2021 Corporate Governance and Executive Pay report

| Edna Twumwaa Frimpong

Diligent Institute and PwC Belgium recently launched our fourth consecutive report focused on the corporate governance landscape of the Belgium and Luxembourg (Belux) region. The report focused on the developing regulatory landscape, changing diversity picture, evolving executive compensation plans and how ESG is integrated in executive compensation.

Evolving regulatory landscape on ESG

The European Commission is leading the charge on  directives to enhance sustainability reporting in the region. The Sustainable Finance Disclosure Regulation (SFDR) came into effect in March 2021 and is expected to have a big impact on asset managers, banks, and fund brokers. The SFDR will supplement the Corporate Sustainability Reporting Directive (CSRD) which reinforces the Non-financial Reporting Directive 2014 (NFRD).

The Non-Financial Reporting Directive (NFRD) as introduced in 2014 required some large companies to give an intermittent report on social, employee matters, human rights, bribery, and corruption, and to a certain extent, environmental matters. However, it did not fully meet the needs of  investors. The information being reported by companies was not also very robust and sometimes incomparable. The inability of the directive to cover the needs of investors regarding issuers’ sustainability reporting  created investment flow risks and an accountability gap between issuers and their stakeholders, necessitating the introduction of the CSRD to reinforce the NFRD. The CSRD has four main additional changes to the already existing directive under the NFRD:

  • The CSRD was expanded to cover all large companies listed on regulated markets
  • It contained a requisition to provide audit (assurance) of all reported information.
  • It now mandates companies have more detailed reporting and conformity to all EU sustainability reporting standards.
  • The directives now require companies to prepare their documents in machine-readable formats to help stakeholders analyze and interpret the documents.

The CSRD is expected to be adopted by the Member States by the end of 2022. Companies will have to comply with these new requirements for financial years starting on or after January 1,  2023. However, certain requirements will be applicable from January 1, 2026, enabling companies to prepare for it.

Evolving remuneration mix

In 2020 during the pandemic, companies issued pay cuts to their executives’ compensation in solidarity with other stakeholders. Though this was not so common in the Belux region as that of other countries such as the UK, Australia, and the US, it was still predicted that executive compensation averages would fall in. However, our findings suggest that the average total realised compensation (TRC) from 2019 to 2020 increased by approximately 86%.

The average total granted compensation (TGC) fell by 4.13%. The rise in TRC is because of growth in long-term incentives plans. This significant increase in the proportion of realised long-term incentives (LTIs) in the CEO compensation package may, however, be largely attributed to the realised LTIs of three outliers of the Selected Index: Anheuser-Busch InBev S.A./N.V. (€92,4m), Argenx SE (€33,8m), and Sofina Société Anonyme (€13,5m). No other CEOs from the Selected Index realised LTIs worth more than €10m in 2020. When removing the three outliers from the sample, the average realised LTI in 2020 falls to €3,5m, which is still higher than the average realised LTI of 2019. The median realised LTI in 2020 is displayed as zero which is since several CEOs of the Selected Index did not realise any LTI at all (see the graph later in the report).

Historically, companies in the region have not been the targets of shareholder activism. However, this situation may change considering the huge growth in realised compensation. Income inequality has been magnified in recent times and investors are looking closely at the executive compensation landscape. Any perceived misalignments between pay and performance are likely to invite investor revolts at the forthcoming AGM.

The most noteworthy difference compared to previous years is the amount of realised LTIs. The average realised LTIs increased by 68% compared to 2019. This may be explained by the multi-year performance period attached to the payout of LTIs, which reflect a pre-pandemic performance cycle.

Diversity snapshot: How are Belgian and Luxembourgish companies faring?

Diversity has become a necessary part of today’s boardroom discussions. As one of the main components under the “S” of ESG, it has become imperative that it sits at the center of corporate strategy. Diversity is not only limited to gender, nationality, and race but also includes independence of directors, skills set, and tenure of current board members. Belgian and Luxembourgish companies have made significant progress in gender diversity on boards. In our sample of companies, we found that women currently form about 29% of boardrooms in the region.

Having independent directors serve on boards of public companies has always been considered a “best practice.” Corporate governance codes of jurisdictions have always advocated for a healthy mixture of dependent and independent directors.

The Corporate Governance Code of LUXX, for example, states that a board must include an appropriate number of independent directors which must not be fewer than two. This recommendation falls short of the OECD standard of having a significant number or majority of independent directors to bring objectivity and balance to the board.

Diligent recently conducted a survey with the Institut Luxembourgeois des Administrateurs (ILA) on strategy in Luxembourg boardrooms.  According to the survey conducted, many directors expressed that they have at least some of the knowledge and skills they expect to need to deal with the emerging topics related to sustainability which is not enough. A majority of 67% agreed they only had some, and not all, of the expertise that will be required, or even insufficient expertise at the board level. Utilizing Diligent’s compensation and Governance intel, we analysed the skills and expertise of board members on Luxembourg companies. The data suggested that directors with backgrounds in sustainability and governance were in the slim minority. With the changing business landscape, having the right directors with the appropriate skills will be crucial to navigate the complex needs and expectations of investors and other stakeholders.

 

About the Author

Edna Twumwaa Frimpong

Edna Twumwaa Frimpong

Head of International Research

Edna Frimpong is an experienced research analyst with a demonstrated history of working in the information technology and services industry. In her role with the Diligent Institute, Edna oversees and directs corporate governance research projects and partnerships internationally, outside the US. She joined Diligent Institute in 2021 after six years with CGLytics  -- a corporate governance analytics firm based in Amsterdam, The Netherlands, acquired by Diligent -- where she served as Head of Research for the EMEA region. Previously, Edna held research positions at firms including Sustainanalytics and Carnomise.  She received her Master's Degree in Finance and Law from the Duisenberg School of Finance in Amsterdam, and her Bachelor's Degree in Administration, Insurance and Risk Management from the University of Ghana.