An Analysis Of One Major Issues Of Corporate Governance

Corporate governance in itself has no single definition but common principles which it should follow. For example in 1994 the most agreed term for corporate governance was “the process of supervision and control intended to ensure that the company’s management acts in accordance with the interest of shareholders” (Parkinson, 1994)1. Corporate governance code is not a direct set of rules but a self-regulated framework which businesses choose to follow. This code has continued to change in the past 20 years in accordance with what is happening in the business world. For example the Enron scandal caused reform in corporate governance with the Higgs Report which corrected the issues which were necessary. Although it does not quickly fix problems, it gives a better framework to

The CEO’s compensation should be set on how well the firm performs and should be awarded based on the performance of the stocks in the long run. It is easier to measure performance by the growth rate in the profits that have been reported since intrinsic value cannot be fully

This paper provides an overview of the current debate and the theories that attempt to explain executive remuneration disclosure. Attention is given to underlying accounting theories such as Positive Accounting Theory, Normative Accounting Theory, Stakeholder Theory, Legitimacy Theory, Institutional Theory, Public Interest Theory, Capture Theory and Economic Interest Group Theory.

While these citizen protests and legislative actions could be an overreaction to a few isolated cases of executive compensation excess, the data suggests otherwise. According to the AFL-CIO (2013), executive pay has increased dramatically over the past several decades compared to worker compensation. In 1982, the pay ratio between executives and workers was 42:1, but by 2012 it had increased to 354:1. This 8.4-fold differential in compensation suggests that the productivity of executives has also increased 8.4-fold relative to productivity of workers. If executive pay is positively correlated with a firm's bottom line, then higher pay should predict success. Unfortunately, researchers have found the opposite to be true.

As previously discussed in this paper, it is unethical for CEOs to be paid so much when compared to other employees their respective organizations, outlearning their peers as of 2011 by a ratio of 201 to 1 since 1965 (Mishel, Bivens, Gould, and Shierholz, 2012). Appropriately,

This was a very interesting article, in my opinion it brings to mind the derived phrase, which came first the chicken or the egg. Meaning, is corporate governance an attempt to control the results of unethical practices of corporations or is it meant to deter them. In reading this article, it is clear that certain corporations practiced unethical business behaviors for self-interest, but the questions this author have are: 1. Should corporate governance be regulated by the legislature as well as the organization and to what degree, 2. Is corporate governance, there to protect the shareholder or the stakeholder, 3. How effective is corporate governance on a global level. The need for a governance system is based on the assumption that the separation between the owners of a company and its management provides self-interest executives the opportunity to take actions that benefit themselves, with the cost of these actions borne by the owners (Larcker & Tayan, 2008).

We believe giving executive compensation with the financial support bestowed from the government during the economic crisis is unethical as they are aimed to support the companies from facing bankruptcy or from financial struggles they are currently facing. The stakeholders involved in this financial crisis were the chief executive officers of the major banks, the investors who invested into the companies, those who bought CDOs and other “garbage”, and ultimately the taxpayers whose money were used to relieve the major banks from going into bankruptcy.

Several of them have focused on economic and non-economic indicators. For instance, Core et al.’s (1999) study discovered a negative relationship in which CEOs receive a higher pay in firms characterized with weak performance and governance structure. Pink and Laett (1991) observed a weak relationship between hospital financial performance and management compensation. Rather, they determined that factors such as size and teaching status impact the compensation of CEOs. This navigates the discussion towards the possibility of non-economic or social factors. Numerous studies have shown that there is a positive relationship between hospital size and CEO compensation (Kramer & Santerre, 2010; Preyra & Pink, 2001; Santerre & Thomas, 1993). Brick et al.’s (2006) study uncovered that overcompensation in for-profit firms may be due to nepotism. Lastly, a critical research study performed by Maulik & Hines (2006) reported on patient satisfaction and CEO compensation to a certain degree resulting in two important findings: (1) An average of 15 percent of CEO compensation was related to quality in the USA; (2) A third of hospitals did not give CEOs incentives for patient satisfaction survey results. Essentially, this information provided some basic insight into the expected relationship analyzed throughout this particular

CEOs have benchmarks to see how they are performing and how the company is growing. Pay for performance is a common term used to define expectations that CEOs pay in annual bonuses and long-term incentives should correspond with and how the company is performing and also superior shareholder returns relative to similar companies. Usually, the performance of the company operating performance is tied directly to its year to year stock earnings. Worldwide pay for performance has gained considerable prominence as CEO pay because it has “attracted political, regulatory and economic attention.” (1) (8) How accurately does earnings per share show how much the CEO should be paid.? Companies like using stock to define CEOs pay because it pleases shareholders in the company. EPS, which is profit divided by the shares of stock outstanding, has multiple flaws as a measure of performance. A growing EPS could be due to a rising economy, which the CEO had nothing to do with. Industry demand rises or other industries go into a winter push EPS up with

Subsequently, Candy (2012) researched whether senior official compensation was affected by the worldwide financial crash of 2008 using an example of Three-Australian companies. The investigation examined senior official’s compensation packages as reported in three-ASX listed companies, viz. Cochlear, FMG, and QANTAS. The study observed that senior official compensation level was not influenced by the crisis, with all senior official classifications rising in compensation compared with the earlier year. The question of wonder is, perhaps, why even in the midst of such deadly economic downturn would the ‘pay-performance rise compared to the last years’? In addition, the study also considered whether or not, firms stakeholders were getting what they have paid their executives to do. The aim was to oversee pay-performance and KPIs, namely revenue as functions of sales, EPS and aggregate sales volume-sold by the firm. It showed that those

This report explores the issue of the pay that top executives make, and the reasons why they do. It also suggests improvements that can be made to make the system better. High Pay Seems Small When Compared To Company Profits Many companies pull in profits that are extremely high. When an employee of such a companies salary is compared to the amount of profit that the company earns, it starts to seem reasonable. It only makes sense that if the employee is directly responsible for the success of their company, then they deserve to get their payback. It seems ironic, but many salaries even look small once compared with a companies profits. Top Executives Are Under A Lot Of Pressure Being the CEO of a

Given the effect a CEO can have on a company's success, we can understand why their compensation packages

The researcher evaluated the following perceptions that CEOS are currently, being over compensated for their performance and their compensation is constantly increasing, CEO may be actually being under paid for their performance in organizations, and finally that an organization’s board of director does not take proper action on CEOs who have poor performance.

Massive number of corporate scandals that began in late 2001 brought into review the functioning of public company boards and brought under scrutiny the potential flaws in their executive compensation practices. Now a common consensus exists that a majority of boards have adapted compensation arrangements that does not abode well with the views of shareholders. There still exists a major disagreement about the scope and source of such problems and the ways and means of tackling them.

The question of whether CEOs earn their pay has been created widely sound debates and attracted comprehensive attention from investors, employment economists, financial economists, as well as unfavorably criticized by the public at large (Conyon, 2006; Larker and Tayan, 2011). The debates on executive compensation in general, and on Chief Executive Officers (CEOs) compensation in particular have been passed for years and agglomerated a multitudinous amount of studies (Devers et al., 2007). Criticisms from the public and heated debates from the academics began from the 1990s when executive compensation soared higher than company profitability (Bedchuzck and Fried, 2004). This led the popular press to claim that executive compensation was not correlated to firm performance (Tosi et al., 2000). As a result, one of the most impetuous questions posed out that whether executive pay had been associated authentically with firm performance or not while the empirical executive remuneration studies revealed that firm performance hardly ever exceeded 50 percent in determining top executive compensation, and pay-for-performance sensitivity was so weak (Grabke-Rundell and Gomez-Mejia, 2002).