Strategy & Operations » Governance » Old Mutual slams corporate culture of rewarding failure

ONE of the City’s most influential fund managers has publicly decried the warped severance culture that rewards boardroom failure.

Old Mutual Global Investors has vowed to vote against companies that fail to slash board director-level service contracts to less than 12 months by next Spring.

The pugnacious stance was adopted after Tesco had tried to avoid making the payment to its former chief executive Philip Clarke and finance director Laurie McIlwee, who both left the disgraced retailer last year after snaffling seven figure payouts following last year’s accounting scandal. 

But it discovered there was no legal precedent to back its stance, forcing it to shell out £2.1m to the duo.

Paul Emerton, head of UK stewardship and governance at Old Mutual Global Investors said Tesco’s decsicion to award its former CEO and CFO termination payments of £1.21m and £0.97m, respectively, provided further evidence that the UK-executive-director standard service contracts based on a 12-month notice period “offer a reward for failure”.

“As Tesco management noted, in the absence of gross misconduct by either individual, these are contractual payments which the company is obliged to make. However, the performance of Tesco over recent years, combined with the investigation regarding accounting revealed last year, make a total payment of more than £2m inappropriate and show 12-month contracts to be an anachronism,” he said.

“In light of this, Old Mutual Global Investors has reviewed the application of our policy on governance and voting. We expect that any service contracts for main board directors at UK-listed companies in existence from March 2016 will have notice periods – and consequential compensatory payments – of substantially shorter than 12 months.”