A revised code on boardroom practices has targeted over-paid and under-achieving executives. But will the recommendations actually mean that the highest earners take a pay-cut?
The pay of fat cat construction executives is under the spotlight this week following the publication of a revised code on boardroom practices. The code calls for companies not to over-reward executives, to shorten notice and contract periods and to rule out "payments for failure" in the case of companies reporting large losses.

A glance at this year's Building top 100 contractors league tables shows that the highest paid directors at the UK's leading contractors pocketed an average £427,000 in 2002. But those directors with the fullest pockets were not necessarily working for those companies that performed best. Mike Foster, a construction analyst with stockbroker KBC Peel Hunt said: "There is little correlation between a company being successful and the remuneration of its directors." The new code will urge companies to be tougher on tackling excessive executive pay.

The shake-up of boardroom practices was recommended in a government-sponsored review led by former investment banker Derek Higgs, published in January. The report followed revelations of fraud at two giant US corporations, Enron and Worldcom.

A less prescriptive version of the review's recommendations has been incorporated into the latest draft of the Combined Code of Corporate Governance, published on Wednesday 23 July.

All UK listed practices will have to comply with the code after its approval by the independent body, the Financial Reporting Council.

The publication of the code is likely to lead to the National Association of Pension Funds renewing calls for Ian Grice, the next Chief Executive of Alfred McAlpine, to be given a shorter notice period to make him more accountable to shareholders if he fails to perform.

Other recommendations contained in the code include:

  • New definitions of the role of the board, the chairman and the non-executive directors
  • More open and rigorous procedures for the appointment of directors and from a wider pool of candidates
  • A formal evaluation of the performance of boards, committees and individual directors, enhanced induction and more professional development of non-executive directors
  • At least half the board to be independent non-executive directors. Or, in the case of smaller companies, at least two non-executive directors.
  • A separation of the roles of the chairman and chief executive
  • A chief executive should not go on to become chairman of the same company
  • There should be closer relationships between the chairman, the senior independent director, non-executive directors and major shareholders
  • The role of the audit committee in monitoring the integrity of the company's financial reporting should be strengthened, reinforcing the independence of the external auditor and reviewing the management of financial and other risks.

The new code will come into effect for reporting years beginning on or after 1 November 2003. Copies can be downloaded from the FRC website: www.frc.org.uk