70. In 2014, the Financial Reporting Council's UK Corporate Governance Code introduced a requirement for performance-related remuneration policies for executive directors to include "clawback" provisions. These enable bonuses to be recovered,251 in circumstances set individually by companies.252 In February 2015, in response to this change, the Carillion RemCo agreed a policy that enabled clawback if the company's accounts needed to be restated, or if the director was guilty of gross misconduct.253 It set the RemCo as the arbiter of whether, and the extent to which, clawback applied.
71. Following the collapse of Carillion, the company was criticised for having overly restrictive clawback terms.254 Alison Horner, Chair of the RemCo, denied this accusation and said the terms made it easier to claw back bonuses.255 Ms Horner also told us that misstatement and misconduct were used as clawback terms are used by "80% of the FTSE".256 However, a sample of clawback terms from 2015 shows that many companies, including those on which Carillion directors were also board members, also included "serious reputational damage" as a criteria for clawback.257 It is unclear why Carillion did not include reputational damage in its terms, and unlikely Ms Horner was unaware of its use elsewhere, including for executives at Tesco plc, where she is Chief People Officer.258 Furthermore, the RemCo considered new clawback terms recommended by Deloitte, "to reflect current best practice", in September 2017 as part of its search for a new Chief Executive.259 Minutes of that meeting show the RemCo agreed new triggers for clawback, including reputational damage, failures of risk management, errors in performance assessments and information, and any other circumstances in which the RemCo believed to be similar.260
72. These new terms were too late to affect the bonuses given to directors in previous years, who remained on the weak original terms. In the same meeting as the new terms were agreed, the RemCo considered asking directors to return their 2016 bonuses, but concluded "that could not be enforced and would be very difficult to achieve at this stage".261 We regret that the RemCo had neither set terms that could have made clawback possible, nor shown a willingness to challenge directors on their pay-outs. We agree with the suggestion by Amra Balic of BlackRock to us that standard legal language around clawbacks applicable to every company would make enforcement more likely.262 Of course, the Carillion directors could have returned their bonuses voluntarily.
73. Nowhere was the remuneration committee's lack of challenge more apparent than in its weak approach to how bonuses could be clawed back in the event of corporate failures. Not only were the company paying bonuses for poor performance, they made sure they couldn't be taken back, feathering the nests of their colleagues on the board. The clawback terms agreed in 2015 were so narrow they ruled out a penny being returned, even when the massive failures that led to the £845 million write-down were revealed. In September 2017, the remuneration committee briefly considered asking directors to return their bonuses, but in the system they built such a move was unenforceable. If they were unable to make a legal case, it is deeply regrettable that they did not seek to make the moral case for their return. There is merit in Government and regulators considering a minimum standard for bonus clawback for all public companies, to promote long-term accountability.
____________________________________________________________________
251 Financial Reporting Council, UK Corporate Governance Code, para D1.1. The terms also specify 'malus' provisions, which prevent non-cash aspects earned but not yet paid out from vesting.
252 "Bank of England tightens bonus rules", Financial Times, 13 January 2016
253 Carillion plc, Annual Report and Accounts 2016, p 78; Carillion plc, Remuneration Committee: Clawback, 26 February 2018; Q640 [Alison Horner]. The first provision did not apply if the restatement is due to a change in accounting standards, policies or practices adopted by the Company
254 "Carillion questions over exec bonuses", Financial Times, 16 January 2018
255 Qq640-1 [Alison Horner]
256 Q640 [Alison Horner]
257 Wood Group, Annual Report and Accounts 2015, p 50; United Utilities, Annual Report and Accounts 2015, p 89; Shell, Annual Report and Accounts 2015, p 90
258 Tesco plc, Annual Report and Accounts 2016, p 64
259 Deloitte, Paper for the Remuneration Committee, 7 September 2017, p 1
260 Carillion plc, Remuneration Committee Minutes, 7 September 2017
261 As above.
262 Q1102 [Amra Balic]