Corporate Governance Committee (2010) in Corporate Governance and the Financial Crisis

) Respond to DISCUSIION below by: • Ask a probing question. • Share an insight from having read the discussion. • Offer and support an opinion. • Validate an idea with your own experience. • Make a suggestion. • Expand on the discussion.

DISCUSSION

The OECD Corporate Governance Committee (2010) in Corporate Governance and the Financial Crisis: Conclusions and Emerging Good Practices to Enhance Implementation of the principles noted that the ability of the board to effectively oversee executive remuneration appears to be a key challenge in practice and remains one of the central elements of the corporate governance debate in a number of jurisdictions. The nature of that challenge goes beyond looking merely at the quantum of executive and director remuneration and incentive arrangements are aligned with the longer-term interests of the company[i].

One of the main law which regulate remuneration relations is the “Say on Pay” which was introduced in the UK in 2002. Say on pay laws provide shareholders with the ability to vote on their firms’ compensation policies on a periodical basis. There are opinions that the main purposes of these laws are to limit the seemingly excessive levels of CEO pay, tighten the link between firm performance and CEO pay, and improve disclosure on executive compensation[ii].

The director’s remuneration debate highlights important aspect of the principal-agents issue discussed earlier. Conyon and Mallin (2007) highlight that shareholders are viewed as the “principal” and managers as their agents and that the economics literature, in particular, demonstrates that the compensation received by senior management should be linked to company performance for incentive reason[iii].

Performance criteria may differentiate between three broadly conceived types of measures: 1) market-based measures; 2) accounts-based measures; 3) individual-based measures. Some potential performance criteria are[iv]:

Shareholder return
Share price
Profit based measures
Return on capital employed
Earnings per share
Individual director performance
The remuneration committee is receiving more attention concerning how executive pay is structured and how executives have earned the remuneration they receive.

Say on pay is defned as “the vote of shareholders at a general meeting on the policy and/or various components of compensation of executives and/or non-executives, depending on the country” (IFA 2013) Strengthen the role and operation of the remuneration committee through new principles on the following[v]:

The composition of remuneration committees;
The obligation for the members of the remuneration committee to be present at the general meeting where the remuneration policy is discussed in order to provide explanations to shareholders; and
Avoiding con?icts of remuneration consultants
The 2014 proposal for a new shareholder directive includes say on pay as part of a broader agenda to encourage shareholder engagement in their investee companies (European Commission 2014). The following are perceived benefits associated with say on pay[vi]:

It gives the shareholders control of overall principles for executive remuneration, thus tilting the balance of power more in favor of the shareholders.
It gives shareholders incentives to become more involved in the governance of companies.
In conclusion, probably topic related to remuneration one of the hot topics, since remuneration for directors depends on their performed work and sometimes it’s very difficult to evaluate it and provide adequate compensation.

[i] C.A. Mallin. Corporate governance 2016.

[ii] Ricardo Correa et al. Say on Pay Laws, Executive Compensation, Pay Slice, and Firm Valuation around the World.

[iii] C.A. Mallin. Corporate governance 2016.

[iv] Ibid.

[v] IFC. A Guide to Corporate Governance Practices in the European Union.

[vi] Ibid.

 

 

 

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