The Association of British Insurers' (ABI) first report on Board Effectiveness and the revised Principles of Remuneration they say will both help companies to better understand the views of institutional investors on effective boardroom performance and executive pay.

“Effective boardrooms should be the powerhouse of the UK economy. The board effectiveness report and long standing remuneration guidelines represent UK best practice. They aim to ensure that remuneration is linked to performance and shareholders’ interests are protected. We continue to favour evolution, building on what we have learnt from recent years to make sure companies act in shareholder’s interests and deliver long term economic growth that will benefit society as a whole,” says Otto Thoresen director-general of the ABI.

Commenting on the principles, Sean O'Hare, partner in PwC's HR and remuneration practice, said: "The ABI's main point on quantum levels of pay is that these should be appropriate to the business, reflecting the challenges of tackling this area. The ABI recognises that benchmarking pay against peers has played a part in ratcheting up quantum pay, but also that peer group comparisons are important for deciding pay. On this point companies are caught between a rock and a hard place.

The ABI report on Board Effectiveness focuses on three key issues that help make an effective board:

• Board diversity – including women in the boardroom
• Succession planning – board engagement in planning for succession for all senior management
• Board evaluation – including discussions on risk management, corporate strategy, geographic markets of operation and reporting

It highlights existing best practice amongst FTSE 350 companies and makes clear that greater progress and transparency on these issues is needed to ensure an effective board and a successful company.

The revised Principles of Remuneration are the latest update to ABI guidance which has evolved over thirty years. They address investors’ renewed concern on executive pay. ABI members believe that non-executive directors have a key role to play in determining the appropriate remuneration and shareholders should be actively involved without micromanaging companies.

Key principles of the guidance show that company boards should:

• Support appropriate reward for exceptional performance
• Strongly resist any payment for failure
• Understand that excessive or undeserved remuneration undermines the efficient operation of the company, adversely affects its reputation and is not aligned with shareholder interests
• Not engage in crude benchmarking when seeking to justify increases

Like the BIS proposals of last week, the guidelines reinforce the suggestion that boards must consider the impact of executive remuneration on the company's finances. Interestingly they also go further by emphasising that the whole board should consider the impact of employee remuneration on the sharing of value with shareholders and investment activity.

"The revised guidelines also have a much stronger endorsement of discretion, whereby remuneration committees have some room to adjust pay schemes to ensure they reflect corporate performance, albeit within pre-agreed guidelines,” says O’Hare. “This makes particular sense given the current economic environment, as in some cases the formulaic outcomes of pay plans may no longer be appropriate. The importance of clawback is also emphasised, so the ABI should be reassured by a recent PwC survey of major organisations that showed that a third were planning to introduce clawback in 2012."

While the report is a positive step, given it’s acknowledgement of the need for improved boardroom composition and performance, O’Hare adds that it is often below board level where change is really needed: “Firms have to nurture and retain talent up through the ranks, defining skills needed at board level and mapping these against potential candidates. However, difficult economic conditions are likely to put pressure on the diversity, development, and training programmes that are essential to making this happen."

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