URGENT/ACTION REQUESTED
[17326]
April 1, 2004
TO: INTERNATIONAL COMMITTEE No. 18-04
SEC RULES COMMITTEE No. 30-04
RE: DRAFT ICI COMMENT LETTER ON EU REGULATORY REGIME FOR
REMUNERATION OF DIRECTORS
Attached is a draft Institute comment letter in response to the EU Commission’s
consultation document on the remuneration of executive and non-executive directors.1 The
consultation documents provides the Commission’s initial views on several key elements of a
recommendation that it expects to make regarding directors’ remuneration.
Comments on the Commission’s consultation document are due by April 12, 2004.
Please provide any comments you may have on the draft comment letter to me at (202) 326-
5810 or at jchoi@ici.org by April 8, 2004.
Generally, the draft comment letter strongly supports an appropriate regulatory
framework for the remuneration of directors that would foster transparency regarding
directors’ remuneration and permit shareholders to approve certain compensation schemes that
may raise particular conflicts of interest concerns (e.g., stock option plans). In addition, the draft
letter responds to specific requests for comments on several enumerated issues. For example,
the Institute supports the Commission’s plans to invite Member States to take regulatory
measures to ensure that listed companies comply with all of the Commission’s
recommendations. We discuss below in more detail some of the Institute’s significant
comments.
Disclosure of Remuneration Policy
The Commission intends to recommend that each EU-listed company disclose the
remuneration policy for directors to be applied for the next financial year in the annual accounts
and annual report (or in the notes to the annual accounts) of the company. The Commission
also enumerates specific elements that should be included in a statement of the company’s
policy on directors’ remuneration. The draft letter agrees with the Commission that the
contemplated disclosure will be beneficial to investors and increase transparency. The letter,
however, recommends that the disclosure include information about the remuneration policy in
1 See Memorandum to International Committee No. 12-04 and SEC Rules Committee No. 19-04 [17135] (Mar. 1, 2004).
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effect during the period covered by the report as well as any anticipated changes to the policy
for the next financial year. The letter takes the position that a description of the remuneration
policy that was applicable during the period covered by the report would be helpful to
investors in reviewing the annual disclosure of the remuneration of individual directors of the
company as proposed by the Commission. Do members agree that disclosure should be of the
remuneration policy in effect during the period covered by the report as well as any
anticipated changes to the policy for the next financial year rather than of the policy to be
applied for the next financial year?
The letter also recommends that the disclosure include information regarding whether
the management or the board has the discretion to alter material aspects of the directors’
compensation policy during the year. In addition, the letter seeks clarification whether the
disclosure would be required in two separate places of the annual report or in two separate
documents. The draft letter recommends that the information be contained in one document
but that it would not be necessary for the Commission to specify the location(s) in the document
where each item should be disclosed. The draft letter also seeks clarification whether the
annual reports would be provided in connection with an annual meeting in all EU Member
States.
Remuneration of Individual Directors
The Commission intends to recommend that the remuneration of individual directors,
both executive and non-executive or supervisory directors, of a company be disclosed in detail
in the annual financial statements. The letter generally supports the disclosure requirements
but questions why companies must explain the reasons for share-based compensation
arrangements of non-executive directors. The letter expresses concern that the Commission
disapproves of such arrangements in seeking justification only for these types of arrangements.
The letter states that share-based compensation can include many forms of compensation,
including simply paying some portion of the director’s compensation in company shares, and
questions why this type of equity-based compensation scheme would raise more significant
issues for non-executive directors than for executive directors. The letter recommends that the
Commission clarify its views on executive and non-executive compensation in this area and
consider narrowing its proposal.
Role of Shareholders’ Meeting
The draft letter supports the Commission’s intention to recommend that shareholders
approve equity-based compensation plans. In addition, the letter suggests that non-share-based
payment arrangements for the termination of employment in the event of a change in control be
subject to prior approval of the general meeting of shareholders. Do members agree that
companies should be required to obtain shareholder approval for “poison pills?”
Recognition of Stock Options in Annual Accounts
Finally, the Commission intends to consider the recognition of stock options in annual
reports after the adoption of the relevant International Accounting Standard, which is expected
to be adopted shortly. The letter states that stock options should be reflected appropriately in a
company’s financial statements and that the Institute hopes that the International Accounting
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Standards Board will adopt a standard that would require companies to treat stock options as
an expense and ensure uniformity in how stock options are valued. If the IASB, however, is
unable to adopt a standard within a short period of time, the letter urges the Commission not to
wait for the IASB but to recommend that companies treat stock options as an expense.
Jennifer S. Choi
Associate Counsel
Attachment (in .pdf format)