Some ongoing corporate governance concerns
It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.
In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.
Alleged excessive director level rewards remain one of the most contentious issues in corporate governance. Shareholder demands for a ‘say- on-pay’ have increased, although such intervention continues to be exhortatory rather than binding on companies. A growing disparity between the wealth and rewards of the few at the top of society and the rest has swung the focus onto executive compensation. The subject also provides a flash point for activists challenging the role of capitalism society.
The traditional solution of the board-level remuneration committee, made up of independent, outside, non-executive directors, does not seem as effective as it was when the late Sir Adrian Cadbury included the idea in the first corporate governance code (1992). For one thing, those outside directors may well be executives from other companies, with their own interests in setting high remuneration levels. For another, industry norms for total remuneration seem to have been rising, thus setting bench-marks for levels needed to attract and hold the best people. Professional firms offering pay level advice tend to reinforce high levels industry-wide.
But new approaches have been appearing. The relationship between reward and performance has come under the spotlight, particularly where the reward seems to be unrelated (or worse inversely related) to performance. Some companies have adopted ‘claw-back’ terms that penalize top earners if they fail to meet set performance goals in the longer term. In Canada, institutional investors have called for the idea to become governance best practice. Other companies have used peer reviews of reward systems in their business sector.
Remuneration decisions should not be made piecemeal. Boards need to establish the underlying basis of their remuneration policy. Moreover, that policy needs to be disclosed to shareholders and other interested parties. Whilst maintaining an appropriate level of individual privacy, decisions on top level remuneration benefit from transparency.
Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see www.BobTricker.com)