View from City Road: Good times just carry on rolling

Argyll, Courtaulds, Signet - the good times are still rolling for directors, with lucrative long-term contracts. The National Association of Pension Funds, representing big investors, does not like it, and is thinking of toughening its line.

It was the NAPF that tried to persuade the woolly-thinking Cadbury committee on corporate governance that directors' rolling contracts should not exceed 12 months. Anything longer is just a guarantee of a huge and undeserved pay-off for failure, though it seems to be regarded as an ancient right in most boardrooms.

The NAPF also said three-year contracts, on the few occasions they are acceptable, should be fixed not rolling, so they gradually expire.

Cadbury disgracefully chickened out and said only that future service contracts should not exceed three years without shareholder approval. It was argued that three-year contracts rarely led to payment of three years' salary on termination. Pull the other one.

That word 'future' has also been helpful to defenders of the status quo, since it has allowed companies such as Signet to argue that there should be no change to existing contracts.

Geoff Lindey of JP Morgan, chairman of the NAPF's investment committee, says in a letter this week to 1,200 members: 'The concern is that a successful director does not need a (long-term rolling) contract whereas an unsuccessful one should not be rewarded for failure.'

He is canvassing the views of funds on whether to have another go at persuading the Cadbury committee to toughen its line when it reviews the code next year, by recommending against rolling contracts of more than a year.

This is even tougher than the position taken by the giant PosTel pension fund when it voted against the re-election of Courtaulds' chief executive this week, saying rolling contracts should be for no more than two years.

The NAPF wants to know whether fund trustees agree with banning rolling contracts above 12 months, and if so whether they should start using their votes, PosTel style, to enforce this immediately, rather than waiting for a revised Cadbury code.

It is the trustees rather than the fund managers whose views are being sought. They should not hesitate to back the idea of voting against all long-term rolling contracts from now on. Unfortunately, a lot of trustee boards are packed with company directors. Do not be too hopeful about an early end to the gravy train.