Corporate Governance and Executive Pay

Corporate Governance and Ethical Decision Making

Corporate governance refers to the systems, principles and processes by which organisations are directed and controlled.
Ethical corporate governance considers factors such as fairness, transparency, accountability and responsibility in decision making.
The board of directors is critical in overseeing corporate governance. They are responsible for setting the company’s strategic aims, providing the leadership to put them into effect, supervising management, and reporting to shareholders on performance.
Companies can establish a Code of Ethics or Ethics Charter to guide corporate behaviour and decision making.
A company’s commitment to ethical governance often directly influences corporate reputation, trust within stakeholders, and overall organisational success.

Excessive Executive Pay and Corporate Governance

A key aspect of corporate governance is the issue of executive pay, particularly when it appears excessively high relative to other employees’ wages.
Executive pay packages are decided by a remuneration committee, which is part of the board of directors.
Critics argue that disproportionate executive pay undermines employee morale and productivity and can lead to a loss of faith among stakeholders.
Some suggest it represents a failure of corporate governance as company boards are often accused of setting their own salaries.
However, proponents argue that high executive pay is necessary to attract and retain top talent in an international job market.

Regulation of Executive Pay

Governments and regulators often intervene to try and limit excessive executive pay. Mechanisms can include pay caps, higher taxes on executive incomes, and requirements for shareholder approval of executive pay packages.
Shareholder activism is on the rise, where shareholders exert pressure on the board regarding executive pay packages.
The “say on pay” approach adopted in some countries allows shareholders to vote on executives’ remuneration packages, promoting transparency and accountability.

Investor and Stakeholder Expectations

Investors and stakeholders are increasingly factoring in corporate governance when deciding which companies to invest in or do business with.
They may be less likely to support organisations perceived as having poor corporate governance or having large gaps between executive pay and average employee wages.
This reflects a growing emphasis on corporate social responsibility, including equitable pay structures, as part of an organisation’s reputable business practices.