Excessive Executive Remuneration

There has been a lot of comment in recent times about the levels of executive remuneration particularly in relation to companies that are underperforming. 

Taking a step back, we should understand the origins of the nature of directorship and ask a good simple clean and hard question: is this in line with the original intent?

As companies grew in the 1800’s it became apparent that a different style of manager was required to look after the interest of shareholders – those people were not active managers within the company. People appointed in this role of looking after the shareholders interests became known as company directors.

Today the same remains true – directors manage on behalf of shareholders, and they must put the shareholders first, with the obvious caveats of acting ethically and legally.

Executive remuneration is a touchy issue. Should the board not have the right to determine the correct market rate for a potential candidate? Is this not within the realm of directorship and corporate governance?

Unfortunately, reason has been lost sight of in some cases. Transparency of reporting has made it more difficult for boards to negotiate downwards. There is a frankly uncomfortable scenario in which boards end up determining their own remuneration and that of the executives – and frankly the higher the earnings of the executives, the greater that substantiates a higher remuneration for directors. There has been enormous criticism of audit companies with consulting divisions working with the same firm, yet isn’t the scenario very similar? Frankly the community and government in Australia have had enough of the sensationalist headlines with no action and have had enough. And so they should.

Whilst I fundamentally believe in free market economies and ensuring decision makers are free to make the decisions they need to with delegation from an accountable board, I cannot reconcile remuneration packages that are equivalent to the full profit figures of mid sized companies. A simpler model and principle that was shared with me at a discussion last night suggested that no person will receive remuneration in excess of 30 times the most junior employee. Some will argue it should be higher or lower, but either way it is a more modest, albeit simple principle at play.

AICD, an organisation I have a great deal of respect for, have lost the opportunity to lead the issue. By refusing to criticise the practice, they are being seen to endorse it. I understand the difficulty of their position, however, falling back to a stance of more education – when clear greed is at play – is proven through history to be unsuccessful. As a result, I have no doubt legislation will be brought it much more extensive and onerous than could have been negotiated – and potentially interfering in areas outside of remuneration. Being a company director is a very difficult exercise, more red tape isn’t the answer. But perhaps by more shareholders taking an active part, they will put an effective brake on these practices.

Have I got this right or wrong? Your comments are welcomed….

The Challenge of Accounting Standards

In the last few days I have been listening to various podcasts from the Australian Institute of Company Directors in relation to issues of guidance requirements in relation to reporting requirements for boards. See here for their podcasts. The key issue is around the very difficult balancing act between guidance for how boards should report to make the requirements clearer, to actually being specific as to how to run a business. The former is important and the latter clearly inappropriate.

One of the interesting areas is financial reporting. In discussing the issue with my colleagues that recently completed the AICD course, we found the variability in valuing assets (particularly when the values may fluctuate) very interesting, particularly when giving consideration to how valuation decisions affect profit outcomes. Whilst we clearly want true and fair representations of the accounts, understanding anomalies around the way assets are valued (and how that positively or negatively affects performance) is important.

The good news is that a new accounting valuation standard is being adopted and introduced on the 1st of January 2009. Introduced by the Accounting Profession and Ethical Standards Board (APESB), APES 225 Valuation Services provides a consistent approach, definition of terms and will hopefully lead to a common understanding among companies and accounting firms about what constitutes a valuation according to Kate Spargo, APESB Chairman.

You can download a copy of the above at APESB site at this link.

Feedback: Have you experienced any issues around reporting? What do you think the key challenges are?