Governance, Risk and Ethics

2 Section A: Governance and responsibility Section B: Internal control and review Section C: Identifying and assessing risk Section D: Controlling risk Section E: Professional values and ethics Governance, risk and ethics

3 Section A: Governance and responsibility A1. The scope of governance A2. Agency relationships and theories A3. The board of directors A4. Board committees A5. Directors’ remuneration A6. Different approaches to corporate governance A8. Governance: Reporting and disclosure Designed to give you knowledge and application of:

4  Describe and assess the general principles of remuneration. [3] Study Guide A5: Directors’ remuneration Learning Outcome

5 Describe and assess the general principles of remuneration Subject of debate FAT pay packagesExcessive termination payments Result of massive privatisation, takeovers & share option deals Bound by contracts entered at appointment stage Continued…

6 Motivation AttractionRetention Recruitment Attract successful people Recruit right candidates Retain employees by offering good remuneration Motivate directors by relating pay to performance Purposes of remuneration Components of remuneration package set according to Job profile & responsibilities Skill sets Level of performance Contribution to strategy Refer to Case Study on page 118 Continued…

7 Managing directors’ remuneration The high compensation paid to executives by Rubble Plc, a mining company, became headline news due to the huge amounts involved. The compensation paid totalled $2,050 million paid to 3 executives owing to the agreements signed by them that entitled them to receive compensation based on the company’s turnover. Rubble made a huge profit of $500,000 million in the year the executives retired (20X8). The press openly criticised these payments as “rewards for failure” since they were made on the basis of the agreements, despite the fact that these directors were voted against and removed from the board due to their failure to contribute positively to the board’s decisions. The open criticism by the press led to resentment amongst shareholders and hence an EGM was convened where the matter was taken up. The executives argued that the huge compensation was a result of the agreements that they signed on election to the board and they had not negotiated or forced the board to make the payments. Following severe opposition from shareholders, the executives were asked to repay 50% of the compensation amount paid. Example: Continued…

8 This incident triggered the formation of the following proposed guidelines for companies to follow when deciding the compensation payments for directors:  All payments, including redundancy payments, pensions and any other retirement payments to be made to directors as compensation for loss of office, should be decided by the board and the implications reported to the public in the annual report.  The payments made on a monthly basis should be strictly performance-based and related to the size of the company.  Redundancy payments should be paid only when the director’s contract is terminated by the company and not otherwise (i.e. not if the director resigns). The managing director’s remuneration should be based on the contribution made to the company and the fixed compensation portion should be limited. Continued…

9 RECAP  Describe and assess the general principles of remuneration. [3]