OMGI view from Paul Emerton - Corporate Governance

Paul Emerton, Head of UK Stewardship and Governance at Old Mutual Global Investors

The recent announcement by Tesco that its former CEO and CFO would receive termination payments of £1.21m and £0.97m, respectively, provided further evidence that the UK-executive-director standard service contracts based on a 12-month notice period offer a reward for failure. 

As Tesco management noted, in the absence of gross misconduct by either individual, these are contractual payments which the company is obliged to make. However, the performance of Tesco over recent years, combined with the investigation regarding accounting revealed last year, make a total payment of more than £2m inappropriate and show 12-month contracts to be an anachronism. 

In light of this, Old Mutual Global Investors has reviewed the application of our policy on governance and voting. We expect that any service contracts for main board directors at UK-listed companies in existence from March 2016 will have notice periods (and consequential compensatory payments) of substantially shorter than 12 months. There may be exceptions where salaries and compensatory arrangements are at particularly low levels but otherwise, it will be difficult to support – and we would therefore generally vote against – the remuneration arrangements of companies who do not meet our required standard, particularly when we vote at company general meetings.

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