EC Examines Compliance With Recommendations On Director Pay And Independence

by Ulrika Lomas, for LawAndTax-News.com, Brussels

24 July 2007

The European Commission last week published two reports on Member States' application of EU recommendations on company directors' pay and independence.

Both reports concluded that the application of corporate governance standards has improved, but that some weaknesses remain.

The report on directors' remuneration showed that transparency standards are widely followed, but in some Member States it is still not recommended that shareholders vote on this issue.

The report on the role of independent non-executive directors found that there has been real progress in improving governance standards in this field, but that some of the recommended standards have not been followed in all Member States.

For example, in some Member States a former Chief Executive Officer (CEO) of a company can still become its chairman without any cooling off period. This undermines the independence of non-executive supervision. Additionally, some Member States do not recommend a sufficient number of independent board members in remuneration and audit committees.

Internal Market and Services Commissioner Charlie McCreevy explained that:

"Directors’ remuneration matters greatly to a company. The level of managers' pay may have a significant impact on whether the company can recruit and retain directors having the qualities required to run the company efficiently. However, remuneration is also an area of potential conflict of interest with shareholders, and therefore they could expect a greater say in this matter."

"Only a few Member States have recommended this. I invite the others to call for a greater involvement of shareholders in setting remuneration criteria."

"Where independent directors are concerned, I am pleased to see a clear move towards stronger corporate governance requirements and improved transparency. But there is still room for improvement as regards appointing former CEOs to the position of the non-executive chairman and further reinforcing independent control over executive pay and the company's accounts. Good governance is essential for our companies and our economy. I encourage those countries lagging behind to speed up."

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