scispace - formally typeset
Search or ask a question
Journal ArticleDOI

Executive Pay: Convergence in Law and Practice Across the EU Corporate Governance Faultline

01 Oct 2004-The Journal of Corporate Law Studies (Hart Publishing)-Vol. 4, Iss: 2, pp 243-306
TL;DR: In this article, the authors consider the regulation of executive pay practices in listed companies in the European Union and the empirical evidence of pay practices, based on the FTSE Eurotop 300 membership's annual report for 2001, and place in the context of the dispersed ownership/blockholding ownership faultline which runs across EU corporate governance, and in light of recent EU initiatives, particularly the Commission's May 2003 Company Law Action Plan and the 2004 Consultation on Executive Remuneration.
Abstract: This article considers the regulation of executive pay practices in listed companies in the European Union and the empirical evidence of pay practices, based on the FTSE Eurotop 300 membership’s annual report for 2001. The analysis is placed in the context of the dispersed ownership/blockholding ownership faultline which runs across EU corporate governance, and in light of recent EU initiatives, particularly the Commission’s May 2003 Company Law Action Plan and the 2004 Consultation on Executive Remuneration. The outstanding feature of executive pay in the EU is the extent to which it reflects the interconnection between pay and corporate governance or ownership structures. Executive pay, regarded as a management incentive contract, is a key agency-cost control mechanism in dispersed ownership systems. Legal controls on pay are accordingly at their most sophisticated, in terms of promoting the adoption of an optimal contract for shareholders, in those EU Member States where dispersed ownership dominates. These systems also see the heaviest reliance in practice on high-powered, equity-based, incentive-driven pay contracts. In blockholding systems, controlling shareholders can, in theory, monitor management directly without the need for an incentive contract. Pay controls are accordingly less sophisticated and, as revealed by the FTSE Eurotop 300 evidence, the prevalence of high-powered equity-based incentive contracts is reduced. Different concerns arise, however, as to the protection of minority shareholders from controlling blockholders.
Citations
More filters
Journal ArticleDOI
TL;DR: In this article, the authors analyse whether the German corporate governance is converging towards Anglo-American practices and find no clear signs of convergence in form, i.e. the main distinctive features of the German system have remained largely unaltered.
Abstract: This paper analyses whether the German corporate governance is converging towards Anglo-American practices. We summarise the extant empirical evidence on the various governance mechanisms that economic theory suggests ensure efficiency and describe recent legal developments. We find no clear signs of convergence in form, i.e. the main distinctive features of the German system have remained largely unaltered. However, changes occurred over the last decade (specially in the legal framework) suggest a certain convergence in function, i.e. some governance mechanisms have effectively incorporated aims and/or goals generally associated with the Anglo-American model.

75 citations

Journal ArticleDOI
TL;DR: In this paper, an overview of national laws and best practice corporate governance recommendations across the Member States following the adoption of the important EC Recommendations on directors’ remuneration and the role of non-executive directors in 2004 and 2005, respectively.
Abstract: This paper analyses the regulatory framework which applies to the determination of directors’ remuneration in Europe and the extent to which European firms follow best practices in corporate governance in this area, drawing on an empirical analysis of the governance systems which European firms adopt in setting remuneration and, in particular, on an empirical assessment of their diverging approaches to disclosure. These divergences persist despite recent reforms. After an examination of the link between optimal remuneration, corporate governance and regulation and an assessment of how regulatory reform has evolved in this area, the paper provides an overview of national laws and best practice corporate governance recommendations across the Member States following the adoption of the important EC Recommendations on directors’ remuneration and the role of non-executive directors in 2004 and 2005, respectively. This overview is largely based on the answers to questionnaires sent to legal experts from seventeen European Member States. The paper also provides an empirical analysis of governance practices and, in particular, firm disclosure of directors’ remuneration in Europe’s largest 300 listed firms by market capitalisation. The paper reveals that, notwithstanding a swathe of reforms across the Member States in recent years and harmonisation efforts, disclosure levels still vary from country to country and are strongly dependent on the existence of regulations and best practice guidelines in the firm’s home Member State. Convergence in disclosure practices is not strong; only a few basic standards are followed by the majority of the firms examined and there is strong divergence with respect to most of the criteria considered in the study. Consistent with previous research, our study reveals clear differences not only with respect to remuneration disclosure, but also with respect to shareholder engagement and the board’s role in the remuneration process and in setting remuneration guidelines. Ownership structures still ‘matter’; these divergences tend to follow different corporate governance systems and, in particular, the dispersed ownership/block-holding ownership divide. They do not appear to have been smoothed since the EC Company Law Action Plan was launched and notwithstanding the harmonisation that has been attempted in this field.

34 citations

Journal ArticleDOI
TL;DR: In this paper, the authors consider the regulation on the books of executive pay across the EU and the evidence "in action" on corporate practice concerning executive pay (based on disclosures by FTSE Eurofirst 300 companies) in relation to the best practice recommendations set out in two key Commission Recommendations from 2004 and 2005.
Abstract: This article considers the regulation “on the books” of executive pay across the EU and the evidence “in action” on corporate practice concerning executive pay (based on disclosures by FTSE Eurofirst 300 companies) in relation to the best practice recommendations set out in two key Commission Recommendations from 2004 and 2005. It finds that Member State implementation of the two Recommendations has been patchy and, in particular, that reliance on Corporate Governance Codes has not resulted in the embedding of good practices, particularly with respect to disclosure concerning executive pay, across Europe's largest companies. It argues that if the EU is to succeed in promoting stronger alignment between shareholder and manager interests by means of the executive pay contract, closer attention is needed to remuneration governance and that a mandatory, harmonised disclosure obligation should be introduced. Although the Commission has recently adopted a 2009 Recommendation on executive pay in the corporate se...

34 citations

Journal ArticleDOI
Klaus J. Hopt1
TL;DR: The EU Company Law Action Plan of May 21, 2003 as mentioned in this paper is one of the most important documents issued by the European Commission in this field in a long time and discusses the list of actions in two parts: topics other than corporate governance (inter alia capital maintenance, groups of companies and pyramids, restructuring and new European company law forms) and corporate governance in particular.
Abstract: The EU Company Law Action Plan of May 21, 2003, is one of the most important documents issued by the European Commission in this field in a long time. It tells what the Commission intends to regulate and not regulate within the next five to ten years. This article explains the background of the Action Plan and its connections with securities, auditing, and takeover regulation and discusses the list of actions in two parts: topics other than corporate governance (inter alia capital maintenance, groups of companies and pyramids, restructuring, and new European company law forms) and corporate governance in particular. Key problems of European corporate governance include better disclosure by an annual corporate governance statement, helping shareholders to exercise their rights, independent directors and committee work, directors' remuneration, responsibility of board members to investors for financial statements, voting policy disclosure by institutional investors, choice between the one-tier and the two-tier board, and generally more shareholder democracy. In 2004 and 2005 the Commission came up with a number of concrete steps to address these problems, especially regarding independent directors and directors' remuneration. The debate this has spawned in the member states is colorful and occasionally highly controversial.

21 citations

Journal ArticleDOI
TL;DR: In this paper, the analysis of current regulatory and legislative reform initiatives of selected countries in Europe (the United Kingdom, Switzerland and Germany) and the United States shows the fundamental common objective to sustain market confidence and promote financial stability by removing incentives for inappropriate risk-taking by firms.
Abstract: The question of how to optimise corporate governance with regard to the structure of remuneration systems and, particularly, executive compensation is presently more hotly debated than ever. Since flawed executive pay structures are considered to have contributed to the financial crisis by encouraging short-term risk-taking at the expense of long-term security, remuneration systems are re-evaluated at national, European and international level. The analysis of current regulatory and legislative reform initiatives of selected countries in Europe (United Kingdom, Switzerland and Germany) and the United States shows the fundamental common objective to sustain market confidence and promote financial stability by removing incentives for inappropriate risk-taking by firms. The internationally emerging remuneration model strives to ensure, to the widest extent possible, congruency between incentives and risks. The need for firms to concentrate on long-term rather than short-term performance is a recurring theme of the reform movement. However, a closer look at the different national regulatory and legislative initiatives reveals that the structural approaches to how to design a well-balanced remuneration system vary significantly as to the scope of application and the intensity and detail of the new regulation and legislation.

8 citations

References
More filters
Journal ArticleDOI
TL;DR: In this article, the authors draw on recent progress in the theory of property rights, agency, and finance to develop a theory of ownership structure for the firm, which casts new light on and has implications for a variety of issues in the professional and popular literature.

49,666 citations

Journal ArticleDOI
TL;DR: This article investigated the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. In a 1980 cross-section of 371 Fortune 500 firms, they found evidence of a significant nonmonotonic relationship.

7,523 citations

Journal ArticleDOI
Hamid Mehran1
TL;DR: An examination of the executive compensation structure of 153 randomly-selected manufacturing firms in 1979-1980 provides evidence supporting advocates of incentive compensation, and also suggests that the form rather than the level of compensation is what motivates managers to increase firm value.

2,203 citations

Posted Content
TL;DR: In this article, a model of optimal dividend payout is presented in which increased dividends lower agency costs but raise the transactions cost of external financing, and the optimal dividend ratio minimizes the sum of these two costs.
Abstract: A model of optimal dividend payout is presented in which increased dividends lower agency costs but raise the transactions cost of external financing. The optimal dividend payout ratio minimizes the sum of these two costs. A cross-sectional test of the model relates dividend payout to the fraction of equity held by insiders, the past and expected future revenue growth of the firm, the firm's beta coefficient, and the number of common stockholders. The coefficients of all variables are significant in the predicted directions. The results indicate that investment policy influences dividend policy.

1,520 citations

Journal ArticleDOI
TL;DR: In this paper, a model of optimal dividend payout is presented in which increased dividends lower agency costs but raise the transactions cost of external financing, and the optimal dividend payment minimizes the sum of these two costs.
Abstract: A model of optimal dividend payout is presented in which increased dividends lower agency costs but raise the transactions cost of external financing. The optimal dividend payout minimizes the sum of these two costs. A cross-sectional test of the model relates dividend payout to the fraction of equity held by insiders, the past and expected future revenue growth of the firm, the firm's beta coefficient, and the number of common stockholders. The coefficients of all variables are significant in the predicted directions. The results indicate that investment policy influences dividend policy.

1,220 citations