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January 2001

Corporate governance standards among UK companies have marginally improved in the past year, but a significant number of companies still have boards and remuneration structures that fail to meet best practice, according to Pensions & Investment Research Consultants (PIRC).

Its annual review of corporate governance, which looked at governance of 500 companies in the FTSE All Share Index, found that 26 per cent did not have a fully independent remuneration committee. It also found that only three per cent of companies put their remuneration policies to shareholders for approval.

FTSE 100 chief executive earnings, excluding share options, increased by an average of 17 per cent – a trend strongly criticised by PIRC. Average cash earnings for directors, including salary, bonuses and benefits, rose by between 8 and 14 per cent.

‘Directors’ remuneration is in danger of getting out of control, with ever higher rewards available for mediocre performance but few companies willing to seek shareholder endorsement for their remuneration policies,’ claimed PIRC research director Stuart Bell.

More than two-thirds of directors have a contract lasting one year or less. PIRC says that while this represents a major success for shareholders who have sought to reduce the length of directors’ contracts, there has been no corresponding fall in the average compensation paid to departing directors.

Awards under share incentive schemes had also risen, but performance targets ‘have not become more challenging’.

‘These findings show there is still a long way to go before best practice standards on corporate governance have been adopted across the board,’ said Bell.

In a separate study, PIRC has found that pharmaceutical and information technology businesses are the poorest performers on corporate social responsibility in the FTSE 100.

The analysis, which has been carried out by PIRC’s recently-formed Socially Responsible Investment Service, concludes that IT businesses in particular have a poor record on measures such as community involvement.

However, it says new firms score badly because ‘their speed of development … appears to have precluded attempts to embed systems of corporate social responsibility reporting’.

The Socially Responsible Investment Service, launched in 2000 as the Corporate Responsibility Service (EP10, 2000) says its conclusions were drawn from detailed scrutiny of the policies and activities of a third of the FTSE 100. PIRC says many companies appeared ‘unwilling’ to let outsiders know what they were doing. It argues that this is detrimental to the companies concerned because they are not telling investors about their good practices.

The Corporate Responsibility Service will be holding a conference, ‘Priorities for the Corporate Social Responsibility Agenda’, in London on 19 January.




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