15.4.96

Taking a fresh look at Greenbury - one year on

A YEAR ago, the Greenbury committee was working on its report on top pay. When it was published in July, Sir Richard Greenbury highlighted some of the key themes - accountability, full disclosure and the need to align director and shareholder interest.

It is worth asking what progress has so far been made in addressing these themes, and the wider objective of improving the climate in which directors work, leading the wealth-creation process on which everything material we value in society depends.

For a report like this to work, its recommendations must be widely known and understood. On this, Greenbury scores high marks. A recent survey of Institute of Directors' members shows a majority are already aware of the main recommendations of the Greenbury code of best practice. Awareness rises to much higher levels in larger companies, on which the committee's recommendations were focused.

Coopers & Lybrand recently carried out a survey of a small number of leading U K companies into opinions about Greenbury .

This revealed a general disposition to comply fully with the report, but also a concern about the political atmosphere in which it was produced, and its over-prescriptive nature. These last two points are really two sides of the same coin.

Businessmen may not like the degree of public interest in the subject of top pay, but it is a reality, and has to be met with a robust response. It is not a choice between more or less prescription. It is a choice between measures such as those proposed by Greenbury, and far more prescriptive legislation.

The code focused on four main areas. First, its recommendations concerning remuneration committees are being widely adopted by public companies, although there is some concern about the idea of such committees being directly accountable to shareholders.

There was no intention to create a division in the boardroom, but it is important that accountability for remuneration should be separate from those who benefit. There is a close parallel here with the role of the audit committee.

Second, there is also widespread support for the idea of more disclosure of executive remuneration, and the evidence is that the committee's recommendations are already being widely adopted.

Sir Richard Greenbury's message that there should be full disclosure of pay packages, in a way which makes directors much more accountable to shareholders, has been taken to heart. The main concern is that this degree of disclosure represents an invasion of personal privacy.

The cynic may say this is something which a director of a plc will just have to accept; but it is an intrusion that simply would not be accepted in many other walks of life, and is one more factor that needs to be taken into account in avoiding a situation where good people are discouraged from taking on positions of responsibility because of the burdens of disclosure imposed on them.

Third, the committee made a number of recommendations about remuneration policy, and has been criticised both for intruding into an area many boards feel is their own preserve, and for failing to come up with new thinking.

Both these criticisms are entirely misplaced. First of all, it was the way in which some pay packages were being put together that had rightly become a matter of public concern. Moreover, even established good practice in remuneration policy was being disregarded by some companies.

The message that directors' and shareholders' interests need to be more closely aligned - eg, through long-term share-participation schemes - is getting through.

Finally, the committee's recommendations on service contracts and compensation were designed to stop the payment of substantial sums to those who were leaving organisations because they had failed to perform satisfactorily.

Again, the committee's recommendations are not as prescriptive as some have made out. We pointed out that, in most circumstances, service contracts of a year or less were appropriate, but recognised that longer periods might be needed in certain cases. All that has to be done is to explain the reasons. Explaining and justifying actions is at the heart of what Greenbury was trying to achieve. One important topic that is still the subject of intense public debate is how best to disclose directors' pension entitlements. Greenbury does not recommend one course or another. We asked the Faculty & Institute of Actuaries to make recommendations on the best way forward. What needs to be shown is the amount a director can expect to receive as a pension on retirement, and how much this increases or reduces during the year. A mechanism that does this clearly is what we're looking for. 

Good progress has been made on a number of fronts as a result of Greenbury . But public interest in this topic is as great as ever, and concerns about unacceptable board pay practices have not diminished. No-one is criticising high pay for high performance, but there is more work to be done to demonstrate that most directors are not overpaid. The few who receive pay packages that attract newspaper headlines could, for the most part, obtain even higher remuneration elsewhere in the world. They operate in an international market-place, and UK directors are not highly paid by international standards.

That said, there are few - very few - who turn a blind eye to public concern, and receive high pay packages, or pay increases, when their performance or the conditions in the organisations they lead do not justify it.

It is only by working hard to create a culture of openness, in which all directors willingly disclose, explain and justify their remuneration packages, that this problem will finally be solved.

Tim Melville-Ross is director-general of the Institute of Directors and former Greenbury committee member.