Cross directorships represent a threat to the efficient working of remunerations committees.
A cross directorship is said to exist when two (or more) directors sit on the boards of the other. In practice, such arrangements also involve some element of cross-shareholdings which further compromises the independence of the directors involved.
In most cases, each director’s ‘second’ board appointment is likely to be non-executive.
Cross directorships undermine the roles of remunerations committees in that a director deciding the salary of a colleague who, in turn, may play a part in deciding his own salary, is a clear conflict of interests. Neither director involved in the arrangement is impartial and so a temptation would exist to act in a manner other than for the benefit of the shareholders of the company on whose remunerations committee they sit.
It is for this reason the cross directorships and cross shareholding arrangements are explicitly forbidden by many corporate governance codes of best practice.
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