UK: CONTRACTS ARE CONTRACTING. - Pay-offs to departing directors highlight the need for a norm.

Last Updated: 31 Aug 2010

Pay-offs to departing directors highlight the need for a norm.

Alistair Ross Goobey, chief executive of the £25 billion Post Office and British Telecom staff pension fund, certainly put the cat among the pigeons when he announced that Postel would vote against any director with a rolling contract of more than two years. A significant number of companies have since moved away from long-term rolling contracts. However, there is still a striking lack of agreement about the length of time for which directors' service contracts should run. A degree of consensus is needed.

Some directors have no contractual agreements with their companies, others have rolling contracts stretching five years ahead. Maurice Saatchi, chairman of Saatchi and Saatchi, claims that the advertising services group is now 'politically correct', since none of its executives has a contract lasting for more than thee years. Until this summer, Saatchi himself had a five-year contract with the company. Across at WPP, chief executive Martin Sorrell still has a five-year rolling contract, although this is 'under review', according to a company spokesman. Sir Nigel Mobbs of Slough Estates is another chairman who has relinquished a five-year contract in favour of three years. 'I felt it was appropriate in the light of the current debate,' he says.

The Cadbury Committee found in favour of service contracts that did not exceed three years except with shareholders' agreement, and it argued - unsuccessfully - that the Companies Acts should be amended accordingly. (Remarkably, as a Cadbury Committee spokeswoman reveals, 'Discussion as to whether contracts should roll or not was outside the terms of reference.') Mobbs considers that three years is a necessary period if a company is to attract top people of appropriate quality. Besides, he argues, an executive who fails to meet expectations may, even so, deserve compensation. 'A board may make a mistake in recruiting or promoting someone who has given up a secure post (in order to take the job). It doesn't seem unreasonable that he should be compensated.' Nevertheless, the weight of institutional shareholders such as Postel is steadily compressing this important directors' perk. Argyll Group has reduced the length of service contracts from three years to two, and British Aerospace is likely to follow. Meanwhile at National Westminster Bank, the three-year rolling contracts of half-a-dozen directors are shortly to be cut to a rolling-over 12 months. That is the period favoured by Ross Goobey, who started this ball moving because 'long-term rolling contracts have been a substantial contributory factor in large and unjustified pay-offs to senior executives'.

Stuart Bell, director of Pensions and Investment Research Consultants, applauds Postel's stand. 'It's very unusual to find a major institution willing to put its proxy vote where its mouth is, so this is a positive move.' Bell, too, would like to see contracts shortened to one year. 'There's no evidence that two-year or longer contracts are necessary to attract or retain good people,' he maintains.

Hanson and Marks and Spencer are two very different companies which seem to manage quite well without them.

Find this article useful?

Get more great articles like this in your inbox every lunchtime