CEO Pay: A corporate governance commentary

Recently, the salary levels of some Chief Executive Officers (CEOs) of some state-controlled corporations in Ghana have come under quite a bit of public scrutiny. What has been in short supply is a discussion of the thematic underpinnings of the subject.

Questions about how much top executives earn, how that aligns with the interest of shareholders/stakeholders, the strategies for creating the said alignment, the role of the board of directors, how much of a say the shareholder has on the pay in question, the possibility of clawing back some of the pay under a given set of circumstances, to mention a few, form the warp and woof of what has come to be known within the corporate governance spectrum as “executive compensation”.

Based on the assumption that top executives of a company are not easily fungible, there is a general belief that they ought to be compensated in a befitting manner.

In doing so, the traditional tensions within the corporate form, come to the fore. Ordinarily, shareholders invest in the business and the executives, whether they are shareholders themselves or not, to manage the business. The board of directors, whose composition almost always includes the CEO, exercise oversight. Thus, the manner in which executive compensation is arrived at is considered by some to amount to self dealing even if the CEO may not be a member of the compensation committee in particular.

The executives extract perquisites by way of their earnings and bonuses. The shareholders, who are the residual claimants, may earn dividends if the company is able to meet its obligations after the payments. In Ghana, an ordinary resolution suffices for the declaration of dividends, but the amount does not exceed what the board of directors recommends. There is always the danger that dividends may not be declared although the executives continue to be compensated. Even where dividends are declared, they may be meagre, compared with the compensation of top executives. Shareholders may sue (derivative actions) but some experts believe the “Wall Street Walk” (selling of shares) may be the most efficient approach.

The rather taut relationships within the corporate form, resulting from the foregoing analysis, are global in nature. Goldman Sachs, Home Depot, Reckitt Benckiser, Citi Group, Royal Dutch Shell etc. have had different levels of contention over executive compensation.

Although unheard of some decades ago, it is now commonplace to find attempts by boards of directors to align executive compensation with shareholder interests. Thus, it is not uncommon to tie executive compensation to company performance. For listed companies, this may include stocks and stock options (through the financial instrument of the “call” option).

In the United States (US), reforms in 1993 capped deductible executive compensation at $one million, the Sarbanes-Oxley Act of 2002 hemmed in certain advancements to executives and the Dodd-Frank Act of 2010 gave shareholders a “say on pay” even if in precatory terms only. The 2010 Act also required certain disclosures with respect to “golden parachutes” during mergers.

The Wall Street Journal reported on July 8, 2011, that although non-binding, “say on pay” votes had caused executive compensation modifications in some top corporations.

Prior to that, on January 20, 2007, the Economist reported that 80 per cent of Americans were of the opinion that executive compensation was too high. Not many people will forget the backlash that the CEOs of Ford, Chrysler and GM suffered in 2008 when they flew private jets to bailout talks in Washington D.C.

The United Kingom (UK) took the lead on “say on pay” as far back as 2003 with respect to companies listed on the London Stock Exchange. In April 2017, BP announced a 40 per cent cut on the annual pay award of Bob Dudley, its CEO. It is reported that this was as a result of the vote of shareholders against the CEO’s pay. Although that vote is non-binding, the effect is obvious.

Australia and Sweden have similar provisions. In the Netherlands and Norway, the shareholder votes are actually binding on top executives.

In Ghana, the public debate over executive compensation is nascent. As the discussion deepens, it is expected that the focus will not merely be on the state-controlled entities.

Indeed, the teaching of Company/Business Law must be modernised to include the corporate governance processes, as well as the corporate finance undercurrents for this key aspect of business law.

In instances where the government is the sole “shareholder” and thus appoints all the directors on the boards, as well as the CEOs and in effect the leading executives, the real control is of a political nature. Given our constitutional arrangements, the government and Parliament need to fall on sound corporate governance expertise to free us of this political stranglehold. The introduction by law of truly independent directors and the effective divesting of shareholding may be key approaches in this direction.

Again, the pervading situation where companies, especially the publicly traded ones, tend to have one or two huge shareholders has rendered directorial “elections” mere formalities where these “owners” invariably have their way.

The Listing Rules of the Ghana Stock Exchange (GSE) need another look. The Securities and Exchange Commission (SEC) needs to re-strategise as well. After all, it is the publicly traded companies that set the tone for the development of the principles and practice of corporate governance in a free-market economy.

In the end, more active dispersed/diffused shareholders in these listed companies may rope in the commercial courts to develop jurisprudential guidance in this virtually under-developed area of Ghana’s company law and practice.

The author is the Managing Partner at Nii Arday Clegg & Co., a corporate law firm. He holds a Master of Laws (LL.M.) degree in Corporate Law, Finance & Governance Concentration from Harvard Law School with cross-registration in Boards of Directors & Corporate Governance from Harvard Business School.