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- DRR Simplification
What’s the Story?
The UK government is inviting comment on proposals to simplify report and accounts disclosures under UK company law in various areas.
The proposed simplification includes changes to the Directors' Remuneration Report (DRR) rules, so that:
the annual advisory vote on directors' remuneration would be removed;
various requirements, including pay ratios, would be removed; and
some duplication would be simplified.
Following the proposed changes, shareholders would only have a vote on policy every three years through which to express an opinion.
Why Does it Matter?
Simplification is welcome: it saves money but, more importantly, it frees up time to focus on the key needs of the business. Yet top pay governance and accountability remain important to shareholders and others. Getting the balance right is tricky.
The consultation is important, as opportunities to simplify reporting are rare. Two things should be considered:
Are the proposed removals sensible?
Do the proposed removals go far enough?
This window is important, as it will shape the new obligations for decades ahead.
Newspoint view
Disclosure of top pay inevitably leads to higher numbers, wherever in the world it is seen.
The thought that disclosing directors' remuneration would promote restraint is plain wrong, and the hope for better-structured incentives is fanciful.
Two themes are important, though: first, on what basis is directors' remuneration set? And second, how do the incentives promote the success of the business?
Remuneration policy should address both issues, but in practice policy has been approached as a wide envelope to allow flexibility and headroom. Shareholders should be concerned, as historically outcomes within policy have varied widely, and sometimes very unexpectedly.
That said, the proposed simplification is insufficient. For example, the graph of TSR relative to pay is rarely used. A bolder approach is needed, combined with a deeper look at how much to pay and why.
The old Irish joke tells of a fellow asking for directions, who gets the reply:
"If you want to go to there, I wouldn't start from here."
What we have now is a mess, driven by hope and politics and put together piecemeal over decades. We need a deeper and more radical rethink than simplification alone.
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