Supplemental: Stakeholders

How directors pay, stakeholder activism and threats of takeovers

ensures the shareholder-centric view is still upheld and practiced
within companies in the UK?
1 Determination of directors pay
Directors pay are determined by the Remuneration
Committee.
The Remuneration Committee consists of non-executive
directors, who are responsible for setting appropriate levels of
remuneration for directors.
Its role is also to ensure that remuneration arrangements
support the strategic aims of the business and enable the
recruitment, motivation and retention of senior executives.
It also ensures the compliance with the requirements of
regulatory and governance bodies, and also satisfying the
expectations of shareholders.
Remuneration committee also ensures that the remuneration
paid to executives is fair and reasonable and linked to the
long-term strategy and success of the business.
Hence directors are generally accountable to the interest
of the shareholders first since their remuneration is in line
with the success of the company.
Remuneration of senior executives has been a widely debated
topic in the UK.
The High Pay Centre published a report The High Cost of
High Pay: An Analysis of Pay Inequality within Firms in
January 2014. Deborah Hargreaves in the foreword says that a
FTSE 100 chief executive takes pay 133 times more than the
average employee in a top company.
In 2012, the highest paid executive in the UK is Angela
Ahrendts from Burberry who takes home 17 million. It would
take an ordinary worker 600 years to achieve the same
amount.
Pay inequality is an issue because those at the top constantly
experience high pay with an acceleration of 10% per year,
while everyone elses have stagnated and failed to keep up
with inflation.
Q: Does pay inequality poses itself as an issue for
stakeholders
Employees are the main stakeholders that are directly
affected by pay disparities.
The High Pay Centre states that organisations with high pay
disparities are more likely to experience high employee
turnover, lower employee commitment and lower satisfaction
with work. In return, it causes increased expenditure for a
company to find replacement, lost production, wasted training

costs, interruptions in the flow of work and damage to the

organisations reputation and morale on those who remain.
Hence besides affecting employees as stakeholders, it also
affects shareholders who are concerned as to where their
investment goes.
The High Pay Centre states the optimal limit for pay disparity
is on a ratio of 24:1.
Today, there are regulatory measures to ensure pay for
directors are accountable. This is ensuring shareholders
interests are ultimately being prioritized. But somehow, the
regulatory measures promotes the enlightened shareholder
value approach since employees concern are being
considered at the same time.
S420 CA 2006: Quoted companies must produce
remuneration report in which non compliance/ reckless
compliance would result in a fine.
S215-S222: Mandatory disclosure for directors loss of office
compensation. This could reduce possibilities of golden
handshakes.
These provisions in the CA 2006 imposes duty on directors
but ditectors could not self regulate in many instances.
Therefore, shareholder must retain a proactive role in
determining remuneration of directors.
Today, this is possible due to the Enterprise and Regulatory
Reform Act 2013, which received royal assent on 25 April
2013.
S79-82 states that shareholders votes on directors
remuneration are binding in quoted companies.
There is also a requirement on shareholders to improve on
remuneration policy at least every three years.
Payment for directors lost of office can only be made to
directors if they conform to the companys policy.
The Companies Act (Strategic Report and Directors
Report Regulations) 2013 has been in force since 1 Oct
2013.
It replaces the old S417 and FBR requirement and imposes on
quoted companies a requirement to prepare a strategic report.
It is for members to assess how directors have performed in
their duty to promote the success of the company.
With this, it is concluded that shareholders have a say when it
comes to directors remuneration.

2 Shareholder Activism
What is shareholder activism?
Shareholder Activism is the relationship/dialogue between the
company directors and shareholders who files in resolutions.
This practice generates investor pressure on corporate
executives and also gains media attention. In doing this, it

adds even more pressure on corporations to improve their

behavior and educates the public on often-ignored social,
environmental, and labor issues. Depending on the value in
which the company seeks to promote, this process could serve
as a powerful tool to encourage corporate turnaround in social
and environmental policies. Ultimately, this can lead to a more
sustainable company.
But what if the shareholders in a company wants to only
promote wealth and profit maximization? Directors then have
to conform to their wishes as S172 codifies the duty of loyalty.
Shareholder Activism promotes success of the company by
also promoting the interests of other entities.
The concept of shareholder activism is not new, but in recent
years there has been an increase in the level of such activity.
Recent high-profile examples of shareholder activism have
included: HSBC (by Knight Vinke Asset Management lobbying
for changes to HSBCs strategy and structure)
Knight Vinke Asset Management is an activist investment
firm.
In 2007, it started to challenge the strategy and
governance of HSBC.
It also started to conduct a wholesale strategic review of
the business, and has raised questions over directors'
bonuses and its U.S. business.
In June 2009, HSBC's largest shareholder, Legal & General
Investment Management (LGIM), became the first major
shareholder to offer public support for Eric Knight's
activism, and urged HSBC to pay heed and answer
questions.
This illustrates shareholder activism because the
shareholders ie LGIM asserted pressure on HSBCs Board
for them to change their strategies to reflect better
governance. . As a result, in 2011, HSBC changed 1/3 of
its Board after being alleged of lack of Board
independence.
The issue on excessive/misaligned pay has also been
addressed. After the pressure, the Board remove the
alleged offensive elements from their pay packages.
Shareholder activism in this context ensures that stakeholders'
interests are protected. This is because if the value of the
company is to promote corporate sustainability, shareholders
interests will be ultimately promoted to reflect this end.
But it also works as a double edged sword- if companies
sought to only promote short term wealth maximization, then
shareholder activism will promote this value. With that S172
would be a blunt instrument of precision.

3 Threats of Takeovers

A takeover happens when an acquiring company acquires a

target company. If the takeover goes through, the acquiring
company becomes responsible for all of the target companys
operations, holdings and debt.
A Takeover will happen when a person or group acquires
interests in shares carrying 30% or more of the voting rights of
a company. Then, they must make a cash offer to all other
shareholders at the highest price paid for the shares in the 12
months before the offer was announced.
When a company is facing a threat of a takeover, the
objectives of the company may not be in line with
stakeholders.
A target companys directors may want to employ tactics to
resist the takeover.
The people directly affected by the takeover may not have
exact interests in line with stakeholders.