Legal Frameworks for Director’s Remuneration

Can you be liable to reimburse a company for remuneration wrongly paid to your fellow directors and officers? The short answer for UK quoted companies from 1st October 2013 is (in certain circumstances) yes. The economic and political context in which this new legal framework has come into operation is well known.There have been plenty of high-profile examples in the aftermath of the financial crisis of excessive executive pay and of a perceived failure to align corporate success (or failure) with individual remuneration.  Although the financial services sector has born the main brunt of these headlines, even venerable institutions such as the BBC have not been immune. The House of Commons Public Accounts Committee chaired by the formidable Margaret Hodge has been especially active in this area.

New Rules

One less high profile aspect of the reforms which has been attracting the attention of the lawyers and of liability insurers is the enforcement teeth given to the new rules. First, a reminder of what the new regime is about. In summary, it rest on three main planks:

  1. All quoted companies will have to put their remuneration policy to shareholders for approval by way of a formal resolution at the annual general meeting at least every three years.
  2. Shareholders are given an annual advisory vote on a resolution to approve the remuneration policy.
  3. Whenever a director leaves office, companies will need to publish as soon as reasonably practicable a statement setting out the payments a director has received and/or may receive in the future.

Where a company makes a payment which is inconsistent with an approved remuneration policy and has not separately obtained approval from shareholders, the payment will be regarded as being held on trust by the individual recipient and an action may be brought to recover the payment.  There are no great surprises there. If you are not entitled to something you have to pay it back. The rules go on to state though that where the funds are not for any reason recovered from the recipient, all the directors who authorised the payment may be held liable for any losses incurred by the company as a result.  Directors who serve on remuneration committees are in the firing line here but other main board directors may (depending on the facts) also be regarded as having “authorised” a particular payment.

Potential Issues

There are a number of interesting potential D&O coverage issues raised here.  Here are some of the more obvious ones:

  • As stated above, you can’t hold on to that to which you are not entitled. The same goes for any fraudulent or dishonest conduct or activity attributable to individual directors. None of this would be covered under a D&O policy.
  • What cover might there be in the policy for a situation where directors authorise a payment to others in breach of the remuneration policy? Provided they have done so negligently and not deliberately they should be covered but things are rarely that clear-cut in practice.
  • The legal costs associated with establishing the true position either with respect to actual entitlement and/or the existence of fraud or dishonesty on the part of individual directors ought to be insurable until “final adjudication” or admission of wrongful conduct by individual directors.
  • D&O policies often contain a broad exclusion in relation to anything related to the gaining of profit or advantage to which a director was not entitled.  Would or should such an exclusion operate so as to deny cover to a director in the event of proceedings based on a breach of the remuneration policy after an admission that there was a breach of such policy albeit an inadvertent one?

As always the answer will depend on close scrutiny of the particular term, conditions and exclusions.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
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