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Executive pay: beyond control?

Published online by Cambridge University Press:  02 January 2018

Charlotte Villiers
Charlotte Villiers*
Affiliation:
University of Sheffield
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Extract

Are company executives greedy? Recent reports reveal that executives’ pay no longer corresponds with corporate performance. The earnings gap has also continued to widen since the 1980s and senior executives in public companies are regularly criticised for taking too much from the corporate purse. The press has highlighted large salary figures and, during a period of economic recession, headlines which accuse corporate bosses of riding a gravy train have considerable impact. This is an issue for corporate governance. We are forced to ask why company law has seemingly failed to control levels of pay at the top of the corporate hierarchy.

Type
Research Article
Information
Legal Studies , Volume 15 , Issue 2 , July 1995 , pp. 260 - 282
Copyright
Copyright © Society of Legal Scholars 1995

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References

1. Gregg, Machin and Szymanzki, ‘The Disappearing Relationship Between Directors' Pay and Corporate Performance’ (1993) BJLL 1.

2. Goodman and Webb For Richer, For Poorer, (Institutue of Fiscal Studies, London 1994), and Jenkins Winners and hsers (1994).

3. ‘Fat Cats get Fatter’, Financial Times, 20 April 1993.

4. Above 1.

5. Dyl argues that management compensation is related to how closely a firm is held, ie the further removed and dispersed the shareholders are from the management of the enterprise, the less correspondence executive pay will have with the company's performance. See Dyl ‘Corporate Control and Management Compensation: Evidence on the Agency Problem’, (1988) 9 Managerial and Decision Economics, 21–25.

6. Empirical evidence provided by Gregg, Machin and Symanzki supports this claim. See note 1 above.

7. Gomez-Mejia, Tosi and Hinkin ‘Managerial Control, Performance, and Executive Compensation’, (1987) 30 Academy of Management Journal, 51–70.

8. Tosi and Gomez-Mejia ‘The Decoupling of CEO Pay and Performance: An Agency Theory Perspective’ (1989) ASQ 169.

9. Cosh and Hughes ‘The Anatomy of Corporate Control: Directors, Shareholders and Executive Remuneration in Giant US and UK Corporations’ (1987) 11 Cambridge Journal of Economics 285–313.

10. Article 82.

11. Article 84.

12. Kraus ‘Executive Pay: Ripe for Reform?’ (1980) Harvard Business Review, Sept-Oct 36.

13. Hill and Phan ‘CEO Tenure as a determinant of CEO Pay’ (1991) 34 Academy of Management Journal 707. See also Ramsay, ‘Directors and Officers’ Remuneration: The Role of the Law’ (1993) JBL 351.

14. Gregg, Machin and Szymanzki ‘The Disappearing Relationship Between Directors’ Pay and Corporate Performance’ (1993) BJIL 1.

15. Main ‘Pay in the Boardroom: Practices and Procedures’ (1993) 22 Personnel Review 3–14.

16. Ibid.

17. Kraus, above, 12.

18. Ramsay ‘Directors and Officers’ Remuneration: The. Role of the Law’ (1993) JBL 351.

19. 28 October 1992, when Britain pulled out of the Exchange Rate Mechanism.

20. Jaques Equitable Payment (London 1961).

21. Ibid, 35. Jaques argues that employees doing a job satisfactorily in an unproductive enterprise should not be paid less than employees doing the same job in a productive organisation. It might be inferred from this argument that the success of the organisation depends on the policies and working practices adopted, which is the role of management.

22. Bishop and Prentice ‘Some Legal And Economic Aspects of Fiduciary Remuneration’ (1983) 46 MLR 289.

23. Martin ‘More than their Job's Worth’, Financial Times, 15/16 May 1993.

24. Goodman and Webb For Richer, For Poorer, above, 2.

25. See eg Wedderburn ‘Trust, Corporation and the Worker’ (1985) 23 Osgoode Hall LJ 203, Wedderburn ‘Companies and Employees: Common Law or Social Dimension?’ [1993) 109 LQR 220, Stokes ‘Company Law and Legal Theory’ in Twining (ed) Legal Theory and Common Law (1986) 157, and Meier-Schatz ‘Objectives of Financial Disclosure’ (1986) 8 Journal of Comparative Business and Capital Market Law 219.

26. Kuhns, Chase and Amuso ‘Directors’ Pay’, (1993) 17 Journal of Directors and Boards 53.

27. See ‘All Wealth and No Pay Makes 500 Very Fat Cats’, Guardian, 3 August 1994, reporting on the annual league table of the Rich 500.

28. Rawls A Theory of Justice (Oxford 1973) p 307.

29. Ibid.

30. Ibid, especially ch 5.

31. Ibid, p 303.

32. Ibid, p 274ff.

33. Ibid.

34. Nozick Anarchy, State, and Utopia, (Blackwell:1974), especially ch 7.

35. Tosi and Gomez-Mejia ‘The Decoupling of Pay and Performance: An Agency Theory Perspective’ (1989) Administrative Science Quarterly 169.

36. Jaques Equitable Payment (London 1961).

37. See below n 76 and associated text.

38. Cameron Felt Fair Pay - An Examination of Elliott Jaques's Theory of Equitable Work Payment (HMSO: 1976).

39. Ibid.

40. Selznick Law, Society and Industrial Justice (Russell Sage Foundation: 1969).

41. A term used by Fox in Beyond Contract: Work, Power and Trust Relations (London 1974).

42. Selznick, above, n 40.

43. Jaques, above, n 36, pp 74–75.

44. Rawls, above, n 28.

45. [1982) 3 AII ER 1016.

47. [1990) BCLC 1084.

48. See eg Hansard, Issue No 1668, 22 November 1994, col 465.

49. Expounded by Berle and Means in The Modern Corporation and Private Property (1932).

50. See Article 70, Table A.

51. Prodham ‘Corporate Governance and Long Term Performance’, Management Research Paper, Templeton College, Oxford, 93/13 (1993).

52. Sealy ‘The Director as Trustee’ (1967) CW 83–103.

53. Wedderburn ‘Trust, Corporation and the Worker’ (1985) 23 Osgoode Hall LJ 203, p 218. It could be argued that this is not true in relation to questions of salary since executives have been accused of being risk averse; see Stokes ‘Company Law and Legal Theory’ in Twining (ed) Legal Theory and Common Law (Oxford 1986) ch 9.

54. Stokes op cit, p 157.

55. Baysinger and Butler ‘The Role of Corporate Law in the Theory of the Firm’ (1985) 28 Journal of Law and Economics 179. See also note 1 of Brudney ‘Corporate Governance, Agency Costs, and The Rhetoric of Contract’ (1985) 85 Columbia Law Review 1403.

56. Easterbrook and Fischel ‘Voting in Corporate Law’ (1983) 26 Journal of Law and Economics 395.

57. Baysinger and Butler, above, n 55.

58. Stokes, above, n 54.

59. Brudney ‘Corporate Governance, Agency Costs and the Rhetoric of Contract’ (1985) 85 Columbia Law Review 1403.

60. Baysinger and Butler, above, n 55.

61. Brudney, above, n 59, esp p 1411.

62. Percival v Wright (1902) 2 Ch 421 although there may be limited circumstances in which the directors may owe duties to their company's shareholders, see Heron International Lrd v Lord Grade (1983) BCLC 244 and Allen v flyatr (1914) 30 TLR 444.

63. Although there is an argument that this is not strictly a management issue (Foster v Foster (1916) 1 Ch 532) Article 84 of Table A gives the directors this power with regard to setting the managing director's salary.

64. Main ‘Pay in the Boardroom: Practices and Procedures’ (1993) 22 Personnel Review 3–14.

65. [1974) AC 821.

66. Brudney, above, n 59.

67. Ibid.

68. Ibid.

69. Ibid.

70. A Rawlsian term, above, n 28.

71. Gower Principles of Modem Company Law (5th edn, London 1992) p 557.

72. [1974) AC 403.

73. As was argued by Birds in ‘Proper Purposes as a Head of Directors' Duties’ (1974) 37 MLR 580. See also Sealy ‘Bona Fides and Proper Purposes in Corporate Decisions’ (1989) Monash ULR 265.

74. A strict statement of the position on quantum meruit was given in Guinness plc v Sounders (1990) 1 AII ER 625 HL.

75. As propounded by Bowen, LJ, in Hutton v West Cork Ruilwuy Co (1883) 23 Ch D 654 at p 671 and highlighted by Sealy, above, n 73 at p 269.

76. Meier-Schatz ‘Objectives of Financial Disclosure’ (1986) 8 Journal of Comparative Business and Capital Market Law 219; see also Sealy ‘The “Disclosure”Philosophy and Company Law Reform’ (1981) 2 The Company Lawyer 51.

77. Easterbrook and Fischel ‘Voting in Corporate Law’ (1983) 26 Journal of Law and Economics 395.

78. Sealy details the extent of disclosure of information that existed in 1981, above, n 76.

79. Sealy, above, n 76.

80. Gower Principles of Modern Company Law, at p 583.

81. Meier-Schatz, above, n 76.

82. S 232(1) and Sch 6, para 1.

83. Wootton The Social Foundations of Wage Policy (London 1955).

84. Ramsay ‘Directors and officers' Remuneration: The Role of the Law’ (1993) JBL 351.

85. Securities and Exchange Commission, Release Nos 33–6962; 34–31327, see Ramsay's note 13, above, n 84.

86. Cadbury Committee Report on the Financial Aspects of corporate Governance (Gee Publications, 1992) para 4.40.

87. Meier-Schatz, above, n 76.

88. Ibid.

89. Ibid.

90. See eg Martin ‘More than their Job's Worth’, Financial Times 15 May 1993.

91. Eg in the Report and Accounts of Forte plc for 1992 the Chairman's emoluments were £237,105 and the highest paid director's emoluments were £249,721 while the company's gross trading profits were £265 million.

92. Tosi and Gomez-Mejia ‘The Decoupling of CEO Pay and Performance: An Agency Theory Perspective’ (1989) Administrative Science Quarterly 169.

93. Brudney, above. n 59.

94. Kraus, above, n 12.

95. Rawls, above, n 28.

96. Prodham, above, n 51.

97. Ibid.

98. Meier-Schatz, above, n 76.

99. Ibid.

100. Finch ‘Corporate Governance and Cadbury: Self-regulation and Alternatives’ [1993) JBL 51, citing Cadbury Report, para 4.48.

101. Rawls, above, n 28.

102. Tosi and Gomez-Mejia, above, n 92.

103. Bradley ‘Corporate Control: Markets and Rules’ (1990) 53 MLR 170 p 178.

104. The City Code on Takeovers and Mergers (Council for the Securities Industry 5th Rev Ed 1981) administered by the City Panel on Takeovers and Mergers.

105. Stokes, above, n 54.

106. This was witnessed in the demerger between ICI and Zeneca, see Kane ‘ICI Split Brings E2m Deal for Top Man’, Guardian, 13 May 1993.

107. Meier-Schatz, above, n 76.

108. Stokes, above, n 54.

109. Hopt ‘Self Dealing and Use of Corporate Opportunity and Information: Regulating Directors’ Conflicts of Interest’, in Hopt and Teubner Corporate Governance and Directors' Liabilities (EUI, Florence 1985), pp 285–326 at 293–4.

110. Cosh and Hughes ‘The Anatomy of Corporate Control: Directors, Shareholders and Executive Remuneration in Giant US and UK Corporations’ (1987) 11 Cambridge Journal of Economics 285.

111. Ibid.

112. Ibid.

113. Brudney ‘The Independent Director - Heavenly City or Potemkin Village?’ (1982) 95 Harvard Law Review 597.

114. Ibid.

115. Institutional Shareholders' Committee The Responsibilities of Institutional Shareholders in the UK (1991) and The Cadbury Report, pp 31–32.

116. Main ‘Pay in the Boardroom: Practices and Procedures’ (1993) 22 Personnel Review 3–14.

117. Tosi and Gomez-Mejia, above, n 92.

118. Cadbury Report, pp 22–23.

119. This revealed general disappointment with the effectiveness of non-executive directors, see BDO Binder Hamlyn Non-Executive Directors - Watchdogs or Advisers? (City Research Associates Limited, 1994).

120. Prodham, above, n 51.

121. Ibid.

122. Ibid.

123. Main, above, n 116.

124. Ibid.

125. Kraus, above, n 12.

126. Ibid.

127. Ibid.

128. Williamson ‘Organization Form, Residual Claimants, and Corporate Control’ (1983) 26 Journal of Law and Economics 351.

129. Brudney, above, n 113.

130. Wood A Theory of pay (Cambridge 1978).

131. Brudney, above, n 113.

132. Ibid, although Brudney provides evidence of some fairly substantial payments too, see his note 47.

133. Ibid, see his note 48.

134. Axworthy ‘Corporate Directors: Who Needs Them?’ (1988) 51 MLR 273.

135. Tosi and Gomez-Mejia, above, n 92.

136. See eg Hansard, Issue No 1669.28 November, 1994, col 806, written answer from the Prime Minister to Mr Gordon Prentice: ‘Shareholders have the ability to exercise influence - for example, by raising questions at the annual general meeting or, in the case of institutional holdings, by exerting pressure behind the scenes’.

137. Tosi and Gomez-Mejia, above, n 92.

138. Tosi and Gomez-Mejia, above, n 92.

139. Stokes, above, n 54.

140. Brudney, above, n 59.

141. Ibid.

142. Ibid.

143. Prodham, above, n 51.

144. Cosh and Hughes, above, n 9.

145. Laurence ‘Timebomb Ticks Under Boardrmm Bonanza’, Guardian, 22 May 1993.

146. Guardian, 10 June 1994. See also Guardian, 20 July 1994 in which it was reported that Postel, an institutional investor which holds 1.5 per cent of the shares of Courtaulds has openly declared opposition to three year contracts and has warned that it will vote against directors being reappointed on these terms. More recently the challenge against the pay increase given to Cedric Brown of British Gas by an individual shareholder Professor Lamb has been widely publicised, see Guardian 7 January, 1995.

147. Brudney, above, n 59.

148. Institutional Shareholders' Committee The Responsibilities of Institutional Shareholders in the UK, (1991).

149. Tosi and Gomez-Mejia, above, n 92.

150. Baysinger and Butler, above, n 51. See also Hirschman Exit Voice and Loyalty: Responses to Declines In Firms, Organizations and States (1976).

151. CfFinch ‘Company Directors: Who Cares about Skill and care?’ (1992) 55 MLR 179.

152. (1843) 2 Hare 461.

153. Eg by s 303 of the 1985 Companies Act.

154. [1992) BCLC 1084.

155. Gregg, Machin and Szymanski, above, n 1.

156. Guardian, 18 June 1994.

157. See Guardian, 18 January 1995.