The EU Shareholder Rights Directive: The implications for executive compensation in Belgium and Luxembourg

The corporate governance landscape is changing. Listed EU companies are increasingly subject to more disclosure and transparency requirements while executive compensation is now under greater scrutiny than ever. In this article CGLytics takes a look at the implications of the EU Shareholder Rights Directive on executive compensation in Belgium and Luxembourg

The corporate governance landscape is changing. Listed EU companies are increasingly subject to more disclosure and transparency requirements while executive compensation is now under greater scrutiny than ever. Part of the call for greater transparency applies to the compensation of top executives of listed companies. Shareholders now have the right to an extended say on pay under the Revised Shareholders’ Rights Directive (SRD II) through their votes on the remuneration policy and report.

The EU SRD II: It’s Main Purpose

  1. To encourage long-term shareholder engagement by facilitating the exercise of shareholder rights
  2. To enhance transparency
  3. To increase directors’ accountability and reinforce the link between pay and company directors’ performance

Impact for companies

Under SRD II – Extension of shareholders’ right to say on pay

The SRD II requires the compensation of all directors to be reported on an individual basis. This will impact Belgium listed companies as previously it was deemed sufficient to provide this information on an aggregated basis.

Another change is the impact of shareholders’ votes on the remuneration policy, empowering them to oversee and influence directors’ remuneration. The shareholders’ vote on the remuneration report is not new, however, the content of the remuneration report will have to be more extensive and explicit to comply with SRD II. In particular, next year’s report will have to explain how the shareholders’ vote on the remuneration report was taken into account.

The most innovative change is the requirement to explain the changes in directors’ pay in relation to the evolution of the company’s performance and employees’ average pay during the period under examination. This will put the emphasis on the compensation committee to provide increasingly data driven analysis against a variety to financial and non-financial KPIs.

In the future – Disclosure of the CEO pay ratio?

The CEO pay ratio is the indicator of CEO compensation compared with employees’ pay, usually expressed by a multiple of the median annual salary of the employees of the company concerned. Currently, the pay ratio is not part of the disclosure requirements under European corporate governance regulations, in contrast with the US and the UK.

In the US for example, public companies are required to disclose the ratio of CEO pay to median employee pay in their proxy statement. In the UK, listed companies with more than 250 employees are required to disclose the ratio of their CEO’s total remuneration to the median (50th), 25th and 75th percentile full-time equivalent remuneration of their UK employees.

The future will tell us whether the disclosure of CEO pay ratios affects companies’ executive compensation practices. It cannot be ruled out that other governments will follow the path taken by the US and the UK in order to manage the perception of executive remuneration being increasingly out of step with the average employee pay.

Fair pay

Fairness in pay is not only about being transparent on the remuneration and the wage gap between CEOs/executives and employees. Fair pay also means non-discrimination between employees.

Significant developments are occurring worldwide regarding gender discrimination. Measures adopted to tackle this issue vary from country to country. Such measures may consist of transparency requirements (e.g. in Germany), the obligation to report on the gender pay gap in the company’s annual report (e.g. in the UK), the requirement to have a gender pay gap analysis conducted by independent and external bodies (e.g. in Switzerland) or mandatory equal pay certification (e.g. in Iceland – such legislation is under discussion in the Netherlands).

In Belgium, equal treatment is enshrined in the Belgian Constitution and in the Non-Discrimination Act, which prohibits any direct or indirect discrimination based on certain grounds, including in employment relations. Under the Gender Non-Discrimination Act, companies employing at least 50 employees are required to conduct a detailed analysis of their remuneration structure – to ensure a gender-neutral remuneration policy – every two years and deliver their report to the employee representative body.

To date, Belgian companies are not required to disclose their gender pay gap in their annual report or in their remuneration policies or report. Nevertheless, the information contained in the company’s social balance sheet must be broken down by gender. In addition, listed companies are required to describe their diversity policy in their Corporate Governance Statement.

In Luxembourg, labour law prohibits companies from using criteria other than knowledge, experience and responsibilities to determine remuneration. Despite initiatives of the Ministry of Equal Opportunities to raise awareness on the gender pay gap, no further legal provisions exist on this matter.

To this end, companies in Belgium and Luxembourg will be required to show greater transparency of executive and director pay, not just in comparison against the performance of the organisation, but also ensuring that it is benchmarked against the growth (or decline) of the average employee. Shareholders will have more information and greater powers to curtail excess pay, while holding companies to account against more financial and non-financial KPIs.

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The case of Superdry: The dynamics of corporate governance and equity control

CGLytics reviews the recent upheaval of the Superdry board, and how these developments have set an unprecedented case in Corporate Governance.

Superdry was founded from a creative partnership between entrepreneurs Julian Dunkerton and James Holder in Cheltenham, UK in 2003. From an initial collection of five t-shirts, which included the iconic Osaka 6 worn by British superstar David Beckham, the company has grown to offer seasonal collections comprising thousands of items and over 500 distinctive logos. Currently, they represent a global community and have developed a cult celebrity following. It is currently a constituent of the FTSE 250, becoming one of the biggest fashion retail success stories in recent times.

2014 – Change for Growth

In October 2014, the company announced the appointment of Euan Sutherland as their new CEO, replacing founder of the company Julian Dunkerton. Julian stayed on as a Brand Director of Superdry. At the time, the company said that as a business with huge growth opportunities, the need for an experienced CEO was paramount. Euan became the preferred choice as he knew the business well, having been a Non-Executive Director since 2012, and was instrumental in implementing and driving a five-year global strategy that delivered more of the incredible growth that Superdry has become renowned for.  The company’s financial success is well documented. From 2012 to 2019, the company’s revenue grew from GBP 329M to GBP 886M while net income grew from GBP 31M to GBP 63M. For share price growth however, the company experienced a sharp dip from GBP 19.03 in 2017 to GBP 4.68 in 2018. (Year-end)

In March 2018, it was announced that Julian was to step down as a director from the Board. In January 2018, Mr. Dunkerton took advantage of Superdry’s impressive stock market performance as shares rose to a five-year high in December and sold part of his stake, making almost GBP 18m. However, he remained the largest shareholder, with control of about 19% in the company. After his departure, the Board comprised of 9 members including 2 women forming about 22% of the Board composition. Just before the General Meeting, the Board comprised of 8 directors and proportion of women of the Board therefore increased to 25%.

2018 – Tensions Surface

In December 2018, Julian censured the business model of the company he cofounded and launched a campaign to return to the company. In an unusual intrusion, Dunkerton disapproved the firm’s business model in comments to the Liberum analyst Wayne Brown, a former head of investor relations at Superdry. The retail entrepreneur stated in the note that he quit the company’s board in March 2018 because he could not “put his name to the strategy”. In another comment to the BBC, Dunkerton said that he’s willing to return to the company “in any capacity” to turn the company around.

Following growing tension between Julian and the Board, the Board announced a general meeting for April 2, 2019 to decide whether the former should be reinstated to the Board. The Board unanimously asked Shareholders to vote against the return of Julian Dunkerton and against the appointment of Boohoo Chairman Peter Williams, which Julian was seeking to bring to the Board as a chairman to overthrow the current. The Board listed various reasons for their decision among which they stated that Mr. Dunkerton’s return would have damaging business impacts because his views have not evolved with the needs of an increasingly international multi-channel brand business. The Board also added that his return will be divisive and distract from the delivery of the Global Digital Brand strategy. For Mr. Williams, the Board said that though he is being nominated as an Independent Director, they cannot trust the transparency of the action because it is not clear if he’s being nominated to serve the interests of Mr. Dunkerton and James Holder; and (ii) is NOT INDEPENDENT and does not represent the interests of all shareholders equally. Again, his appointment will be in a manner that which circumvents good corporate governance and the established policies and procedures of the Company.

2019 – Dunkerton Returns

The outcome of the meeting was quite different from the Board’s recommendation as shareholders voted to elect Julian to the Board by 51.15%. Peter Williams was also elected to the Board by 51.15%. This subsequently led to the resignation of then Chairman Peter Bamford, CEO Euan Sutherland, Chief Financial Officer Edward Barker and Independent Director Penelope Hughes. Subsequently, Peter Williams was appointed Chairman and Dunkerton, interim CEO. With the current composition of the Board, women form only 14% of the Board, a drop from the initial female composition of 25% before the disruptions. Dennis Millard, Minnow Powell, Sarah Wood and John Smith who are all Non-Executive Directors have also given three months’ notice and will stand down as Directors on July 1, 2019.

The board expertise diagrams, produced directly from data and analytics in CGLytics’ platform, show Superdry’s board expertise matrix before and after the mass resignations that happened after the April 2nd 2019 General Meeting. The information used for producing CGLytics’ expertise and skills matrices in the SaaS offering is standardized and applied consistency to more than 5,500 companies globally for easy comparison, analysis and benchmarking of boards composition.

It is evident, from CGLytics’ Board Expertise matrix, that the expertise of the board has reduced since the resignations of Directors. Before their General Meeting in April 2019, 25% of the Board had Technology expertise; with the current Board composition, approximately 14% of the Board has Technology expertise. With today’s retail business climate, the connection and interaction between traditional stores and the internet is fundamental to the growth of businesses in this sector. With the company’s struggling performance over the years, having directors with technology expertise could bring another dimension to the company’s strategy with adapting to changing customer needs and preferences as the it solidify itself as a “global digital brand”.

Another interesting insight is that after the resignations there is now no Executive board member who has financial expertise, however some of the non-Executive board members do including the new Chairman, Peter Williams. Previously Superdry’s CFO had a seat on the board, which may have an impact on the financial decision-making.

The board expertise diagrams, produced directly from data and analytics in CGLytics’ platform, show Superdry’s board expertise matrix before and after the mass resignations that happened after the April 2nd 2019 General Meeting. The information used for producing CGLytics’ expertise and skills matrices in the SaaS offering is standardized and applied consistency to more than 5,500 companies globally for easy comparison, analysis and benchmarking of boards composition.

Before the General Meeting of the company, approximately 75% of the Board served on 8 other listed companies’ Boards in total, compared to 57% of the current Board members holding 6 other seats on listed Boards. Again, of these, the new Chairman of the Board, Peter Williams, serves on three other listed Boards including one other chairmanship position. Though he is not considered overboarded according to the UK corporate Governance code, there may be some reservations over his ability to discharge his duties given his other time commitments. The composition of the Board before the General Meeting also had directors who served on two other Boards; these includes the former chairman of the Board Peter Bamford and Penelope Hughes, who is also the current chair of Aston Martin Lagonda Global Holding Plc.


Lessons learnt and key takeaways from Superdry:

The Superdry development has shed light on how large shareholders influence voting outcomes. Specifically, Julian Dunkerton and his co-founder who owns about 28.1% between them could influence the resolution to change the direction of the company. According to the statement released by the company after the general meeting, 74% of shareholders other than Julian and James have voted against the resolutions. Two big institutional shareholders – Investec and Schroders, which together control about 10% of the shares also supported Mr. Dunkerton’s return.

But the company’s second largest shareholder, Aberdeen Asset Management, sided with Superdry management, and influential investor advisory firms PIRC and Institutional Shareholder Services (ISS) had both recommended that shareholders should reject Mr. Dunkerton’s re-election. What cannot be ignored is that this development has set an unprecedented case in Corporate Governance.

CGLytics: Identify the gaps, manage the risk

Would you like to learn more about how, you too, can have instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills? Click here to find out about CGLytics’ boardroom intelligence capabilities and obtain the same insights used by investors and advisors.

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What is ESG?

ESG (Environmental, social and governance) criteria are of increasing interest to companies, their investors and other stakeholders. With growing concern about he ethical status of quoted companies, these standards are the central factors that measure the ethical impact and sustainability of investment in a company. ESG factors cover a wide spectrum of issues that have traditionally been excluded from financial analysis:

Environmental:
  • Climate change
  • Resource depletion
  • Waste and pollution
  • Deforestation
Social::
  • Working conditions, including use of child labour
  • Local communities
  • Conflict
  • Health and safety
  • Employee relations and diversity
Environmental:
  • Executive pay
  • Corruption
  • Political affiliations and donations
  • Board composition, diversity and structure
  • Tax strategy

As global interest in ethical investment grows, these factors have increasing financial relevance. There are many dedicated ESG professionals and many more who recognise the relevance of ESG information to gain a more meaningful understanding of corporate policy management and strategy.

ESG investing identifies and quantifies risks that are overlooked by traditional financial metrics, such as a company’s impact on the environment, its use of child labour or employee diversity. It is also concerned with executive pay, and how this relates to company performance, accounting and tax policies. Companies with sound policies are managed better and are more sustainable.

Today, ESG investing accounts for around a quarter of all professionally managed funds around the globe. Although institutional investors have a duty to maximise shareholder value, there is growing awareness that ESG ratings are an indicator of a company’s long-term performance, including return and risk, as well as its ethical standing.

One of the major barriers to successful investment had been a lack of quality, impartial data, but that’s changing rapidly.

Learn How to Incorporate ESG Factors Into Your 2021 Executive Remuneration Policy

Download our latest report with FTI Consulting to learn how companies and asset managers are linking ESG metrics in their executive remuneration policies, so you can mitigate scrutiny from investors.

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What is Corporate Governance?

Corporate governance is the system of rules, procedures and processes by which a company is controlled and directed. In practice, governance is concerned with balancing the combined interests of a company’s stakeholders, including shareholders, management, staff, customers, suppliers and the community in which it operates.

Corporate governance is the system of rules, procedures and processes by which a company is controlled and directed. In practice, governance is concerned with balancing the combined interests of a company’s stakeholders, including shareholders, management, staff, customers, suppliers and the community in which it operates.

The board of directors is pivotal in influencing and implementing good governance. The board appoints corporate officers and makes important decisions, such as executive compensation and dividend policy. Proxy advisors and shareholders are important stakeholders, which can have major implications for equity valuation.

How does CGLytics help companies achieve good governance?

CGLytics provides the necessary tools that are central to good governance. Our services help promote transparency in companies’ corporate governance practices and promote informed dialogue between a company, its investors and other relevant stakeholders.

We provide access to high-quality corporate governance data, analytics and actionable insight through a single access. Our market and data insight helps companies manage reputational risk and identify issues that are of potential concern to shareholders. We give investors access to granular data, unique information and screening tools so they can make well-informed decisions.

Why Corporate Governance Matters

Good corporate governance implements a transparent set of rules to ensure that shareholders, directors and officers have aligned incentives. But good governance can also be seen as a mark of good corporate citizenship and ethical behaviour.

With its many stakeholders, corporate governance must balance the need for short-term earnings with the strategic objectives of the company. In practice, good governance must encompass all areas of management and become part of a company’s DNA.

Although shareholders do not have a right to proxy access, some companies have implemented it on a voluntary basis, for example to help ensure the right mix of skills in the boardroom.

A strong board is fundamental to good governance. A good board will comprise a diverse group of multi-talented people who combine insight and good judgement to ensure that the company implements good governance and maintains its market share. A successful board must be well informed and decisive.

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