Joint statement on executive contracts and severance
The Association of British Insurers (ABI) and National Association of Pension Funds (NAPF), whose members are leading institutional investors in UK markets, have published a statement of best practice setting out the expectations of shareholders that boards negotiating executive service contracts will give careful consideration to the risk of inappropriate termination provisions leading to “rewards for failure”.
The statement is aimed at assisting Boards and their Remuneration Committees with the design and application of contractual obligations for senior executives. It highlights that shareholders have an expectation that Boards will consider the risks of negotiating inappropriate executive contracts that can lead to situations where failure is rewarded.
Paragraph 3.8 states that from the outset, Boards should establish a clear policy to ensure any non-contractual payments are linked to performance. No director should be entitled to discretionary payments in the event of termination of their contract arising from poor corporate performance.
The conclusion highlights that it is unacceptable that poor performance by senior executives, which detracts from the value of an enterprise and threatens the livelihood of employees, can result in excessive payments to departing directors. Boards have a responsibility to ensure that this does not occur.
The statement can be viewed at:
http://www.ivis.co.uk/ExecutiveContractsAndSeverance.aspx
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