Lloyd's Maritime and Commercial Law Quarterly
DIRECTORS’ REMUNERATION: CONSTRAINING THE POWER OF THE BOARD
Andrew Griffiths *
The power to award remuneration to the directors of a company is usually vested in its board, who have an obvious conflict of interest. However, the unitary board system of governance does not allow a satisfactory alternative decision-maker for public companies, given the unsuitability of shareholders for this kind of role. This article examines the legal basis of the board’s power and the constraints which result from the board’s fiduciary status. Although the House of Lords in Guinness v. Saunders confirmed that the board must exercise this power itself, there is uncertainty about the degree of formality which the board must observe, about the precise legal effect of a failure to disclose an interest in remuneration under the Companies Act 1985, s. 317, and about the effectiveness of the board’s duty to act in the company’s best interests. It will be argued that the law governing directors’ remuneration could be improved by insisting on a much stricter adherence to procedural formality, including disclosure of the reasons for an award of remuneration and express consideration of where the best interests of the company lie, but that a more radical change of the governance structure of public companies may be required to remove the controversy from this area altogether.
Introduction
The level of remuneration enjoyed by the directors of public companies has become a focus of controversy and debate, especially in the case of former public utilities.1 The controversy stems from the role of boards of directors in determining this remuneration; yet it has proved difficult to find an alternative mechanism which would retain the efficiency and flexibility of the board.2 The Cadbury Report,3 for example, recognized the
* Lecturer in Law, University of Manchester.
1. See, e.g., “British Gas chief receives 75% pay rise”, Financial Times, 21 November 1994 and “British Gas board bruised on pay but wins the day”, Financial Times, 1 June 1995. For convenience, the term “remuneration” will be used in this article to refer to any reward received by a director as consideration for their services, including options to purchase shares in their company and the overall benefit of their service contract.
2. In January 1995, a task force was set up under Sir Richard Greenbury, the chairman of Marks & Spencer, to make some practical proposals, probably in the form of a code of practice, to reduce the controversy about directors’ remuneration. In response to a question in the House of Commons on 28 February 1995, the Prime Minister indicated that the Government would be looking at any proposals which required legislative backing. See generally “Major to curb top pay rises”, The Sunday Times, 4 December 1994; “City task force to set up top pay code of practice”, The Times, 17 January 1995; “Company reports may soon explain executive salaries”, Financial Times, 9 February 1995; and “Major hints at laws to tackle top salary deals”, Financial Times, 1 March 1995.
3. The Report of the Committee on the Financial Aspects of Corporate Governance (Gee: London, 1992). The Committee was chaired by Sir Adrian Cadbury.
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