The Executive Compensation Controversy - Fondazione Rodolfo ...

More documents

Recommendations

Info

THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISBarnevik’s November 2001 pension payment of €60 million sparked not only outrage bylawsuits, and Barnevik was eventually pressured to resign his posts as chairman of Investor(the investment vehicle for Sweden’s Wallenberg dynastic) and AstraZeneca. To avoidlengthy litigation, Barnevik agreed to return 60% of his severance pay.In the Netherlands, controversies erupted over massive overstatements of reserves byRoyal Dutch Shell linked to its executive bonus formulas. Under Shell’s “balancedscorecard” performance-measurement system, bonuses were paid in part on the basis ofincreases in reserves. In 2002 and 2003, Shell’s internal auditor warned that Shell’s bookingof reserves did not comply with SEC guidelines, and argued that Shell’s bonus systemencouraged the inflation of reserves booking. 75 In January 2004, the stock price of Shell’stwo parent companies plummeted as Shell slashed its reported oil and natural gas reserves by20%. Along with the restatement, Shell changed its bonus formula to remove any weight onreserves.As executive compensation in Europe became more controversial, demand forincreased pay disclosures intensified from labor unions, the government, and internationalinvestors. The most sweeping new rules were adopted by the UK following the Greenbury(1995) Report, which equalled and in many cases surpasses USA disclosure rules. Inparticular, the Greenbury Report required companies to list the details of all options held atyear end (e.g., quantities, exercise prices, terms); the USA did not require these details until2006. 76 The Greenbury report was followed by the Hampel (1998) report which requiredcompanies to report changes in the actuarial value of pension benefits, also not part of USAdisclosure requirements until 2006.In January 2000, all firms listed on the Irish Stock Exchange were required to revealdetails of individual executive pay. But elsewhere in Europe, disclosure reform was uneven.Many large firms throughout the Continent cross-listed on USA or UK exchanges beganvoluntarily reporting compensation details, under the theory that more transparency wouldattract more USA and UK investors. But formally, several countries such as Spain and Italyhad no reporting requirements, and reporting was encouraged but not mandatory in France. 7775 Cummins, “Shell's Outside Auditors Got Warning on Reserves in 2002,” Wall Street Journal (July 15,2004), p. A3.76 Under the 1992 USA disclosure rules, companies must report the number and intrinsic value of exercisableand nonexercisable options held at year end, but did not have to report details arising from each tranche ofoptions.77 In spring 2000, the Mouvement des Entreprises de France (or MEDEF) – essentially the union of thelargest employers – encouraged public companies to voluntarily disclose pay. For details on European-57-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISWhile many large French companies complied with the voluntarily guidelines, others (suchas PSA Peugeot-Citroen) vowed to never voluntarily disclose their pay. In any case, therewere no specific French disclosure guidelines, and as a result there was substantial dispersionon how firms chose to report pay (even among those that chose).Under rules in effect until 2005, public companies in Germany were required to reportonly the aggregate cash compensation paid to all management directors; details on individualcompensation or on stock options were not required. In 2000, following the Ackermann-Mannesman scandal discussed above, Germany legislators began working on sweeping newpay disclosures that would reveal individual pay packages. However, the landmark Germandisclosure legislation was not passed until 2005, requiring details on option grants but notoption holdings, and also included a loophole to benefit secretive family-owned or closelyheld corporations: the company would not have to disclose pay details if 75% of the sharesvote against such disclosure. 78On 21 May 2003, the Commission of the European Communities issued its reportentitled, “Modernizing Company Law and Enhancing Corporate Governance in the EuropeanUnion - A Plan to Move Forward” (the “Action Plan”). The Action Plan – directed atcorporations in the fifteen countries (as of 2003) represented in the European Union 79 –included four guiding principles:• Disclosure of compensation policies in annual reports;• Disclosure of details of remuneration of individual directors in the annual accounts;• Prior approval by the shareholder meeting of share and share option schemes in whichdirectors participate;• Proper recognition in the annual accounts of the costs of such schemes for the company;Member countries were asked to implement the Action Plan by June 2006, eitherthrough legislation or best-practice rules based on the “comply or explain” principle: thedisclosure as of September 2000, see Woodruff, “A Vanishing European Taboo: Disclosing Executives Pay ---Goal of Single Market, Pressure Abroad Help; Response Is Unexcited,” Wall Street Journal (September 11,2000).78 See Simensen, “Debate Over Remuneration Has Led To Changes In German Corporate Governance,”Financial Times (October 23, 2006), p. 23; “Germany's pay law: Disclosure is right - but anti-business rhetoricis futile,” Financial Times (May 20, 2005), p. 18.79 The fifteen country-members of the European Union as of May 2003 were Austria, Belgium, Denmark,Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and theUnited Kingdom.-58-
Page 2:
1. INTRODUCTION 12. A PRIMER ON EXE
Page 5 and 6:
THE EXECUTIVE COMPENSATION CONTROVE
Page 7 and 8:
Page 9 and 10: THE EXECUTIVE COMPENSATION CONTROVE
Page 59: THE EXECUTIVE COMPENSATION CONTROVE
Page 111 and 112:
Page 113 and 114:
Page 115 and 116:
Page 117 and 118:
Page 119 and 120:
Page 121 and 122:
Page 123 and 124:
Page 125 and 126:
Page 127 and 128:
Page 129 and 130:
Page 131 and 132:
Page 133 and 134:
Page 135 and 136:
Page 137 and 138:
Page 139 and 140:
Page 141 and 142:
show all

The Executive Compensation Controversy - Fondazione Rodolfo ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?