Statement by Mr Noel Treacy TD,Minister for Science, Technology and Commerce to the Seanadon consultationby investment/fund managers in relationto directors’ remuneration on Wednesday 2nd May 2001, 3pm

In recent years the most significant corporate activity on the Exchange was the flotation of Eircomm plc. The monitoring and supervising of takeovers is the statutory responsibility of the Irish Takeover Panel, whose Chairman and Chief Executive I met in recent weeks. The objective of the Panel is to ensure fair and equal treatment of all shareholders in takeover situations and to provide support and credibility for our financial markets, a task they undertake most creditability.

Some weeks back I signed into law regulations which extended the remit of the Panel to cover publicly quoted companies registered here but not listed on the Irish Exchange, which will of course provide greater safeguards to investors in such companies in the event of significant corporate activity.

Statute gives, in so far as my Department is concerned, two roles to the stock exchange, as listings authority and a specific role in relation to investigation of instances of alleged insider dealing. I am currently engaged in examining the year 2000 report. The preceding indicates some of the measure put in place to give greater transparency in the governance of corporate affairs in this State

This is not exhaustive list of requirements that are placed on directors, rather it is illustrative.

In the area of the remuneration of directors the 1963 Act provides that the emoluments of directors be disclosed in aggregate.

As you will be aware provision for the payment of remuneration to directors is determined by the articles of the company. For example, Article 76 of Table A provides that:

"The remuneration of the directors shall from time to time be determined by the company in general meeting. The directors may also be paid all travelling, hotel and other expenses properly incurred by them in attending meetings …… or in connection with the business of the company."

• all, salaries, pension contributions and other benefits paid to directors in aggregate
• aggregate figures for the performance element of the remuneration of executive directors should be stated separately, and
• detailed information on share option schemes available to individual directors.

She was of the view, one which I share, that full individual disclosure to shareholders would be in the in the best interest of all. In that connection she indicated her preference that the Stock Exchange rules on that issue should be revised voluntarily and that would be the best way to bring about change.

In June 1999 the OECD published its Principles of Corporate Governance which it suggested should disclose sufficient information on the remuneration of board members and key executives for investors to properly assess the costs and benefits of remuneration plans and the contribution of incentive schemes.

After intensive discussion, the Exchange amended its rules to come into effect for financial periods beginning on or after 1 January, 2000. Thus we have now reached the situation of disclosure of directors’ remuneration on an individual basis.

Amongst the views expressed are that investment and fund managers should consult with their clients and policyholders on this issue.

It is a matter of current interest in this debate that in the case of the proposed demerger and sale of Eircell to Vodaphone, a postal ballot of beneficiaries is in being to determine how the votes attaching to the ESOP 14.9% shareholding should be cast in relation to the resolution to demerge Eircell.

The goal of the Investment Manager is to obtain the best return for his client, which can number from the single figures to the hundreds of thousands. Irish institutions own something in the region of 20% of the Irish Stock market, a proportion that has dropped by several percentage points in recent years, which is related to an extent at least to eurozone investment possibilities.

• special procedures to allow shareholders to table resolutions for the AGM on remuneration
• a requirement for listed companies to have an annual vote by shareholders on the boards remuneration report
• a requirement for them to have a remuneration policy and to seek shareholders agreement to it annually
• annual elections for directors of listed companies, and
• a requirement for the chair of the remuneration committee to be elected every year.

There are other legal issues in the matter of how to fix pay. One is conscious, as I have said already, that payment of remuneration for directors is normally provided in the articles of the Company. There is the ability of shareholders, although in practice this would be institutional shareholders due to voting strength, to propose an amendment to a Company’s articles in such cases as meet their disapproval.

The current Company Law Review Group, whom I have met in recent weeks, received no submissions on issues related to directors’ remuneration in response to public advertisements placed as late as February, 2001. While the final report of the Group at end 2001 will contain substantial recommendations to correct anomalies relating to directors and on directors’ fiduciary responsibilities, it will not include any recommendations directors’ remuneration.

The growth of pension fund activism raises the question of whose interests, precisely, are being pursued in the name of good governance. The increasing tendency of publicly-quoted companies to return to closely-held forms of ownership through buy-outs and similar forms of reorganisation suggests that dispersed shareholder ownership may not be as effective in ensuring good governance as many have thought.

Meanwhile, attention is being paid to alternative modes of governance, including cooperative and mutual forms of ownership, collective employee voice, and creditor-based monitoring.

Research in corporate governance needs to unravel the incentive effects of these different forms of ownership and control.

Giving shareholders, whether they be institutional entities representing many thousands or indeed hundreds of thousands of policyholders, the right in law to vote on remuneration is problematic. As a means of reining in excessive pay they might be slow to work. Here I would agree with John Lawrie’s remarks made some years ago, that "initially only the most flagrant cases would result in a row at an AGM and a vote against the Board".

However research in this area in the United States show no clear trends. It is a fact that boards of directors pay their key staff for performance. While researchers feel that performance is being measured, typically total return to shareholders, the actual director pay plans are often built around other criteria.

In a paper by the North Western University’s Kellogg Business School the authors ascertained that performance measures often cited were net income, sales, return on assets, earnings per share and share price. Comparing the weighting of those criteria in the directors pay plan indicated that the Board of Directors got what it paid for, to the extent that there is a problem, it is that directors mostly aren’t paying for what shareholders want, which is higher total return.

The issues in relation to directors remuneration packages, in so far as the Irish market is concerned, are now unfolding.

No clear trends are yet evident. It is a fact that we here in Ireland have considerable sums invested through investment and pension fund managers.

A salient issue is whether such fund or pension managers have themselves the ability to set down criteria for executive remuneration? Is it practical that institutions be mandatorily obliged to consult their clients, who will range in their thousands, on such an issue. Are those consulted competent to understand the issues they are being presented with, as such packages as "notoriously" complex? There will be cost issues involved which I would be concerned would translate to cost to the individual pensioner or saver, probably on an ongoing basis.

I mentioned earlier that the Eircom ESOP are currently balloting on the sale of Eircell to Vodaphone. Such a ballot, which I presume involves thousands of people, is focussed on a strategic issue, that of a substantial asset disposal of the Company.

I would be concerned if corporate practices that routinely reward poor main board directors’ performance with massive pay and perks jeopardize working families’ savings, retirement savings, the kids’ third level education funds and other family finances. Another concern would centre on excessive directors’ pay and corporate practices which threaten jobs, as nobody in a company has more at stake than workers and their communities.

Perhaps their clients would expect the institutions, to whom they have contributed their funds to invest, to seek the highest returns and where they did not obtain the highest return to immediately disinvest. After all such clients use the services of the institutional investors at no small cost to themselves, as such individual perhaps have neither the capacity nor opportunity to invest directly in the markets to ensure a satisfactory return to fund pensions, savings etc.

No calls have been made on me as Minister to change company law in respect of remuneration. I see no prospect of moving in that direction unless a compelling case is made. I would not accept as a starting thesis that "something should be done by the State" because of the remuneration package given in one plc.

To my mind the current debate on the various issues centring on directors remuneration has, in the words of the Carpenters refrain "only just begun". Let us see what companies, individual directors, institutional investors and others bring to the matter over the next 12 months or more and better still let us see what investors want.