Corporate Governance Compliance and What to Learn from Royal London Asset Management’s Vote Against Burberry

Governance has gone global, and shareholders in many markets have become more active in pressing companies to link pay to performance. This is increasingly true in the UK, and the anger of investors at what they consider unfair remuneration at Burberry, as well as frustration with the board’s failure to justify the unusual organisational structure, is emblematic. Royal London Asset Management’s outspoken public rejection of the Burberry remuneration package and organisational structure was extremely influential, suggesting that boards should carefully explain why a package is ‘fair’ as well as show why a choice for a non-compliant organisational structure has been made.

The lesson here is that companies must provide fair remuneration packages with respect to performance, even if understanding what is meant by ‘fair’ can be problematic. 

Long History of Non-compliance at Burberry

Burberry Group plc was initially floated on the London Stock Exchange in July 2002. Founded in 1856 as Burberrys, the luxury fashion house grew into an international fashion producer.

In its post-listing organisation, Burberry’s board consisted of a chairman, a chief executive, two executive directors and four non-executive directors.

As an LSE-listed company, compliance with the Combined Code is not voluntary for the group, as it is with private UK companies.

As early as 2004, Burberry was cited for non-compliance with the Combined Code in terms of organisation and executive pay. The National Association of Pension Funds, the UK’s largest shareholder group, singled out Burberry Chairman John Peace, for conflict of interest, as he was on the board of GUS, the company that owned a large stake in Burberry. The organisation also complained that the Burberry executive-share scheme was excessive.

In 2006, there were challenges from shareholder organisations to the substantial remuneration package for then-CEO Rose Marie Bravo. These were followed, in 2013, by similar objections to the large pay package for Angela Ahrendts.

 In 2014, Christopher Bailey, Burberry creative director, became CEO while retaining the creative responsibilities. This was done despite objections from other board members that he was unfit to handle both responsibilities. More than half of the company’s investors rejected the company’s remuneration report, as the board had awarded shares worth £20 million to Bailey without any conditional performance standards.

By 2016, the company’s shares had fallen 21 percent, and Bailey was replaced as CEO by Marco Gobbetti, although he was named President and retained creative responsibilities – this sparked shareholder frustration. One-third of the company’s shareholders rejected the executive remuneration package, leading to a reduction of Bailey’s bonus, and Finance Director Julie Brown was effectively obliged to return a substantial buyout award that had been part of the offer that recruited her to Burberry.  Royal London Asset Management’s (RLAM) outspoken public rejection of the package was extremely influential.

 Lesson 1 – What is fair executive pay?

Several organisations representing Burberry shareholders reacted vigorously against the Burberry remuneration package, but RLAM made a particularly strong argument.

“The slim reduction in CEO Christopher Bailey’s bonus seems lacklustre against a backdrop of reduced targets and poor financial performance at the firm. The incoming Finance Director was offered a substantial buyout award, much of which she later decided to return,” commented RLAM Corporate Governance Manager Ashley Hamilton Claxton.

“While shareholders may appreciate these gestures, strong and effective governance should have prevented these issues in the first place. Poor oversight has led to the board publishing additional clarifications and evidence to supplement the disclosure in the annual report, which does little to instill confidence in the board. In addition, the flip-flop over Christopher Bailey’s role as CEO and the new reporting structure, which sees both Mr Bailey and incoming CEO Marco Gobbetti reporting in to the firm’s chairman, creates further uncertainty and governance risks for investors.”

RLAM was joined by Institutional Shareholder Services, the Investment Association and Pensions & Investment Research Consultants (PIRC) in expressing concerns about the level of pay in relation to the performance of the company. PIRC commented: “No clear performance conditions were set with regard to this award, which is not appropriate. It is considered that the poor performance of the Company under his management, leading Mr. Bailey to waive his 2016/17 bonus for instance, does not justify the vesting of such award. Further, the Executive Directors’ total potential awards under all incentive schemes are considered to be excessive as they may amount to 525 per cent of base salary.”

The issue here is what would justify the vesting of such an award, or the award to Finance Director Brown? How can we judge if executive pay is fair?

First, it’s clear that different kinds of companies have different standards for executive pay. A farming cooperative judges performance and rewards differently from a software producer. This means that boards must provide clear and carefully argued reasoning to show when performance merits higher pay or a bonus. This is what Burberry failed to do, as the PIRC statement shows. Such reasoning should include comparative examples to show that the company is aligned with current industry payment trends, according to the European Corporate Governance Forum, which lays out examples of best practice.

Further, boards need to match risk and remuneration – the OECD highlights the need for boards to “understand how risk flows through the structure of remuneration and, as importantly, the remuneration metrics. A number of steps that boards could take to improve remuneration arrangements: i) a better integration between risk management and compensation/incentive setting such as by cross-membership of risk/audit committees and compensation committees; ii) adopting formal processes for mapping risk tolerance with incentive structure; and iii) extending the duration of performance targets and factor in
greater ex-post flexibility including clawbacks.”

Lesson 2 – Board structure matters

The conflation of management and creative responsibilities at Burberry also breached corporate governance principles, and became an object lesson in why non-compliance often doesn’t work.

As one institutional investor commented: “It has been a two-year experiment that was never going to work. The chief executive is responsible for the business and managing people, whereas the creative person is looking at building an image for the brand. They are quite different roles — and Bailey’s talent was on the latter.”

The key responsibility of the CEO is to drive the company, to formulate strategy and then to see that management implements it. Good governance separates this role from other spheres of activity, because, essentially, the CEO is responsible for all of it, “leading the executive management of the Group’s business, consistent with the strategy and commercial objectives agreed by the board,” as one commentator puts it.

Burberry gave the CEO too many tasks. The CEO cannot manage company strategy and run operations – for which he or she is responsible – at the same time.

Good governance means better performance

The poor corporate governance at Burberry may not have been the only factor leading to poor performance, but it was probably a critical one.

A recent study by Hermes Investment Management shows that companies with poor corporate governance regularly underperform compared with well-governed companies. In fact, companies with a poor standard of corporate governance underperformed in 61 percent of the months in the period under study.

Careful application of corporate governance principles clearly can make a difference to companies.

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