Has Greenbury tamed the fat cats?

Greater accountability and transparency about the relationship between directors' rewards and performance can only be to the good. This is the key recommendation of the Greenbury committee and it should be seen not as an imposition on boards but an opportunity to increase understanding and appreciation of the important role that companies, and those who direct them, play in the economic and social well-being of the nation.

Successful companies are the economy. They pay taxes. They create jobs and pay wages out of which taxes are paid, families provided for and the prosperity of communities secured. They generate the wealth which government uses to provide education, health and welfare.

That is the central message of the Greenbury committee's code of practice. For it to work, we have to win the minds of the general public and, perhaps more importantly, of the men and women in Britain's boardrooms who will have to apply it and abide by it.

For what the Greenbury code on disclosure is asking of them is a significant surrender of privacy. No one else, unless paid by the taxpayer, is required to expose every detail of their salary, their bonuses, shareholdings, pension provision, company car and other perks, for scrutiny by their next-door neighbour or anybody else who is interested. Ask employees to do the same and their trade union representatives would be up in arms.

Those who argue that the Greenbury code should be backed by law should consider the consequences of such action. Companies are already heavily regulated, with about 750 statutes governing the daily lives of directors. Under this mountain of law they can be fined, imprisoned and disqualified. Surely we do not need a statutory incomes policy for directors, any more than for any group of people.

The concerns that prompted the appointment of the Greenbury committee must be kept in perspective. Out of the hundreds of directors who run the UK's companies, public disquiet has been caused by the level of pay and the scale of increases of only a small number, and the "one-way bet" share options in privatised utilities.

Rightly, very little criticism has been directed at the vast majority of directors who are taking responsibility for risk, exercising leadership and using their talent to direct their companies to success. No one challenges the principle of high reward for high performance.

What the Greenbury committee proposes is that high rewards should be explained and justified through maximum disclosure. Its recommendation that contracts should normally be for no more than one year is designed to ensure that there are no big pay-offs for failure. There will need to be exceptions if high-performing executives are to be persuaded to risk their security to move from one company to another - but such exceptions also need to be explained and justified.

For many companies, share options have been and will continue to be valuable incentives. Their purpose is to give directors a stake in the company and identity of interest with shareholders in its long-term performance, and also a share in the risk borne by those who invest capital in the business.

The Greenbury committee has put forward proposals to reduce the scope for windfall profits and to encourage longer-term holding of shares. Directors do not expect gains from the sale of shares to go untaxed but expect them to be taxed fairly. The switch from capital gains tax to income tax is not as significant an imposition as it at first appears and will be generally acceptable.

What will require greater explanation is the application of income tax at the point of exercise of share options. Many will find it hard to see the equity of a system under which, on the day they pay out hard cash to take up their options, they also start paying income tax before any income or profit has been gained.

Shareholders, as the owners of companies, are the ultimate policemakers in the matter of directors' pay. They can take direct action in relation to directors' remuneration if they are not satisfied that the remuneration committee, or the board, has acted in a responsible or reasonable way. They can remove them. The power exists. They should use it.

The writer is director-general of the Institute of Directors.