Corporate Governance and Compensation Research Paper

Corporate Governance and Compensation - Research Paper Example ance as â€Å"the system by which business corporations are directed and controlled†¦[specifying] the distribution of rights and responsibilities among different participants in the corporation such as the Board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs† (OECD, 2004, 11). A third definition is articulated by economists: â€Å"Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of mechanisms such as contracts, organizational designs and legislation† (Fernando, 2006, 13-15). More recent literature has expanded the coverage of corporate governance to include management and financial discipline, corporate social responsibility, business ethics, stakeholder participation in decision-making, and more recently, sustainable economic development in the country in which the business operates (16). Presented in the appendix is a figure showing the comparative descriptions of the OECD and UK’s Good Governance Standards for Public Service, as they measure up to the generic principles of good governance. Executive compensation as a concern of corporate governance Before the financial crisis, there was little reason for doubting the rising pay of chief executives as set by board. The general public perception is that the board acted in a regular and informed manner when they agreed in setting the compensation level of the CEO, and that corporate governance was implemented optimally from the top of the organization. The issues that arose out of the financial crisis, however, led to the belief that the process of determining CEO compensation is not as efficient as the public were led to believe, and that significant... This essay stresses that the case of Disney’s derivative suit involving Ovitz’s morally untenable compensation package highlights the huge discrepancy between what the law requires and what is required by good corporate governance, as far as executive compensation is concerned. Presently, in determining liability and propriety the law measures executive action by the minimum standard of due care and good faith, but this case shows that it is possible for a powerful CEO to meet the minimum and still cause severe pecuniary and organizational risk to the company and its shareholders. This paper makes a conclusion that the courts decided against the derivative suit filed by the shareholders, because the board of directors were deemed to have met the minimum standard of due care, and not to have acted in bad faith as defined by the law. This does not clear Disney executives, particularly its CEO and those directors who evidently connived with him, from meeting their moral and ethical responsibility towards their shareholders and stakeholders, and is an evident display of poor corporate governance. Executive compensation and the hiring of a successor must not be left to the whims and designs of a CEO who manipulates these matters in order to retain power for himself. The terms of executive compensation and succession should be considered as legitimate by social standards and the norms and cognitive impacts on the organization.