The final Hampel Report on corporate governance which waspublished in January endorses the Greenbury Report of 1995,recommending that boards set one year service contracts as theirobjective. Although both reports envisage circumstances when thismay not be appropriate, the reiteration of this goal may encouragesome companies to revisit the matter of directors' noticeperiods.

Prior to publication of the Hampel report but some two yearsafter Greenbury, Granada Group PLC reduced five of its executivesdirectors' notice periods. The provision for the notice period toincrease, on change of control of Granada, to three years, wascancelled in consideration for a payment by Granada of an amountequivalent to two months' salary. Accordingly each executivedirector of Granada now has an employment contract with a noticeperiod of two years.

The reduction in notice periods and the compensatory paymentswere revealed when the group's annual report for 1997 was publishedin January. Institutional shareholders criticised the payments. Thedegree of dissatisfaction with Granada was evidenced in a protestvote against the re-election as director of a member of theremuneration committee. Of those voting at the AGM in February, 19%opposed the re-election and 12% registered abstentions.

Notice periods essentially give an employee financial protectionagainst breach of contract by the company. An employee whosecontract is broken is entitled to calculate damages for breach,having regard to his loss, that is, the amounts which would havebeen paid to him had the employer complied with the terms of thecontract. Therefore, an employer that terminates a contract whichincludes a two year notice period but requires the employee toleave employment immediately, will potentially be liable to pay theemployee a sum equal to two years salary. The employee will beunder a duty to mitigate his loss, that is, make attempts to findanother job. This may reduce the liability of the employer.

A change in notice periods will clearly amount to an alterationof contractual terms. The main requirement for a valid variation ofa contract of employment is that the employee has consented to it(either orally or in writing). The imposition of a unilateralchange by the employer will constitute a repudiatory breach ofcontract, giving the employee the right to resign and claim breachof contract or constructive dismissal giving rise to liability onthe part of the employer for unfair dismissal or a redundancypayment.

It may be that an employee will require consideration in returnfor consent to any reduction of a contractual notice period.However, given that a contractual notice period only provides acontingent benefit to a director (if the company terminates thecontract in breach) it will generally be difficult to justify thepayment of any significant inducement to a director to amend hiscontract. Granada may not have considered that the equivalent oftwo months salary was significant (amounting to £138,000 inthe case of Gerry Robinson, Chairman). Clearly shareholdersconsidered it to be substantial.

The Cadbury Committee, which was the first committee to makerecommendations on notice periods, did not intend that itsrecommendations should apply to existing contracts before theybecome due for renewal. Hampel confirms that remunerationcommittees should be sensitive and flexible, especially over timingof reductions in notice periods. A more appropriate method thanpaying an inducement may be to give the director on a rollingcontract twelve months' notice of a change in the notice periodfrom, say three years to two. If a director will not consent tosuch a proposal, the employer could give the director notice asspecified under his existing contract and then re-employ him undera new contract with a reduced notice period. AM