Following a change to the UK Corporate Governance Code which limits executive notice periods to one year, Towers Watson reports that Old Mutual Global Investors is now leading a campaign to further reduce the standard notice period to substantially less than that. Support for this position has been seen from the Investment Association, National Association of Pension Funds and the Financial Reporting Council.
Outrage over termination payments and executive notice periods is not a new phenomenon. Most recently, outcry followed termination payments given to outgoing executives at Tesco following a major accounting scandal that hammered Tesco’s share price. Shareholders were angered that Tesco’s former CFO was paid a £970,800 termination payment, in addition to his salary during the notice period, despite the scandal in his department. It would take 35 years for someone making the current average UK salary of £27,200 to earn what Laurie McIlwee earned for resigning amidst scandal.
Situations such as Tesco’s have brought notice periods and termination provisions into a bad light. However, contractual notice periods play a very important role in enticing talented executives to leave secure positions at other companies. Boards must have the flexibility to ensure that they can recruit top talent even if that talent is entrenched in a secure position at a competitor. Skilled executives are unlikely to leave a sure-deal for a risky unknown without some downside protection.
While lengthy notice periods and bulky termination payments should not be standard features in every executive’s contract, a blanket proclamation limiting all notice periods to a period substantially shorter than 1 year would not be in a company’s best interests. Companies must have some flexibility in cases where a lengthier notice period is truly necessary for recruitment. Hopefully Old Mutual will allow for such flexibility in its campaign.