Although the facts of the case in Newcastle International Airport Limited v Eversheds LLP [2012] EWHC 2648 concern the service contracts of two executive directors of the airport operator, Newcastle International Airport Limited (NIAL), and whether the firm of solicitors (Eversheds) who drafted their new service contracts was negligent (which claim was rejected by the High Court), the case reinforces some important principles of decision-making for all members of local authority committees (and not just those of local authority-controlled companies).
Facts
51% of NIAL is owned by seven local authorities in the North East of England. At the relevant time, NIAL had:
- Two executive directors (John Parkin (JP) the Chief Executive Officer and Lars Friss (LF), the Finance Director and Company Secretary) respectively appointed under service contracts dated 15 May 2002 and 18 September 2002.
- Five non-executive directors, all of whom were members of NIAL’s remuneration committee and two of whom were local authority councillors. (The position of chair of the Board and chair of the remuneration committee was held by the same individual (RR).)
The remuneration committee’s function was to determine NIAL’s policy on behalf of the Board in relation to senior executive remuneration and to review that remuneration on an annual basis by reference to a number of factors, including comparison with similar businesses. (JP and LF were not members of the remuneration committee.) It was common ground between the parties that:
- The remuneration committee was supposed to ensure that executive directors were provided with appropriate incentives to encourage enhanced performance and were rewarded, in a fair and responsible manner for their individual contribution to NIAL’s success.
- None of the remuneration committee properly understood in 2006, when the new service contracts for JP and LF were entered into, that under these JP and LF would be entitled to bonuses of £8 million for securing a refinancing deal with the Royal Bank of Scotland.
- Eversheds had drafted the 2006 service contracts based on instructions received from JP and LF.
So what went wrong?
The High Court rejected the claimant’s argument that Eversheds should not have accepted instructions from JP and LF to draft their service contracts, given that they had an interest that was distinct from NIAL and a conflict of interest in that they wanted to obtain the best possible terms in the new service contracts. The court held that NIAL suffered a loss because of failings on the part of its non-executive directors as follows:
- Although RR obtained a report from remuneration consultants (report) as to the terms of JP and LF’s new contracts (which did not mention a refinancing bonus) and invited JP’s comments on the report, she did not ask JP what he meant by his referring to a fair share of the proceeds on any refinancing deal. Nor did she forward JP’s response to the other members of the remuneration committee.
- RR prepared a paper (the principles paper) for approval by the remuneration committee. The principles paper, under a heading “Principles of a market-based approach for new arrangements” included a passage that the remuneration committee “retain discretion to vary performance conditions to avoid unexpected results where distorting events occur”. No consideration was given in the report as to what distorting event might occur on the refinancing, what was meant by a fair share of the proceeds or even how large the refinancing might be.
- While RR circulated the report to members of the remuneration committee, the report was a complex report dealing with the issues of discretionary bonuses. Even after all the relevant parties had been cross-examined in the proceedings, it was not clear to the court what the remuneration committee members understood by the provisions in RR’s principles paper. One member of the remuneration committee relied on RR’s executive summary rather than his own reading of the remuneration consultants’ report. RR admitted in cross-examination that she had not read the terms of JP and LF’s contracts and it was “crystal clear” to the court that she gave no thought to what the refinancing bonuses might entail and had not calculated the actual amount of any bonus.
However, the court singled out for praise the South Tyneside Council officer and the local government solicitor advising the seven local authorities. The court’s view was that they were the only people who adopted a proper considered attitude to the revision of the service contracts. Their briefing paper, which they provided for the two local councillors on the remuneration committee for a telephone meeting of the committee, set out:
- The roles and duties of the remuneration committee.
- The factors which the non-executive directors should bear in mind.
- Those factors that were particularly appropriate to directors appointed by local authority shareholders.
- Six questions that the members might wish to raise in the course of the telephone meeting. One of these asked whether it was right that management should get a share of any proceeds of re-financing of the business given that the decision was to be a local authority decision.
Unfortunately, none of the questions in the briefing paper were asked in the telephone meeting. The minutes of the telephone meeting recorded that the remuneration committee agreed the principles contained in the principles paper. Following the meeting, JP instructed Eversheds to draft amendments to the service contracts.
Lessons learnt
What the case emphasises is the importance of:
- Committees carefully reading all the papers that are relevant to a decision. Members must remember that all the relevant background information and papers to a proposal on which a decision is to be taken are provided for a reason. They are pertinent to the decision to be taken and should be read. What was apparent in this case was that one of the local authority members of the remuneration committee did not regard it as part of his duties to consider anything in the documents setting out what was proposed unless his attention was drawn to it.
- The report for any proposal including details of all the relevant considerations that those taking the decision must consider. Officers preparing the report for members should have in mind the words of the High Court in R (W) v Birmingham City Council [2011] EWHC 1147 (Admin) that decision-makers need rigorous and accurate advice and analysis from officers, not statements of what officers think the decision-makers want to hear.
- Committee members understanding their role and their obligations. In this case, RR and the remuneration committee failed to understand their role on behalf of NIAL was to provide independent scrutiny of JP and LF’s new service contracts.
For more information on decision-making, see the following Practice notes: