The Guardian (UK): Contract aims to claw back rewards for executive failure: “Other cases of "rewards for failure" that F&C believe should have been repaid include cash handouts to former Shell directors after last year's reserves scandal…”: Thursday October 6, 2005
· City firm seeks means to block cash 'paid in error'
· ABI may back wording tying down directors
Julia Finch and Jill Treanor
A City investor firm has hired a law firm to draw up a universal employment contract in an effort to prevent executives walking away with rewards for failure.
F&C Asset Management, which has been leading a campaign to clamp down on such payoffs, is devising a "template" for directors' contracts that where appropriate will permit companies to claw back salary and bonus payments after executives have left troubled companies.
There have been a series of controversial payoffs to board directors that companies have argued they were powerless to prevent, as executives were entitled to the money under their contracts.
In some cases, corporations attempted to halt payments they believed had been made inappropriately. Last summer, J Sainsbury called in lawyers in an attempt to prevent the supermarket group's ousted chairman, Sir Peter Davis, receiving a £2m bonus. In the event, the lawyers were powerless in the face of his contract.
Karina Litvack, head of governance and socially responsible investment at F&C, said: "We have hired employment lawyers to come up with model language for contracts. We are hopeful this will be emulated by others in the industry."
F&C has sent its draft contract to the Association of British Insurers, which is working on its revised guidance to companies for remuneration policies in 2006. The ABI is supportive of attempts to halt failure payments and is now considering the F&C contract and its practicality.
The proposal includes a clause that cash can be recouped from executives when it has been "paid in error" when remuneration committees did not know the full facts about a company's finances at the time it was awarded. Ms Litvack said clawback should be immediate if accounts had to be restated after a director's departure or if there were any later findings of fraud. "There shouldn't even be a debate," she said. "If they have collected a bonus ... they owe it."
However, F&C hopes also to come up with a wording that will enable cash to be clawed back from executives judged either incompetent or negligent.
Ms Litvack said that executives' reputations should be tarnished if they received a reward for failure: "There should be a little black cloud over them which follows wherever they go."
Other cases of "rewards for failure" that F&C believe should have been repaid include cash handouts to former Shell directors after last year's reserves scandal, and bonuses totalling £807,000 to executives of the Jarvis group when the share price had crashed by 98%. Salary and bonuses paid to three Marks & Spencer directors last year angered shareholders. Chairman Luc Vandevelde, chief executive Roger Holmes, and director Vittorio Radice banked more than £8m though sales had declined. Mr Radice's disastrous LifeStore project cost £30m.
The Department of Trade and Industry waded into the debate two years ago after former Tory MP Archie Norman - previously the chairman of Asda - sponsored a private member's bill to stop such payouts, saying firms should be able to challenge contract obligations to failed executives. His bill, after the near bankruptcy of Marconi and big payments to the heads of Railtrack and the collapsed British Energy group, had cross-party support but was quashed by Labour whips.
The then trade secretary, Patricia Hewitt, ordered a consultation paper and threatened legislation, but eventually decided that increased activism by shareholders meant government action was not necessary.
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