Remuneration of the Executive Directors of Public Limited Companies - Assignment Example

Introduction Following what appeared in guardian online on 30/01/12, this paper will, first describe the legal procedures and commercial practices adhered in remuneration settings of the executive directors of public limited companies. Secondly, it will critically evaluate the entire extend to which shareholders are legally empowered to counteract the excessive company director’s remuneration. Lastly, the paper will comment generally on why investors are always reluctant to challenge the CEO’s excessive pay and particularly why the government was reluctant to challenge Hester’s controversial bonus as a major stakeholder within the Royal Bank of Scotland (RBS). Legal procedures and commercial practices The effectiveness in restraining directors of public limited company’s remuneration is clearly stated under company’s law. More so, each evolutionary stage has its requirements that need to be fulfilled. Legislature’s response to a high impact occurrence has resulted into law for repression changes. (Garner & Walking 2009, p. 4). Directors, being the paramount partakers of business, have adhered to such changes in ways that are innovative, building upon complexity a layer of complexity, making such law changes obsolete. As stated in public company’s general principles, the common law outlines remuneration as a consideration offered in return for an overhaul, whether it is in liquid or payment of any kind. Reflecting the basis of law, historically, directors, even though not trustees, they are cared for as fiduciaries similarly to trustees. However, they are neither entitled to remuneration nor to make profits outside their office. More often, the article of association gives directors a mandate to be remunerated. The remuneration is thus fixed in the article of association and states how fixed the remuneration should be provided. The authority to establish the directors’ remuneration is handed over to the board of directors. Remuneration is restricted to apply outside the company’s capital. (Gompers & Lerner 2006, p.69). A director may only award himself a peculiar remuneration out of the company’s profit, and none should be affected by the general principles. The court also provides other principles which may affect remuneration, and based on the past progressions of directors from trustees. A director of a company owns given duties to the company, duties like to act in accordance to the company’s interest. The court thus applies a subjective test to determine if, the director’s actions are within the company’s best interests. This duty is sometimes relevant to remuneration. That is, the higher the reward, the more reasonable responsibilities are expected from the director. As far as remuneration practice is concerned, the most effective duty is exercising individual judgment. If a director introduces another director to the company through generous incentives, the recent director has an independent judgment in awarding his remuneration. Shareholders legality to challenge excessive remuneration paid to the Companies directors Despite numerous reforms and committees of the soft and hard laws, directors’ remuneration has persistently increased out of line with the rest of the employees. This may be due to the intractable problem at the corporate governance’s foundations. Shareholders within the public companies have entrusted the business running to the directors. The directors and shareholders interests may diverge. The directors’ forefront interests might be different from that of the company. (Klaus & Eddy 2003, p. 76). These interests may be associated to the criteria in which directors are remunerated. Though, the technical scenery of establishing directors’ remuneration makes it necessary for shareholders in the company to delegate the duty. As earlier highlighted, the board of directors performs the task. The corporate governance then, addresses the imbalance between the directors and the shareholders. Under certain circumstances, it might be argued that, no director could have reasonably concluded that, taking excessive amounts of proceeds in remuneration could be as per the company’s interests. Such cases would therefore be rare, as no director would be willing to take a court action to make a breach of duty claim against him self. For that matter, a shareholder may bring a derivative claim on the company’s behalf. Shareholders in a company are required to sustain the company’s capital and not diminish it, but by the business ordinary course. In this case, if a company is suffering insolvency, it can not afford to remunerate higher levels. Thus, share holders are within their means to ensure that the director reduces their remuneration. The duty effectiveness sometimes may be further weakened by a company’s constitution. This may include specific resolutions, hampering discretion in accordance to section 173 of the company’s law. A shareholder may however rectify the breach of duty of a director by resolution. The rectification mechanism effectively minimizes litigation, and permits the company’s shareholders, to a make decision concerning the director’s actions on remuneration. (Alessio 2010, p.84). The duties of the director take a subjective and an objective test upon his diligence, skills, and care. These tests are applied by the court to determine the remuneration of a director in relation to his general skills, experience, and knowledge. Although the duty of care may be effective in remuneration restraining, but the degree of distinguishing it among directors is proved to be difficult. Shareholders are therefore within there mandate to argue that, the remuneration of the director is excessive as compared to the peak level of care. Although the director may continue drawing remuneration excessively, the shareholders can make a decision to get rid of the director by resolution. Considering the changes in running businesses today, there is no doubt that human capital is what differentiates organizations. The U.S. economy for example, has transformed from manufacturing to businesses that offer service to its clients. Talent is extremely vital when it comes to service businesses. The market has become very competitive and this has forced the shareholders to demand for performance in their organizations. (Carola 2008, p. 5). The directors pay should be proportional to the performance of the company. If a director is not performing, then the shareholders have the legal power to challenge the excessive remuneration paid to him. If the salary of the said director is reduced but the performance still deteriorates, then the shareholders have every reason to demand for his resignation. Each industry faces its own unique challenges that necessitate successful design and implementation of human capital strategy. In retail business, satisfaction and retention of customers is very fundamental since it maximizes growth opportunities in the business. Issues concerning labor relations and workforce are critical in the manufacturing companies. There is need to include a number of leadership positions to assist the directors work on the performance of the organization. (Curtis & Katharina 2010, p. 75). The role of Human Resource (HR) directors is defined as the strategic planning of the functions in the HR department. These functions include; organizational development, compensation, training, recruitment and employee relations. HR directors are among the people who earn the highest salary in most organizations. Statistics have shown that the annual pay for this position is highest in Germany, followed by U.S and then Britain. There is greater competition in the market for talent and thus employers have to pay more for their top employees. (Lattman & Craig 2010, p.6). In return, these employers deserve to get high profits in their companies. There is need to ensure there is pay for performance in all organizations. From a business point of view, this puts pressure on all directors to display a quantifiable return on their company’s human capital investments. The shareholder has the right to demand value for their money and this is why they always challenge the salary paid to the directors. Shareholders have the legal power to block high pay, pension and deals that benefit directors in the organization. (McCahery & Vermeulen 2008, p. 97). The tendency of company director’s rubber stamping rewards that are unjustified in order to benefit their colleagues has led to losses in organizations. Many companies suffer from selfish behaviors of directors who increase their salaries with no positive relation to the company’s performance. This has enabled even the failed directors to pocket millions of money at the expense of the shareholders. It is high time for large investors and company bosses to support the proposal to have shareholders vote when it comes to salary packages. Reasons for the reluctance of institutional investors to challenge the excessive remuneration paid to CEOs High salaries paid to leaders in major companies has been questioned severally in the entire world. Due to the poor performance of companies as a result of economic crisis in most parts of the world, there is an increase in the shareholders activism. However, institutional investors have always remained reluctant in challenging the excessive remuneration paid to their CEOs. (Marc 2012, P. 57). Changes in the Companies Act demand that Remuneration Committees should explain the factors that have contributed to the setting of the CEOs pay. The subject of the relationship between the CEOs pay and the workforce has started to attract greater concern. Unfortunately, it is extremely hard to make comparisons between sectors within organizations and thus difficult to come up with a relationship between the CEOs pay and that of other members of staff. The main reason is that the relationship varies between sectors. These discrepancies emerge as a result of different skills required by individuals to perform in varying sectors. Since institutional investors understand this concept, it becomes hard for them to challenge the CEOs remuneration. Despite the consequences of economic crisis witnessed in many countries globally, a company has the responsibility to offer high salaries for the CEOs position. This will enable them attract well qualified and result oriented individuals to occupy the position. It is all about the concept of motivation. A highly motivated CEO will move the company to great heights in terms of performance. Institutional investors are also reluctant in challenging the CEOs remuneration in order to avoid high turnovers. An organization should be able to retain its top management for a longer period of time in order to enhance stability. High turnovers in a company contributes to its poor performance since after employing a new CEO, it takes time for him or her to understand an organizations operations. (Ringe & Bernitz 2006, p. 37). Reasons why the government was reluctant in exercising its legal powers as a major shareholder to challenge Hester’s controversial bonus Stephen Hester who is the CEO of RBS bowed to intense political and public pressure and gave a bonus of almost one million pounds. As a result of this, he received criticism from various people including some politicians who had supported him the same position. Hester was operating in a system that pays executives in both private and public sectors exceptionally well. The government relaxed in challenging Hester’s controversial bonus for various reasons. First and foremost, RBS was a national bank and the government did not want people to loose trust in it. It was forced to approach the issue soberly despite the intense criticism. Moreover, Hester had not taken a longer period of time at the helm of RBS. Removing him from the position at that time could destabilize the bank where the government was a major shareholder. In addition, Hester had acted out of pressure from the public and the political class. There was therefore need to give him more time to address the challenges facing the bank as per that particular time. Conclusion The paper has addressed the issue of legal procedures in setting remuneration for the company’s directors and CEOs. The powers of the shareholders to challenge excessive remuneration paid to the company’s directors has been discussed at lengthy. Furthermore, the paper has highlighted the reasons why institutional investors are always reluctant in challenging the CEOs remuneration. Lastly, a case study of the RBS boss has been looked at and the reasons why the government was reluctant in challenging his controversial bonus discussed. Reference List Alessio, M 2010, The Law and Economics of Corporate governance: changing perspectives, Edward Elgar Publishing Ltd Price, Cambridge. Carola, F 2008, Learning from the Past: Trends in Executive Compensation over the Twentieth Century, Center for Economic Studies. Curtis, M & Katharina, P 2010, Law and capitalism: What Corporate Crises Reveal about Legal systems and Economic Development, University of Chicago Press, Chicago. Garner, L & Walking, A 2009, Electing Directors. Journal of Finance, 64 (5), 2387-2419. Gompers, P & Lerner, J 2006, The Venture Capital Cycle, MIT Press, Cambridge. Klaus, H & Eddy, W 2003, Capital Markets and Company Law, Oxford University Press, Oxford. Lattman, P & Craig, S 2010, Companies May Fail, but Directors Are in Demand, New York Times. Marc, G 2012, International Corporate Governance, Prentice Hall Price, Prentice. McCahery, J & Vermeulen, E 2008, Corporate Governance of Non Listed Companies, Oxford University Press, Oxford. Ringe, W & Bernitz, U 2006, Company Law and Economic Protection: New Challenges to European Integration, Oxford University Press, Oxford. Read More