Archive for the ‘corporate governance legislation’ Tag

Pay Ratios

 

Interest by the media, the public, and shareholders in the pay of CEOs has never been higher, and governments have increasingly taken notice of this in recent years. It is perceived as inequitable and often unjustifiable as to why there should be such large discrepancies between the pay of CEOs and of the employees in their companies. Recent legislation in some countries, and proposed legislation in others, has sought to address this concern by ensuring that companies disclose the ratio of CEO pay and the median employee’s pay in their company.

US Companies

In 2015 the SEC adopted amendments to Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, on pay ratio disclosure such that companies have to provide details of the relationship of the annual total compensation of their employees and the annual total compensation of their Chief Executive Officer (CEO), i.e. the ratio of the CEO pay to the median of the annual total compensation of all employees. This applies to companies’ for their first fiscal year beginning on or after 1st January 2017.

Honeywell International, a large multinational corporation, was the first major U.S. public company to disclose its ratio of CEO pay to that of the median employee with a pay ratio of 333:1.

The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) highlights that in the S&P 500, Mattel had the highest ratio of CEO pay to median worker pay with a ratio of 4987:1. They reported a higher ratio still in the Russell 3000 where Weight Watchers International had a pay ratio of 5908:1. More detail is available at:

https://aflcio.org/paywatch/company-pay-ratios

UK Companies

In the UK, listed companies with more than 250 UK employees will legally be required to annually publish and justify the pay difference between chief executives and their staff for the first time. The regulations governing pay ratios will, subject to Parliamentary approval, come into effect from 1 January 2019 with companies reporting their pay ratios in 2020.

The disclosure of pay ratios is part of a move to hold larger companies more accountable for CEO pay and will provide helpful insights into the difference between CEO pay and average employee pay in different sectors and in individual larger companies in the UK.

https://www.gov.uk/government/news/uks-biggest-firms-will-have-to-justify-pay-gap-between-bosses-and-their-workers

 

Japan

Japan is a country whose CEOs have traditionally earned less than their global peers and where the ratio of CEO pay to that of the average employee has been lower than in countries such as the US. Part of this is attributable to the culture of Japan where very high pay ratios between CEO pay and average employee pay would not be viewed favourably.

It will be interesting to see what the impact of the disclosure of pay ratios in the US and other countries will be in the coming years.  Already shareholder revolts over executive pay during 2018 are growing and high pay ratios of CEO pay to the average employee’s pay could increase shareholders’ dissent on this issue.

 

Chris Mallin

June 2018

 

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Rethinking the Exercise of Power over Corporate Entities

Society, acting through their legislative processes, provides for the incorporation of corporate entities in their midst, and permits companies to limit the liability of their shareholders for the debts of those companies.   But over time, the accountability of those companies to society, and the way that power is exercised over them has slipped for society to shareholders, and from shareholders to incumbent management.

We need to re-think the way that power is exercised over companies for the good of all affected by their activities. But before such ideas can evolve, some fundamental dilemmas have to be resolved.  We lack a coherent unifying theory of corporate governance.  The most widely used research tool, agency theory, is proving to be a straight jacket: useful in context but inevitably constraining. We need some new theoretical insights that will take us beyond agency theory or the perspectives of jurisprudence.

The corporate governance principles published by the Organisation for Economic Co-operation and Development (OECD) were designed to assist countries develop their own corporate governance codes.  They reflected what was considered best practice in the UK and USA.  This so-called Anglo-Saxon model of corporate governance required listed companies to have unitary boards, independent outside directors, and board committees.  The principles focused on enhancing shareholder value, and in the process richly rewarded top executives. In this model shareholders are widely dispersed, in markets that are liquid, with the discipline of hostile bids.

This so-called ‘Anglo-American approach’ to corporate governance, became the basis for governance codes around the world.  Indeed, in the United States it was widely assumed that the rest of the world would eventually converge with American corporate governance norms and reporting requirements, simply because it was thought the rest of the world needed access to American capital.

But a schism has emerged in the ‘Anglo-American approach’.  In the United States, Sarbanes Oxley mandated conformance with corporate governance by law.  Whilst in the United Kingdom and those other jurisdictions whose company law has been influenced over the years by UK common law, including Australia, Hong Kong, India, Singapore and South Africa, compliance is based on a voluntary ‘comply or explain’ philosophy.  Companies report compliance with the corporate governance code or explain why they have not.  This ‘rules versus principles’ dilemma seems to have been amplified by the ongoing global financial crisis.  It needs resolving.

But the Anglo-Saxon system is not the only governance model and some are questioning whether it is necessarily the best. Corporate governance is concerned with the way power is exercised over corporate entities.  In other parts of the world, alternative insider-relationship systems exercise power through corporate groups in chains, pyramids or power networks, by dominant families, or by states.  These markets are less likely to be liquid, the market for control poor, and the interests of employees, and other stakeholders more important.

In Japan, keiretsu organizational networks spread power around a group of inter-connected companies in ways that might provide insights for complex western groups.  The view that business involves relationships with all those involved – employees, customers, suppliers, and society, as well as shareholders, has only recently been recognized in the West under the umbrella of ‘corporate social responsibility’.

The governance of Chinese family businesses throughout East Asia can provide some valuable insights: for example, the emphasis on top-level leadership, the view that the independence of outside directors is less important than their character and business ability, and the way that the Chinese family business sees business more as a succession of trades rather than the building of empires.

In China, the link between state, at the national, provincial and local levels, and companies relies on a network of relationships, and policies can be pursued in the interests of the people, seen as the Party.

Of course there are problems with Asian approaches: corruption, insider trading, unfair treatment of minority shareholders, and domination by company leaders, to name a few.  But these are not uniquely eastern attributes as case-studies of US and UK company failures show.

These diverse models reflect more concentrated ownership, different cultures, and varied company law jurisdictions. But they also show different perceptions about the way power should be exercised over corporate entities. The eastern experience suggests that board leadership and board-level culture, in other words people and the way they behave, are more important than board structures and strictures, rules and regulations.  New theoretical perspectives will need to embrace such diversity.

Bob Tricker