also be made available, in order to facilitate comprehension for foreign investors.
- Remuneration Report disclosure timelines. Generally, all listed companies should follow the same rules regarding public disclosure, and ECGS sees no reason why cooperative listed companies should follow different rules. Cooperative listed companies should disclose all information relevant to the vote at the General Meeting at least 21 days before the first call meeting date.
- Information to include in the first section of the Remuneration Report. In Scheme n.7 of the Remuneration Report, the maximum amount that variable remuneration might reach must be clearly quantified, even in the form of an estimated amount in Euros. The disclosure of the weight of variable compensation on total remuneration is not sufficient to clearly quantify the impact of aggregate future remuneration on companies’ financials. Applicable performance criteria should be disclosed with precise and pertinent benchmarks.
- The disclosure of procedures. ECGS research reports confirm that Italian Remuneration Committees generally do not yet rely on independent advisors (selected external advisors paid by the Committee and not by management) to evaluate the fairness of Directors’ remuneration. Committees should have an amount determined by the Board available to hire an independent advisor. Remuneration committees should not employ the same company already advising the Executive Directors, as this clearly undermines the genuine independence of their decisions. Remuneration Committees should be required to hire strictly independent advisors, who cannot hold any other advisory contract with the company or the Board of Directors.
- Shareholder approval of Directors’ remuneration. Too often, Directors’ remuneration is part of bundled items on the Meeting Agenda (usually “Election of the Board of Directors having defined the amount of their remuneration”). Such behaviour prevents shareholders who vote by proxy, that is the case for almost all minority shareholders, from correctly voting on Directors’ remuneration. It is absolutely necessary to enact a regulatory provision imposing Directors’ (and Statutory Auditors’) remuneration as a specific item on the Annual General Meeting Agenda.
- Harmonisation with bank and insurance company regulation. Current rules stipulate that the Remuneration Reports of listed banks and insurance companies must be put to a binding vote by shareholders. On the other hand, the Remuneration Reports of all other listed companies are subject to a non-binding vote. As remuneration holds the same level of importance regardless of the business sector, shareholders’ votes on Remuneration Reports should be considered binding for all listed companies.
We appreciate the opportunity to express our views and remain available for further discussion on our proposals.
PARIS, 9 Novemberth, 2011