Earnings of executives at Britain's leading companies are largely determined by a band of part-time directors whose job it is to oversee the way a company is run and ensure that those with day-to-day control act in the best interest of shareholders.
These non-executive directors are also responsible for setting the pay of the chief executive, finance director and other leading managers through membership of remuneration committees. It is these groups who, according to yesterday's report from Hewitt New Bridge Street, got the sums wrong last year and set relatively easy targets for executives.
"There are clear guidelines on a number of issues, especially relating to remuneration and the way in which compensation is decided," said Chris Hodge, of the Financial Reporting Council. "But the code does not stipulate what figure the directors should decide on."
There have been numerous examples of non-executives losing control of what management is doing. Sir Tom McKillop, the former chairman of Royal Bank of Scotland, was castigated for his failure to rein in the excesses of Sir Fred Goodwin, which effectively led to the bank being bankrupted before its bailout. Carl-Henric Svanberg, BP's non-executive chairman, has come under huge scrutiny for the energy giant's methods in the run up to the Gulf of Mexico oil disaster.
Many non-executives have been accused of using lucrative chairmanships and more junior board positions as an extension to their pensions, rather than properly exercising their fiduciary duty to the benefit of shareholders. This year, a survey by the analysts Incomes Data Services showed that non-executive chairmen were given pay rises of 5.1 per cent during the 12 months to March.
Chairmen of remuneration committees – the very people supposed to guard against boardroom excess – enjoyed an increase of 14.6 per cent in their fees with their average typical fees running at £12,000, on top of their basic fees. And despite acute political and public concern about bankers' pay, Barclays and the majority-state-owned RBS take joint first place in the chairmen's pay league – at £750,000 each.
There are rules and codes of conduct governing the responsibilities of directors. Under the Companies Act there is no distinction between executives and non-executive directors, but the FRC has long published its best practice guide.Reuse content