Issues Which Surround Directors' Remuneration Packages - Essay Example

Discuss the Relevant Issues Which Surround Directors Remuneration Packages and Actions Which Have Been Taken To Solve These Issues of Contention Table of Contents Table of Contents 2 Introduction 3 Relevant Issues That Surround Director’s Remuneration Package 4 Actions Taken To Solve These Issues 6 Conclusion 8 References 9 9 Bibliography 10 Introduction Generally, it is believed that directors’ remuneration is defined based upon the economic performance aspect of the enterprises, which includes factors such as return on equity and return on assets. However, according to the current empirical researches, it has been viewed that there is not much of relationship between the company’s performance and the director’s remuneration. Instead, the director’s remuneration is correlated to the funds of shareholders, size of the corporation and operating profits. In the United Kingdom region, the Labour party has been demanding for institutional investors to support an autonomous call for companies to either reconsider the payment of top level management or face harsh actions on the corporate governance policy by the government. Thus, the definition of directors’ remuneration has emerged as a major issue of academic interest which is the objective of the study (Prasanna, 2005). Correspondingly, the issues discussed within this study include regular increase of directors’ remuneration as compared to the stagnant pay scale of the workers. It also oversees at the situation where directors’ remuneration has been continuously increasing even when the company is suffering losses. The study also delineates the actions that have been taken to solve these issues which include enhanced transparency of directors’ remuneration in the financial data provided by the company. Relevant Issues That Surround Director’s Remuneration Package In the recent years, it has been observed that the shareholders, workers, general public and the media have increased their concerns relating to the remuneration packages paid to the directors. This issue involves poorly organised remuneration report which fails to exactly demonstrate the linkage between the pay and the performance, inappropriate transparency of the companies to report the remuneration package and excessive payments for exit of director’s who depart from the company. In addition, the issues also surround the changes in the structure and level of the directors’ remuneration from the last era which has been ever-increasing irrespective of the company’s size and performance. Director’s remuneration issues often arise due to the market failure that occurs in the heart of corporate governance system. Moreover, shareholders do not maintain any control on the director’s pay which increases the possibility of director’s pursuing a strategy that would reward them personally instead of contributing to the company’s long-term value (Crown, 2012). It also has been observed that due to the information provided by the media, the general public criticised the top directors’ for getting paid more than what they were actually worth for. Directors’ were also condemned by the investment institutions for receiving rewards that were always increasing even if the company’s performance was bad. Companies in the UK during the period of 1980s and 1990s witnessed a situation where the Chief Executive Officer (CEO) and the director decided remuneration packages on their own. It is considered that if the directors’ remuneration is more irrespective of the company size and performance, it can have a detrimental impact on the stock market. Moreover, it has been observed that the directors’ objectives are attained successfully which make them earn big rewards even if the company and its shareholders do not achieve desired benefits. Furthermore, there have been high payments made to the directors who have failed in leading their companies in setting business strategies (ICSA, 2009). In June 2012, the Secretary of State for Business developed policies which involved the measures linking the failure of the stakeholders’ absence of information along with binding stakeholders’ votes with high transparency. This provided the requirement of remuneration report which was divided in two parts that involved a policy report that sets out all the components of a company’s remuneration policy and key factors taken for setting the policy along with a report on how the policy gets implied that sets out actual payments to the directors. Besides, details regarding the linkage between the performance of the company and pay for the financial year in the accounts are also entailed (Crown, 2012). The Financial Services Authority (FSA) and the Treasury Committee executed certain initiatives for the improvement of corporate governance and reformation of practices for remuneration which included the FSA’s remuneration code that required the financial instructions to maintain, institute and implement policies, practices and procedures that relate to effective and reliable risk management. In the year 2009, the financial institutions were subjected to the FSA’s remuneration code which stated that the remuneration committee had to be directly responsible not just for the payment of directors but also for the individuals that may have an impact on the risk aspect of the entity. This will ensure that the committee will have control to a greater extent on the pay practice of the company. Furthermore, the committee should have a satisfactory confirmation in its report regarding the risk adjustment and performance objectives that reflect the compensation structures of the top level management (Pinsent Masons LLP, n.d.). Actions Taken To Solve These Issues It has been observed that the issue relating to directors’ remuneration has developed as a major concern in the UK in the past few years. This has led to the establishment of Greenbury Committee in the year 1994 by the British Industry Confederation to tackle the growing concerns with regard to the salary along with bonuses paid to the directors. Therefore, the Greenbury report provided by this committee developed certain code that had to be practiced by the listed companies in the UK. The guidelines in this code included that the remuneration committee should provide each year report to the shareholders on behalf of board that entails the annual report and accounts of the company, which would act as a medium for the shareholders to view the directors’ remuneration. The report should also state that in deciding the remuneration the committee has provided its complete consideration. The report would include complete details of remuneration packages for individual directors in the company. It also stated that the endowments provided underneath the executive share option or long-term schemes for incentives if awarded at once instead of being phased, there should be justification and explanation in the report. In addition, the payments received and commitments made to each director have to be subjected in the audit paragraph. Business interest and undertakings along with shareholdings should be disclosed as needed by the London Stock Exchange and Companies Act listing rules. The report also states that shareholders should be given the initiative for approving long-term incentive schemes whether to be payable in shares or in cash (China Academy of Corporate Governance of Nankai University, 2003). The Organisation for Economic Co-operation and Development (OECD) principles cover six areas of corporate governance which have a major implication on directors’ remuneration such as “ensuring the basis for an effective corporate governance framework”, “the rights of shareholders”, “the equitable treatment of shareholders”, “the role of stakeholders in corporate governance”, “disclosure and transparency”, and “the responsibilities of the board” (Jesover & Kirkpatrick, n.d.). The first principle which includes certifying the basis for an effective corporate governance framework promotes the effectual and transparent markets that provide consistent rule of law and clearly communicate the division of responsibility amid diverse enforcement and regulatory authorities. The second principle entails the rights of shareholders and key ownership functions which state that the framework of corporate governance should aid and safeguard the rights to be applied by the shareholders. The third principle involves the impartial treatment of shareholders in which the framework ensures impartial treatment of minority and foreign shareholders along with the opportunity for obtaining the reparation for infringing their rights. The fourth principle includes the role of stakeholders in corporate governance wherein the framework ensures the recognition regarding the rights of the shareholders which is recognised by the law through common agreements that encourages lively co-operation between shareholders and companies in creating jobs, wealth and sustenance of financially sound companies. The fifth principle mentions disclosure and transparency which ensure precise and timely disclosures in all substantial matters relating to the company that include the performance, financial situation, ownership along with governance of organisation. The sixth principle relates to the responsibility of the board that ensures the company’s strategic guidance, effective observation of management by the members of board and the accountability of the board members to the shareholders and the company (Jesover & Kirkpatrick, n.d.). Conclusion Correspondingly, it can be concluded that in the recent year’s shareholders, workers, general public and media have increased their concerns relating to the remuneration packages paid to the directors. In this regard, there has been an emergence of various issues pertaining to the situation, which include issues that surround the changes in the structure and level of the directors’ remuneration from the last era which has been ever-increasing irrespective of the company’s size and performance. Therefore, in order to tackle this situation certain committees and principles has been setup, which provide guidelines to be taken into consideration in order to ensure that there is a fair payment system for the directors and increased transparency of the organisation. It is worth mentioning that if these guidelines are correctly followed, there would be an increased level of responsibility for the board members and their accountability to the shareholders and the company. References China Academy of Corporate Governance of Nankai University, 2003. Disclosure and Approval Provisions. Greenbury Recommendation, pp.1-5. Crown, 2012. Directors’ Pay: Revised Remuneration Reporting Regulations. BIS, pp.1-54. Crown, 2012. What is the Problem Under Consideration. Shareholder Votes On Directors’ Remuneration, pp.1-31. ICSA, 2009. Directors’ Remuneration As A Corporate Governance Issue. Directors’ Remuneration, pp.193-218. Jesover, F. & Kirkpatrick G., No Date. The Revised OECD Principles of Corporate Governance and Their Relevance to Non-OECD Countries, OECD, pp.1-31. Pinsent Masons LLP, No Date. Governance Initiatives. Directors Remuneration: An Introduction to the Issues. [Online] Available at: http://www.out-law.com/page-11141 [Accessed February 02, 2014]. Prasanna, P. K., 2005. Corporate Governance and Directors Remuneration. ICAI, pp. 1483-1489. Bibliography ACCA, 2010. A Policy Report. Directors Remuneration Report. [Online] Available at: http://www2.accaglobal.com/uk/members/technical/advice_support/financial_reporting/consultations/2012/remuneration [Accessed February 02, 2014]. European Corporate Governance Institute, 1995. Remuneration Policy. Director’s Remuneration. [Online] Available at: http://www.ecgi.org/codes/documents/greenbury.pdf [Accessed February 02, 2014]. OECD, 2004. Organisation for Economic Co-Operation and Development. OECD Principles of Corporate Governance. [Online] Available at: http://www.oecd.org/corporate/ca/corporategovernanceprinciples/31557724.pdf [Accessed February 02, 2014]. Read More