By Huw Jones
LONDON (Reuters) - Listed companies across the European Union must get shareholder approval on pay for their top executives under a draft law aimed at making firms more answerable to their owners and addressing public anger over big pay rises for bosses.
EU financial services chief Michel Barnier has proposed toughening up the 28-country bloc's law on shareholder rights to tackle "short-termism" in company planning, while stopping short of capping pay in the way he has done for banker bonuses.
Barnier wants shareholders to help keep pay in line with a company's performance, following a public outcry against huge pay increases for some top executives at a time of high unemployment and austerity for much of Europe.
"I cannot explain this enormous gap between the level of pay and corporate governance, and it does leave you with a pretty bitter taste in your mouth when you see the excessive levels of pay in some cases," Barnier told a news conference on Wednesday.
In France, where shareholders don't have a say on executive pay, remuneration rose by 94 percent between 2006 and 2012 while average share prices fell by a third, he said. After Sweden adopted a binding shareholder say on pay, share prices and executive pay have moved largely in lockstep.
Barnier has pulled back from major change like caps on pay or moving from "soft law" governance codes, widely used in Britain, to imposing binding rules.
"We are not there to set salaries for companies in general. We are no longer in a command economy, fortunately," he said.
The plans are among his last policy measures before the European Parliament goes to the polls next month and a new European Commission takes up the reins in November.
The measures need approval from EU states and the European Parliament to come into force, with changes likely.
Under the proposals, the bloc's 10,000 listed companies would have to publish clear and comparable information on their remuneration policy for executives and seek shareholder backing for it every three years.
The policy on pay must explain how it contributes to the long-term interests of the company and state a maximum amount of pay for executives. It should also say why the ratio or difference in pay between directors and full time staff is appropriate, though it does not set a fixed ratio.
Shareholders would have the right to vote annually on the company's report on pay packages for directors, but it would be up to member states to decide what happens if the report is rejected.
"Currently, EU countries differ dramatically in their approach to say on pay, so the EU's proposals may create a more level playing field," said Alexandra Beides, a lawyer at Linklaters.
Institutional investors and asset managers would also have to show how they take into account the long-term interests of the people whose money they invest in companies, including the reasons behind their investment strategy.
Asset managers, who typically hold a stock for eight months, would not be forced to vote in company meetings but have to explain if they did not, Barnier said.
Other changes include making it easier for a firm to find out who its shareholders are, as 45 percent of shares in Europe are held by investors from outside the company's home country.
Proxy advisers, or firms that give investors advice on how to vote in annual meetings, would also have to disclose certain information about how they prepared their guidance.
In a separate initiative, Barnier published non-legally binding guidance for the system used widely in Britain and some other countries whereby companies state if they comply or not with national corporate governance codes.
The system generally works well but companies that depart from a code often fail to explain why properly, Barnier said.
The Financial Reporting Council, which enforces Britain's codes, said the guidance would improve how companies are run.
The guidance aims to improve the quality of statements companies make but if it proves ineffective the European Commission has the option of proposing a draft law.
Barnier also proposed a draft law to make it easier for a small company to operate across the bloc by setting itself up as a pan-EU firm without having to undergo the costly process of registering subsidiaries in each country.
(Editing by Mark Potter)