A FTSE100 Company Secretary writes...
Should companies require their NEDs to have a shareholding in the company – and if so, at what level should the shareholding be set?
We currently require our NEDs to use a portion of their fees to purchase shares. Our current practice is that we deduct £10k per annum (post tax & NI, representing approximately 11.5% of average gross fees), on a monthly basis and shares are purchased and held in a nominee account on their behalf. The NED is not permitted to sell them during their tenure.
Are we in line with practice elsewhere? What (if anything) are other companies doing?
We do not have a formal requirement for NEDs but they have all purchased shares voluntarily in varying amounts. I agree with the alignment with shareholders point and none of the NED holdings are large enough to attract enquiries about independence etc.
There is an expectation that NEDs will have a shareholding equal to 100 per cent of their annual fees in the Company’s shares. It does seem unusual not to allow the NEDs to sell their shares during their tenure, especially if they have already met the shareholding expectation/requirement. We allow Executive Directors to sell their shares as long as they have met their own minimum shareholding requirement, which is different for different roles. They tend to accumulate this expected amount of shareholding within the first/second year of their tenure.
We don’t have any shareholding requirement for the NEDs although in practice four of the five do have at least some shares. I think it’s unusual to prevent shares from ever being sold during a director’s tenure – for our EDs we allow sales as long as the minimum shareholding requirement is maintained.
We have had a shareholder guideline policy in place for several years for EDs. This was extended in 2018 to the NEDs. The requirement is for NEDs to hold 1x fees and to facilitate this, it was agreed that a portion of fees would be withheld to purchase shares. It was felt by the Board that this would encourage greater alignment with shareholders.
The NEDs are paid quarterly (£75k pa), with £5k per quarter withheld (representing approximately 26% of average gross fees) to purchase shares in the open market. These shares are subsequently held in a nominee account on their behalf. There are no restrictions on selling the shares during their tenure, provided they have reached the 1x fee threshold.
Your policy feels harsh, but might be appropriate in the FTSE100. We sit in the next level down (top 200) and our Chair does not insist on NEDs having a shareholding. However all but one of the NEDs do hold shares – probably about £10k – £20k’s worth. Their base fee is £52kpa.
We do not have a requirement for NEDs to hold shares. They are informally encouraged and two (of the three) NEDs have bought shares and hold a small shareholding. The third NED has chosen not to (which may be because they are Rem Com Chair and having a shareholding somehow compromises this role). I think it should be left to NEDs to decide, and it should not be a requirement
We don’t have such a policy and ours NEDs don’t even feel that they should hold shares in the company. Personally I think they should be encouraged to hold shares. It has to do with alignment with shareholder sentiment. I appreciate there may be questions about their independence, etc. Some proxy agencies question it when they see their shareholding at nil. The practice you outline is in line with what I’ve seen in other companies.