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Shareholder Rights and Institutional Investors

UK shareholders enjoy more rights than investors in many other jurisdictions. There is a universal one-share, one-vote standard, shareholders may put forward their own resolutions and nominate candidates at annual general shareholder meetings (AGMs),  an annual advisory vote on executive remuneration policy and a binding vote of future remuneration policy (the so-called 'say-on-pay' vote).  Shareholders also enjoy pre-emptive rights over new share issues and may themselves convene AGMs.

While share-ownership is not highly concentrated in the UK (ownership stakes of more than 5 percent of listed companies are uncommon), institutional investors play a large role in their ongoing discussions with management. Institutional engagement has increased in recent years, however it remains behind the scenes more often than in the press. Since the credit crisis, there has been some criticism that shareholders could have done more to prevent abuses by holding management to account.

Shareholders have played a crucial role in driving forward changes in remuneration reporting.  They have more power through binding votes, so they can hold companies and directors to account.  The 2016 UK Corporate Governance Code added a specific provision requiring companies to explain what action they intend to take in response to situations where a significant proportion of votes have been cast against a resolution at any general meeting. This is particularly relevant to resolutions on directors' remuneration.  The 2018 Code went further regarding significant votes against resolutions and actions the board must take in response.

In June 2019, the Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 came into force. These Regulations partially implement the EU Shareholders Rights Directive II in the UK and bring in new requirements around shareholder involvement in the process of establishing, voting and publishing remuneration policies and reports on their implementation.

The Investment Association

The Investment Association has welcomed the UK Government’s aim to reverse the UK’s long term productivity problem and has developed a framework for how investors can contribute to productivity improvements with long-term investment. Among the main principles of the framework are a suggestion to enhance company reporting for efficient capital allocation and to enhance investor stewardship and engagement. The framework also suggest to simplify behavioural incentives and the investment chain, develop efficient and diverse capital markets and to overcome tax and regulatory impediments to the provision of long term finance.  The Investment Association published its Updated Principles of Remuneration in November 2019.  This remuneration guidance sets out its members’ views on the role of shareholders and directors in relation to remuneration and the manner in which remuneration should be determined and structured.

In 2017, following a Government request, the Investment Association launched the Public Register of significant (>20%) votes against listed company resolutions.

The independent Executive Remuneration Working Group

The independent Executive Remuneration Working Group was established in the Autumn of 2015 by the Investment Association in order to assess whether the complexity of current remuneration structures is inhibiting executive directors from acting in the long-term interests of companies and their investors. In July 2016, the Group issued a report proposing ten recommendations to rebuild trust in executive pay structures in the UK, following consultation with investors, asset owners and company employees. The report calls for companies to be given the flexibility to select the right pay structure that works for them and their shareholders, rather than focusing solely on the currently dominant Long Term Incentive Plan pay structure. The report includes:

  • a call for boards to explain why they have chosen their company’s maximum pay level, with consideration or relativities such as the pay ratios between CEOs and different employees;
  • a call for transparency around the target-setting employed in bonuses, including retrospective disclosure of performance ranges and provision of explanations where discretion has been used;
  • a proposal that whole boards be required to engage in the remuneration-setting process, and for non-executive directors to have at least a year’s experience on a remuneration committee before being appointed as its chair, plus clear disclosure of the rationale to be provided when discretion is used in awarding pay. 

The 2018 UK Corporate Governance Code, effective for periods commencing on or after 1 January 2019, introduced a provision requiring a director to have served on a remuneration committee for at least a year before becoming a remuneration committee chair. 

The Pre-Emption Group (‘PEG’)

The Pre-Emption Group (‘PEG’) consists of representatives of listed companies, investors and intermediaries. The group was initially set up in 2005 to produce a Statement of Principles to be taken into account when considering the case for disapplying pre-emption rights. PEG’s aim is to guide companies in relation to good practice in requests for disapplication and better disclosure.

Correction list for hyphenation

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