August 15 2011
More than a year has passed since the official publication of the Corporate Governance Act, which aims to strengthen the corporate governance of listed companies and autonomous state enterprises, particularly in relation to remuneration (for further details please see "End of the big payout? Stricter remuneration rules for public companies"). Over the past few months, several members of Parliament have introduced legislative proposals that seek to impose further restrictions on the variable remuneration awarded to directors and other senior managers of such companies.
One of the key features of the act introduced binding rules on the variable remuneration of directors and other members of senior management in certain companies. The act regulates the issue of remuneration on two levels. The first-level rules are binding rules, whereas the second-level rules are merely recommendations
Changes to the Code of Companies
The Corporate Governance Act introduces certain changes to the Code of Companies, which may be termed the 'Level 1 rules'. These rules increase transparency with respect to variable remuneration policies in listed companies. They also introduce approval requirements and rules on the deferral and clawback of variable remuneration payments. Although the rules are considered binding, the act provides that a company may derogate from some of them in certain circumstances, if such derogation either is allowed by the company's articles of association or approved by the shareholders' general meeting. The Corporate Governance Act introduces certain changes to the Belgian Code of Companies as Level 2 rules.
Corporate Governance Code recommendations
In addition to the binding rules, the act and the implementing Royal Decree of June 6 2010 require that listed companies and autonomous state enterprises follow the recommendations in the Corporate Governance Code 2009, as approved by the Corporate Governance Committee on March 12 2009. Pursuant to the 'comply or explain' principle, companies may derogate from these second-level rules, provided that they justify the derogation.
Certain members of Parliament consider that the act's rules on variable remuneration do not go far enough. Moreover, there are doubts about the effectiveness of the 'comply or explain' principle: despite the requirements of the act, the explanations offered by companies are not always well founded. The European Commision's Green Paper of April 5 2011 in relation to the EU corporate governance framework, which includes a chapter on the improvement of the quality of the explanations given in connection with the "comply or explain" principle, should be noted here.
This has resulted in proposals to include further restrictions on variable remuneration, either by moving certain rules from Level 2 to Level 1 or by introducing new Level 1 rules which do not exist at Level 2.
Independent and non-executive directors
The act introduced at Level 1 the rule that the general meeting must approve any variable remuneration awarded to independent directors. 'Independent directors' are non-executive directors who meet certain independence requirements. Under the Level 2 rules, no variable remuneration may be awarded to non-executive directors unless the company explains why it wishes to deviate from this rule. The Chamber of Representatives has recently approved an amendment to this rule, extending it to all non-executive directors. This amendment has been transferred to the Senate for review. If the Senate approves the amendment, variable remuneration to any non-executive director (regardless of whether he or she meets the independence requirements) will fall within Level 1 and will therefore be subject to the approval of the general meeting. At EU level, the European commission has addressed similar issues in its green paper by asking the public whether it should be mandatory to put the remuneration policy and the remuneration report to a shareholder vote.
Other legislative initiatives seek to cap the variable element of a remuneration package. For example, one proposal would limit this element to 30% or less of the fixed element. Any variable remuneration above this level would be subject to high taxes - some have suggested a tax of up to 95% on variable remuneration above the cap. The same proposal advocates a link between variable remuneration and certain social and environmental targets, and seeks to prohibit the payment of variable remuneration within 24 months of a mass redundancy.
Although it is far from certain that these proposals will become law, they clearly indicate that the battle over big bonuses in listed companies and autonomous state undertakings is far from over.
For further information on this topic please contact Johan De Bruycker or Kasper Van Landeghem at ALTIUS by telephone (+32 2 426 1414), fax (+32 2 426 2030) or email (email@example.com or firstname.lastname@example.org).
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