Question

Boards of directors and top managers are being scrutinized more than ever. Complete the following assignments having to do with these two groups of strategic decision makers.

a. Fortune publishes an annual ranking of the most admired companies, both globally and in the United States. Choose either ranking and get the most recent listing of the top 10. Look up financial information on the top three companies on the list. Look up information on the boards of directors of these companies. Report what you find. What conclusions might you draw about the role of the board in the strategic management of these most admired companies?

b. Top executive compensation has been a controversial topic recently because of floundering company performance. Do some research on executive pay. What issues are being raised? How do you feel about these issues? What things are happening in response to these issues?

Answer 1

a)

Overview

• Candidates: FORTUNE 1000, Global 500 companies, and other major non-U.S. companies
• 199 non-U.S. companies from 28 countries and 476 U.S. companies invited to participate across 56 industry groupings
• Customized industry questionnaires
• Survey approximately 15,000 senior executives, outside directors, and industry analysts and the World's Most Admired Companies are rated on nine attributes
• Overall corporate reputation score is an average of the attribute scores

FORTUNE World’s Most Admired Top 50 All-Stars – Top 10:

1. Apple

2. Amazon.com

3. Berkshire Hathaway

4. Walt Disney

5. Starbucks

6. Microsoft

7. Alphabet

8. Netflix

9. JPMorgan Chase

10. FedEx

How are companies selected to be on the list? FORTUNE determines the industry groupings by using the Fortune 1000 listing and the Global 500 listing. The number of companies within an industry ranges from a minimum of 5 companies to a maximum of 15. Companies must have approximately $10 billion in revenue and rank among the largest by revenue within their industry. The more companies competing internationally, the more companies in an industry grouping.

What are the attributes of reputation on which companies are evaluated in determining the industry rankings?

1. Ability to attract and retain talented people
2. Quality of management
3. Social responsibility to the community and the environment
4. Innovativeness
5. Quality of products or services
6. Wise use of corporate assets
7. Financial soundness
8. Long-term investment value
9. Effectiveness in doing business globally

How are the attributes defined on the survey? Only the attribute names as listed above are provided on the survey. We simply state that ratings may be based on your firsthand knowledge of these companies or on anything you may have observed or heard about them. Thus, interpretation of the meaning of the attributes within a specific industry is left to the respondents.

How were these attributes developed? The attributes were developed prior to the inception of the Most Admired Companies rankings in the mid-1980s through a series of interviews with executives and industry analysts to determine the qualities that make a company worthy of admiration.

Rank	Company	Country	Sector	($ Bil.)
1	Microsoft	U.S.	Technology	1,058
2	Apple	U.S.	Technology	959
3	Amazon	U.S.	Consumer Services	959

Rank	Company	Country	Revenues ($ Mil.)	Revenues % Change	Profits ($ Mil.)	Profits % Change
1	Walmart	U.S.	514,405	2.8	6,670	-32.4
2	Sinopec Group	China	414,649	26.8	5,845	280.1
3	Royal Dutch Shell	Netherlands	396,556	27.2	23,352	79.9

Rank	Company	Country	Revenues ($ Bil.)	Profits ($ Bil.)	Assets ($ Bil.)	Market Value ($ Bil.)
1	ICBC	China	176	45	4035	305
2	JPMorgan Chase	U.S.	133	33	2,737	369
3	China Construction Bank	China	150	39	3,382	225

A board of directors is a team of people elected by a corporation's shareholders to represent the shareholders' interests and ensure that the company's management acts on their behalf. The head of the board of directors is the chairman or chairperson of the board.

A company director's duties/role can include:

• determining and implementing policies and making decisions.
• preparing and filing statutory documents with the Companies Office or other agencies.
• calling meetings, including an annual meeting of shareholders.
• maintaining and keeping records.

b) RESEARCH ON EXECUTIVE PAY:

The recent financial crisis has created a public uproar over top-executive pay packages and has led to calls for reform of executive pay in Europe and the United States. The current controversy is not the first – nor will it be the last – time that executive compensation has sparked outrage and led to regulation on both sides of the Atlantic. In this report, we trace the evolution of executive compensation, its controversies and its resulting regulations, which have typically come in the form of tax policies, disclosure rules, and accounting standards. We show that many features of current executive compensation practices reflect the oftenunintended consequences of regulatory responses to perceived abuses in top-executive pay, often stemming from relatively isolated events or situations.

The Structure of Pay Despite substantial heterogeneity in pay practices across Örms, most executive pay packages contain Öve basic components: salary, annual bonus, payouts from LTIPs, restricted option grants, and restricted stock grants. In addition, top executives often receive perks, deÖnedbeneÖt pension plans, and severance payments upon departure. The relative importance of these compensation elements has changed considerably over time. 2.2.1. The Main Components of Executive Pay Figure 5 illustrates the importance of the major pay components for CEOs of the 50 largest U.S. Örms from 1936 to 2005, using again the Frydman and Saks (2010) data. From 1936 to the 1950s, pay comprised mainly salaries and annual bonuses. As today, bonuses were typically non-discretionary, tied to one or more measures of annual accounting performance, and paid in either cash or stock. LTIPs started to become signiÖcant from the 1960s. These are bonus plans based on multi-year performance, often paid out over several years, in cash or stock. The most striking pattern in Figure 5 is the large increase in stock option pay starting in the early 1980s. The use of options was negligible until 1950, when a tax reform permitted certain 12 option payo§s to be taxed at the much lower capital gains rate rather than at the income tax rate. Although many Örms responded by instituting option plans, option grants remained a small proportion of total pay until the late 1970s. During the 1980s and especially the 1990s, options surged to become the largest component of executive pay. Panel A of Figure 6 illustrates this development for large-cap CEOs from 1992 to 2014. Options increased from only 19% of pay in 1992 to 49% by 2000. Thus, a large portion of the overall rise in CEO pay is due to growth in options, and any theory that explains the surge in CEO pay needs to account for this important change in the structure of pay as well. The growth in options did not occur at the expense of other components of pay; median salaries are constant at $1.2 million, and short- and long-term bonuses rose from $0.9 to $1.4 million over the same period (all in 2014 dollars).

According to the Center on Executive Compensation,

"Executive pay arrangements typically consist of six distinct compensation components: salary, annual incentives, long-term incentives, benefits, perquisites and severance/change-in-control agreements."1 See High-Performing Companies Pay Executives Differently.

ISSUES:

• Executive Compensation Governance. ...
• Institutional Shareholders. ...
• Shareholder Advisory Groups. ...
• Say on Pay. ...
• Consultant Independence. ...
• Risk Assessment. ...
• Performance Equity. ...
• Peer Groups.

RESOLVE :

Here are just a few competing priorities at play:

• Paying enough money to prevent another company from poaching your CEO.
• Offering appropriate incentives for hitting goals to improve executive performance.
• Finding ways to pay for rising executive compensation costs.
• Justifying huge gaps in salaries to other executives and non-executive employees.
• Accurately calculating salary gaps and executive pay ratios.
• Managing tax burdens for the company and executives.
• The increasing importance of social justice to consumers.

• A full breakdown of any one of those could fill an entire book. Which is why executive pay is such a complicated issue.