The Guardian (UK): Crackdown on 'failure payouts': Directors of ailing firms handed huge bonuses must repay their unearned reward, says investor group: “It is also believed that cash handouts to Shell executives, paid after last year's reserves scandal, should be repaid.”: “Foreign & Colonial also singled out Sir Phil Watts at Shell, who was ousted in March with more than £1m to cover his monthly salary to June 2005. "His bonuses were paid on the basis of [oil] reserves that were not there," (ShellNews.net) 25 April 05
Directors of ailing firms handed huge bonuses must repay their unearned reward, says investor group
Julia Finch and Jill Treanor
Monday April 25, 2005
One of the UK's biggest investors is demanding a new clampdown on "rewards for failure" to executives who walk away from troubled firms after banking big bonuses.
Foreign & Colonial, the fund management group, wants directors to be forced to pay back bonuses if it is later proved that their company had not been performing as well as it appeared.
There have been a string of high-profile "rewards for failure" in the past 12 months. Sir Peter Davis, the former chief executive of the supermarket group J Sainsbury, called in lawyers to protect his £2m bonus when he was ousted by shareholders last summer. In the wake of his departure Sainsbury's crashed into the red for the first time in its 135-year history.
Salary and bonus payments made to three directors of Marks & Spencer last year also angered shareholders. The M&S chairman, Luc Vandevelde, its chief executive, Roger Holmes, and a director, Vittorio Radice, banked a total of more than £8m though sales had declined. Mr Radice's disastrous LifeStore project cost the retailer some £30m.
Foreign & Colonial took action after bonuses totalling £807,000 were made to executives of the Jarvis group. It is also believed that cash handouts to Shell executives, paid after last year's reserves scandal, should be repaid.
The Jarvis payouts were shared among six directors, including the chief executive, Kevin Hyde, despite the company's share price having crashed from 566p to 9.5p.
The firm, chaired by the former Conservative minister Steven Norris, breached its banking covenants, suffered losses and was forced into a restructuring fire sale. It insisted, however, that it had a "contractual entitlement" to pay the employers' bonuses.
Karina Litvack, Foreign & Colonial's head of corporate governance, said: "We feel very strongly that this needs to be looked at. Shareholders should be protected against incompetence or lies." The Jarvis payouts were unacceptable, she said. "Something went horribly wrong and someone should have to take responsibility." Ms Litvack also suggested that directors had a moral responsibility to hand back cash they had not earned. "How can they accept the money?" she asked.
Foreign & Colonial also singled out Sir Phil Watts at Shell, who was ousted in March with more than £1m to cover his monthly salary to June 2005. "His bonuses were paid on the basis of [oil] reserves that were not there," Ms Litvack said.
The fund manager is particularly concerned about bonuses paid before accounts are re-stated or which later show not to have reflected a true picture of financial performance.
Foreign & Colonial has asked the Association of British Insurers to incorporate the new requirement into its corporate governance guidelines.
The Department of Trade and Industry waded into the debate over rewards for failure two years ago after the Tory MP and former Asda chairman Archie Norman sponsored a private member's bill to stop such payouts. He said companies should be able to challenge contractual obligations to failed executives.
Mr Norman's move came after the near bankruptcy of Marconi and big payments made to the heads of the collapsed British Energy group. The trade secretary, Patricia Hewitt, ordered a consultation paper but eventually decided that increased shareholder activism meant no action was necessary.
Foreign & Colonial said a firm's remuneration committee "should maintain authority to withhold or reclaim all or part of non-base pay, including cash bonuses, options and stock awards, from executives" where appropriate.
A sub-committee of the ABI's investment group is now considering the Foreign & Colonial proposal. Ms Litvack suggested that undeserved bonuses could be retrieved more easily by making sure that directors' contracts were carefully drawn up.
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