Reward on cash creation not share price says Frijns

Amsterdam, July 15 2003

New Dutch guidelines on corporate governance will not work unless and until independent directors have significantly more power over directors, a leading investment banker warned the International Corporate Governance Network conference here.

The guidelines, published in The Hague by the Tabakslblatt committee, recommend that the remuneration of managem ent board members “must be made more transparent", and that the general meeting of shareholders must approve the annual remuneration report.

Similar recommendations have been made in a number of other European countries.

But Jean Frijns, chairman of ABP Investments, one of the world's leading pensions fund managers, told the IGNG meeting earlier this month: "They will not work as long as remuneration committees are not powerful enough, and do not use their power".

Mr Frijns, addressing one of the conference's hottest topics, directors' pay, blamed a lack of financial discipline for the destruction of shareholder value, along with what he called ¢â‚¬Ëœfairy tales' and a ¢â‚¬Ëœlack of insight among investment banks', which had led to shareholder absenteeism when their voices were needed.

He was equally dubious about any scheme for rewarding executive directors that was based on share market performance. Reminding the 300 corporate governance experts that it had been the markets that had created the dotcoms and telecoms fiasco, he said:

“The markets are not good at valuing companies. Compensation systems linked to market value will not work. Markets are not efficient. Look at the IT bubble"

Mr Frijns said for good corporate governance to work, compensation needed to be based not on short-termism but on proven profitability, including cash payouts.

“Cash is king", he said. “Reward cash payouts and penalise retained earnings".

Editor's note: What do you think? Is it wrong, as Mr Frijns says, to reward executives on share price? What is the best form of measuring directors' pay?

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