“Corporate governance, according to the Organisation for Economic Cooperation and Development (OECD), is ‘the system by which businesses are directed and controlled.’” (cited in Britton & Waterston, 2010, p.235) Corporate governance of a company maintains the welfare of the stakeholders in an organisation. Stakeholders are people who are directly affected by the company’s actions and consequences, such as the directors, managers, employees, auditors, and shareholders. Executive compensation is an important part of the corporate governance. It is a financial return for the executives’ services to the company, which is devised to ensure that the directors are “kept in line” in terms of their actions and performance in the business’s …show more content…
Thus, avoiding the involvement of executives in financial crimes, such as theft, embezzlement or bribery. As mentioned in Business Accounting by Collis, Holt, and Hussey (2012, p. 248), former companies’ executives of major UK companies, Maxwell Communications, the Bank of Credit and Commerce International and Polly Peck International, who were involved in such financial scandals in the early 1990s, were one of the main reasons for the establishment of the Committee on Financial Aspects of Corporate Governance, or known as the Cadbury Committee, in 1991 by the Financial Reporting Council, the London Stock Exchange and accountancy profession.
In the corporate’s perspective, having shareholders’ binding votes on executives’ salaries also helps organisations to assess performance targets. It is viewed as a “value enhancing monitoring mechanism for firms with weak penalties for poor performance.” (Ferri, Maber, 2012, p. 528) An example of a corporate’s ignorance on supervising their director, is the collapse of Barings Bank in 1995 caused by the lack of risk management and internal control by the company. (Chua-Eoan, 2007) Despite the fact when corporates’ performances are found to be disappointing, the executives are still receiving pay rises or bonuses, such as companies like Aviva, whose chief executive, Andrew Moss, received compensation for losing
Recent high-profile corporate failures, scandals and, in some cases, executive corruption, have focused international regulatory and public attention on the need for having appropriate corporate governance standards and practices. (Leblanc 2005) As such, much emphasis is being placed on board evaluation.
However, there have been many cases where the CEO and executive officers receive outrageous compensation even when the companies suffer. Overall, there is a wide disconnect between the incentive of the executives and the financial performance of their company, which needs to be fixed. By passing regulations and rules such as the Dodd-Frank Act, there is hope of shedding light on the connection between the company’s performance and the executives pay. Although it will provide a clear insight, it will not be able to set a strict regulated compensation or define what an executive should earn. Instead regulations will allow for more transparency for the shareholders regarding corporate governance issues such as executive pay. Along with that, it will force companies to take accountability for their actions. If they do poorly, then the executives should be paid less, and vice versa. Overall, there should be a direct alignment between executive pay and the company’s
Generally, under-performing companies are the prime targets of hostile takeovers, so it makes sense that aligning shareholder and executive goals is a major way to avoid that. One popular way of aligning these goals is through the use of elaborate, structured compensation plans for executives which directly tie an executive’s salary to the performance of the company, usually and specifically its stock price (Megginson & Smart, 2009). These compensation plans have become the norm for American corporations, and their effectiveness in solving the agency problem is debatable. On one hand, it should drive an executive to strive to maximize the shareholder wealth, and it also helps companies to attract and retain the best available managers. On the other hand, it serves to sometimes wildly inflate the compensation paid to these executives, either by corporations trying to stay competitive for the best talent, or through easily achievable goals and uncapped maximums. The structured plans, if done correctly, are an effective way to help insure the goal of wealth maximization, but they are also by definition agency costs. Hence, agency problems are inherent to our American corporate system.
Directors have awarded compensation packages that go well beyond what is required to attract and hold on to executives and have rewarded even poorly performing executives. These executive pay excesses come at the expense of shareholders as well as the company and its employees. Furthermore, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company. Excessive CEO pay is essentially a corporate governance problem. When CEOs have too much power in the boardroom, they are able to extract what economists' call "economic rents" from shareholders (Economic rent is distinct from economic profit, which is the difference between a firm's revenues and the opportunity cost of its inputs). The board of directors is supposed to protect shareholder interests and minimize these costs. At approximately two-thirds of US companies, the CEO sits as the board's chair. When one single person serves as both chair and CEO, it is impossible to objectively monitor and evaluate his or her own performance.
In this article, Mary Jo White, the chairwoman of the Securities and Exchange Commission, emphasized their crucial duty to protect shareholders from abusive practices they oversee. A good corporate governance and rigorous compliance are essential. However, ‘ethics and honesty’’ can become core corporate values when directors and senior executives embrace them. A recent academic study suggests that lax oversight can result when a director of a company is friendly with the chief executive overseeing it.
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).
In terms of Dodd-Frank’s effects on corporate governance, the first question is “does say on pay undermine the duties of the board of directors?” The only answer is, “not if the company’s Board of Directors is effective.” This legislation forces accountability for the board of directors to ensure that its compensation packages are based on measureable facts which truly tie into the performance of the company. The Citigroup CEO Compensation pushback by shareholders serves as an example where it was rejected in 2011. Upon further inspection by the shareholders, the CEO’s large compensation package had nothing to do with the performance of the company and would not provide the shareholders any true value.
In order to examine the effects of excessive CEO pay on the company’s stakeholders, one must define the two terms. Russell S. Whelton, a former graduate student at Saginaw Valley State University, defines excessive pay as, “compensation that is 20% or greater than the national average CEO salary” (Whelton 15). Therefore, excessive pay would constitute compensation over $13.8 million per year (Chamberlain). A stakeholder is anyone who is directly affected by the performance of an organization and thereby, holds a stake in that company (Schermerhorn 73). Some examples of stakeholders are directors, shareholders, executive officers, and all employees. It is important to understand why executive officers are compensated at the high levels they are today to determine the benefits and disadvantages of the argument. The purpose of compensation at any higher level is to “attempt to ensure that management actions result in successful performance for the firm” (Ashley and Yang 369). Possible excessive compensation can be a result
The executives are accountable to the board of directors. Instead of protecting the investors, the board enticed the culture of financial fraud in the company for selfish gains. It failed in its duties in keeping the executives in check.
sation is only one of a number of corporate governance issues that companies now face, we need to consider how to foster greater accountability by removing impediments to the market for the transfer of corporate control. We 've made it harder for shareholders to join together and shift control of a company by supporting tender offers from outsiders-outsiders who may be able to deliver stronger performance. That, I think, has made the market less efficient than it was 20 years ago. This issue needs more study, but I believe part ofthe overall answer on executive compensation is to restore a greater liquidity in the market for corporate control. Peter Clapman: I hope the new stock-exchange requirements help change things, but I 'm not counting on it. We 're talking about a closed-door process that happens at board meetings, and I don 't think we can count on real progress until we 're able to influence the private discussions that take place behind closed doors. TIAACREF has retained, as consultants, two retired CEOs who also sit on compensation committees of major American companies, and they 've talked about the way compensation is actually discussed in the boardroom, based on their informal discussions with compensation consultants. Here 's what they told us about the process. Let 's say a board is discussing whether to award the CEO
A company’s board of directors, specifically its compensation committee, is responsible for determining executive compensation. Much of that power is subjective, and various studies have shown that the compensation justification is both fair at times or unfair at other times.
Currently, there is an increasing argument about whether CEOs’ salaries and compensation packages have become excessive, consequently, should be regulated. According to the High Pay Centre (n.d., as cited in, West, 2016) and the Tim Bush (n.d., as cited in, West, 2016), chief executives from FTSE 100 received a salary of £4.96m a year which is 180 times more than the average UK employees’. This essay argues that the compensation and salaries for chief executives are excessive, therefore, should be regulated. In this essay, the reasons for why CEOs’ compensation is excessive will first be argued, then the stakeholders’ power and influences on companies’ performances will be discussed.
The stories of evidently mind boggling CEO pay never stop; every year conveys another bundle of plausibility to parade as tests of private undertaking miss the mark on control, yet the matter of CEO pay is not exactly the same as some institutionalizing sentiment what society considers sensible. Despite the likelihood that judicious money related pros may agree that CEO pay appears to be unequal, they can wander back and examine for reasons why current compensation levels may be magnificently shrewd in a business division sense. What turns out finally is something of a hung jury: An expansive number of segments make it difficult to check whether CEO compensation is systemically uneven and inefficient, and for whom or to what result. Most
The notion of executive compensation is a contentious issue, particularly during times of economic slowdown. According to Business Dictionary, executive compensation is “the financial payments and non monetary benefits provided to high level management in exchange for their work on behalf of an organization.” Examples of high level management include presidents of the corporation, chief executive officers (CEOs), chief financial officers (CFOs), vice presidents, managing directors and other senior executives (Business Dictionary). It is understood that these individuals are of special interest, because their decisions influence the strategic direction of the company. Over the last 20 years, academic
In the present days, corporate governance law is ultimately important and is influential. Particularly, the executive pay has long been a topic of interest among the legal profession for many years. As the companies need to attract the director who has skills and experience to manage the company’s resource and make profit for the company, offering high remuneration to the director could incentivize them to use maximize proficiency and experience to control the company and not to use the company’s resources to benefit themselves. Therefore, it can be argued that the remuneration for executive directors is an important factor to attract the person with the right skills to control the company. However, the executive