Directors’ remuneration: proposed amendment regulations

Lucian Bebchuck and Jesse Fried’s seminal study Pay without Performance: The Unfulfilled Promise of Executive Compensation and similar critiques have killed stone-cold the argument that arm’s-length contracting works: the argument has not been resurrected and it is widely accepted that in the corporate sector pay remains decoupled from performance. For Bebchuck and Fried – both professors of corporate law at Harvard University – management can easily manipulate directors and, rather than creating value for the company, everyone is more interested in personal gain at the cost of the company.

From this perspective “market forces are neither sufficiently finely tuned nor sufficiently powerful to compel” the conventional view of corporate governance which assumes that executives will be rewarded for performance and not failure. It is therefore not surprising that in order to win voters’ support, governments everywhere in Europe are making promises to reform the dynamics of the pay and power equation.

The Secretary of State for Business Innovation and Skills (Mr Vince Cable, “the business secretary”) is keen to be seen as a promoter change in the business world and is hence proposing reform which strengthens shareholder democracy and promote the public interest.

Shareholder Democracy, Corporate Governance and Future Reform

Writing on the corporate governance blog earlier this month, Bob Tricker observed that “serious”  interest in corporate governance is a recent phenomenon which only came to the fore following Sir Alan Cadbury’s 1992 Report. The dichotomy is that despite the existence of regulatory bodies such as the US Securities and Exchange Commission since the mid-1930s, it was not until problems such as the Enron scandal, the sub-prime crisis and more recent Libor scandal – that “corporate governance” became a buzzword in the business sphere, company law and regulation.

For Tricker, corporate governance  – to which constructs such as marketing, production, finance, operations research, and management information systems have only recently ceded ground – is quickly becoming the focus of a company’s organisational chart. Themes such as the board of directors, executive directors’ remuneration and their relationship with management are all now very much at the apex of the debate about issues such as shareholder democracy, accountability and transparency in the corporate sphere. It is often said that good corporate governance is about promises kept: Macey, Corporate Governance: Promises Kept, Promises Broken (2010). Conversely, bad corporate governance is considered “promise breaking behaviour”.