Question

Just basic thoughts with relevant theory.

Related to corporate governance.

"Senior Executives in large companies get paid too much" Discuss this comment in line with at least one relevant theory elaborated in this unit and provide examples to support arguments for your agreement or disagreement. me Background Various global and local corporate scandals and government enquiries have placed excessive executive remuneration under scrutiny. The Global Financial Crisis (GFC) in 2008 saw many changes to corporate governance laws worldwide to strengthen accountability and transparency of company operations. In Australia, one of the changes was the introduction of the "Two Strikes Rule." This rule has been in place since 2011. In simplistic terms if 25% of voting shareholders reject 2 remuneration reports then they can vote to spill the board. In April 2016 a major profit rigging scandal with Target Australia became known and was reported in the media. Target Australia is part of the Wesfarmers group. Coles, also part of the Wesfarmers group has received many fines from the ACCC (Australia's corporate watch dog) for poor operating practices. The Wesfarmers group is also facing $2 billion dollars in write-downs associated with Target and a Queensland Coal mine in 2016. Globally there are many examples of excessive remuneration being associated with poor corporate performance, corporate failure and unethical corporate behaviours.

Answer 1

The situation of excessive remuneration to an organization’s management and how it is detrimental to corporate governance can be explained with the help of “agency theory”. Agency theory is an important corporate governance principle that defines the relationship between the principals of an organization (i.e. shareholders) and agents (i.e. company executives and managers). As per this theory of corporate governance agents are expected and required to act and make decisions that will further the best interests of the principal.

The managerial power approach of the agency theory of corporate governance states that pay will be higher in those organizations in which managers have relatively more power. When managers are paid excessive remuneration then this is a clear indication that their pay is less sensitive to their performance and this is due to the fact that managers enjoy a great quantum of power in the organization. Managers have more power when board is ineffectual and when there are fewer institutional investors. In these scenarios excessive remuneration to managers does not solve the agency problem, in fact it worsens it as managers are further empowered. When this happens that managers increasingly neglect the interests of the principals and hence their actions goes against the basic tenets of corporate governance in the long run.