Governance In Brief - Your Summary Of The Latest Corporate Governance Developments, March 2009

Headlines

FSA issues a draft code of practice on remuneration

policies.

OECD publishes corporate governance lessons learned from the

financial crisis.

FSA issues a draft code of practice on remuneration

policies

In Brief: The FSA has released a draft code of practice on

remuneration policies for FSA-regulated firms and intends to

consult on the code and further proposals for remuneration later in

March. The purpose of the code is to encourage firms to develop

better, risk focused remuneration policies.

Governance

Although firms need to offer competitive remuneration,

benchmarking data should be a secondary rather than the primary

factor in determining remuneration policy.

Remuneration committees should include at least one member with

practical skills and experience of risk management.

Foreign firms with UK subsidiaries should have a body with

oversight of the remuneration policies in the UK entity.

The FSA may ask a firm to prepare an annual statement on its

remuneration policies including an assessment of the impact of

remuneration policies on behaviour and the risk profile of the

firm. It would be good practice for this statement to be available

for shareholders ahead of the annual vote on directors'

remuneration at the AGM.

Procedures

Risk and compliance functions should have a significant input

into the determination of remuneration policies.

Bonuses

The bonus pool calculation should be based principally on

profits, with an adjustment for current and future risk, taking

into account the cost of capital employed and liquidity required.

The FSA would expect firms to be able to provide them with

information relating to the workings of such calculations.

Firms should not assess performance solely on the results of

the current financial year. This might be achieved through using a

moving average of results, or by deferral of a sufficiently large

proportion of remuneration.

Non-financial factors should also form a significant part of

the performance assessment process. This could be achieved through

a balanced scorecard approach.

Long term awards

The measurement of performance for long-term incentive plans

should also be risk adjusted. The FSA question whether total

shareholder return or earnings per share achieve this objective and

state that they

will press for a wider review of the use of such unadjusted

measures in the corporate sector.

Composition of remuneration

The fixed proportion of remuneration should be sufficiently

high that the...