A publish by visitor blogger Pieterjan Heynen
Primarily based on the annual studies of Belgian listed firms, Guberna and VBO not too long ago carried out a research so as to decide to what extent the suggestions of the Belgian Company Governance Code are being noticed. Explicit consideration was paid to Advice 7.6, a comparatively new provision which was launched into the Code in 2020. This Advice states that non-executive administrators ought to obtain a part of their remuneration in shares. Nonetheless, the Guberna and VBO research confirmed that this provision is at the moment one of many least complied with within the Code, since solely 15% of Belgian listed firms embody shares within the remuneration bundle of their non-executive administrators.
In response to the low degree of utility of this suggestion, we carried out a extra in-depth empirical research, complemented by theoretical and comparative findings. The outcomes of our evaluation will probably be introduced at a convention on “Latest Developments within the Remuneration of Executives and Administrators”, which can happen on the College of Antwerp on 23 Might 2024 (see additionally right here). Our focus was on the compensation of unbiased administrators, who, as non-executive administrators, additionally fall throughout the scope of Advice 7.6. At first look, this will sound stunning. The “explanations” of firms that don’t adjust to this suggestion typically state that they don’t present for remuneration in shares, exactly as a result of they don’t need to jeopardize the independence of their unbiased administrators…
Is that this skepticism justified? Does fairness compensation inevitably impair a director’s independence? Answering this query requires a great understanding of the function and capabilities of unbiased administrators. In any case, they’re key gamers in Belgian listed firms and type a de facto majority on most boards. Furthermore, the Belgian Code for Firms and Associations (CCA) assigns them particular roles in associated events transactions and audit, remuneration and nomination committees.
From these particular authorized duties, it may be inferred that unbiased administrators have a task to play as “mediators” in two of the three well-known principal-agent conflicts of company regulation. On the one hand, they need to act as a buffer between the manager administration of the corporate and its shareholders, as a type of further management mechanism. This follows, amongst different issues, from their presence on the audit and remuneration committee. Then again, in addition they seem to mediate the second principal-agent battle, between the controlling shareholder and minority shareholders, which follows from their involvement in associated get together transactions.
Taking these duties as a place to begin, it might certainly be fascinating to remunerate unbiased administrators in shares. On this method, they’re now not merely mediators within the principal-agent issues talked about above, however as an alternative they turn out to be principals themselves. An unbiased director who can be a (small) shareholder might expertise an necessary further incentive to take care of the pursuits of all small shareholders.
Nonetheless, not everybody will agree with this view. For instance, it may be argued that unbiased administrators mustn’t solely take care of the pursuits of minority shareholders, however that due to their independence, they’re rightly positioned to have in mind a broader, societal curiosity as properly. In response to this view, their function consists of the commentary of the pursuits of all the corporate’s stakeholders. Consequently, remuneration in shares may very well be counterproductive in such a case, as a result of it may slender the main target of unbiased administrators to the pursuits of shareholders, whereas overlooking different stakeholders.
Thus, the query of whether or not unbiased administrators have a slender or a broad function, specializing in the pursuits of shareholders or of all stakeholders, respectively, can’t be answered unambiguously. Furthermore, a comparative regulation evaluation exhibits that authorized programs usually present totally different solutions to this query. In our presentation we look at these totally different approaches that may be present in Belgium, France, the Netherlands, Germany, the UK and the US. We may even have a look at outcomes from financial analysis. Does fairness compensation incentivize unbiased administrators to raised understand their function? Or does it have solely a minor influence on their perspective on the board?
Primarily based on these theoretical, comparative regulation and empirical findings, we take inventory of Advice 7.6 of the Belgian Company Governance Code concerning fairness compensation for unbiased administrators.
This blogpost relies on a joint analysis challenge with Pieterjan Heynen, Tom Vos and Theo Monnens.
Pieterjan Heynen
Jan Ronse Institute
KU Leuven
