INTRODUCTION:

FIVE CORPORATE GOVERNANCE REGIMES: Contemporary discussions of corporate governance focus on relations between ownership and management within joint-stock, limited-liability, publicly-held, predominantly large-scale enterprises. This focus centers attention on the balance of power between shareowners and managers, together with the consequences of that balance for enterprise performance. The two ideal-typical property systems, based on concentrated and dispersed ownership respectively have been described. The concentrated ownership system is characterized by controlling block holders, weak securities markets, high private benefits of control, and low disclosure and market transparency standards, with only a modest role played by the market for corporate control, with a possibly substitutionary monitoring role played by large banks. The dispersed ownership system is characterized by strong securities markets, rigorous disclosure standards, and high market transparency, in which the market for corporate control constitutes the ultimate disciplinary mechanism. Countries can be organized around the concentrated versus dispersed ownership distinction. But the system of corporate property relations in each country is embedded in a broader set of social, institutional, and power arrangements. In particular, three institutional domains and groups of actors are held to shape the nature of corporate property relations: financial systems (e.g. bank- versus market-driven); the governance role of stakeholders versus stockholders; and the political governance of the economy (e.g. state directed, associational, or market-driven). Different authors place varying emphases on the degree of integration between the levels of corporate governance, the financial system, stakeholder rights, and political authority. But most use each of these as empirical components in constructing contrasting national models of corporate governance. The following portraits of the US, UK, France, Germany and Japan, therefore, will be structured by their location in relation to these four dimensions. UNITED STATES: The United States is typically portrayed in contemporary corporate governance debates as the paradigmatic liberal economy where financing is based on well-developed and highly liquid securities markets, enterprise stock is widely dispersed, managers seek to maximize shareholder

value, and the government allows market relations to drive the economy by strongly defending the rules of contract and the rights of propertyin particular of minority interests within joint stock companies. But this system did not always exist in its present form. When unrestricted incorporation and limited liability became available in the mid-nineteenth century, closely-held family firms dominated the corporate form. This gradually gave way to dispersed ownership during the first half of the twentieth century, as the securities markets grew more robust and managerial control of enterprises solidified. American banking was very regionally decentralized and fragmented. Much of its activities originally revolved around the financing of trade. Banks played a very small and never more than short-term role in industrial finance in the nineteenth century. To the extent that they utilized external finance, young American corporations relied on bond issues. There were efforts to construct universal banking arrangements (involving both commercial and investment roles) allowing financial institutions to take equity stakes and intervene more directly in the internal governance of firms. But these experiments co-existed with increasingly liquid securities markets and were, finally, legally constrained in the 1930s by the Glass-Steagall Act institutionalizing specialized banking. Stakeholder views, especially in the guise of movements for manager autonomy, competed with stockholder views for much of the mid-twentieth century. Collective bargaining also regulated labor markets in important industrial sectors for much of this period, but stopped well short of union involvement in corporate governance. The government experimented with stronger forms of interventionism and collaboration with corporations and business associations during much of the Progressive and, especially, New Deal eras. But these mechanisms of intervention have been receding since the 1980s BRITAINS: Britains corporate governance regime is portrayed in contemporary accounts as resembling that of the United States. But the history of British corporate governance is actually quite divergent from that in the US. Indeed, unlike Americans, Britons were very skeptical about limited liability for much of the nineteenth century. Once adopted, moreover, closely-held family firms dominated the joint-stock company form for a much longer period of time than in the US. Not until the 1930s and a subsequent succession of merger waves, did dispersed ownership begin to predominate. Corporate finance in Britain has always been characterized by specialized banking,

with a clear distinction between commercial and investment roles. The absence of universal banks, however, does not mean that bank-industry relations were purely arms-length. On the contrary, long-term and often quite intimate relations frequently prevailed between commercial bankers and their clients. Close, performance-monitoring ties were produced and reproduced through cooperatively constructed short-term contractsloans, overdrafts, etc. But this relation in British banking stopped short of the strong form engaged in by continental universal banks: British banks did not become involved in the transfer of property and never strategically sought ownership stakes in their clients (though stock was sometimes accepted as collateral for loans). Securities markets were significant but often little utilized by domestic firms for much of the early period of industrialization. The London capital market grew significantly in both depth and liquidity over the course of the twentieth century. There is ambivalence in British corporate history about stakeholder rights. Labor governments supported unionization and worker rights relative to corporate actors for much of the twentieth century. Moreover, during the midtwentieth century there were numerous nationalizations after which companies were run in stakeholders interests, rather than according to strict market criteria. This stakeholders has declined since the 1980s, as privatization and merger were accompanied by the dispersal of stockownership and political struggles weakened the labor movement. FRANCE: France presents in many ways the greatest contrast with the US and British cases, due to the strong role of the state. During the nineteenth and early twentieth centurys, there were very few large corporations in France. Those that did exist were closely held. In large part, these firms financed investment from earnings and engaged with banks only for short-term loans. Relational banking (in the sense of banks holding equity stakes in firms) was rare. Like the British, French banks maintained a specialized divide between commercial and investment functions. Similarly, the securities market was used, particularly in the 1920s, but it was not a significant factor in corporate finance. But the most distinctive aspect of French development is the states extremely strong role in enterprise governance, especially after 1945. Beginning around World War I, the French state began to encourage the development of national champions in strategic industrieschanneling capital to firms and acting as their major customers. After World War II, this role increased as national plans were developed, banks and firms were nationalized, and

public influence was exercised both directly and indirectly on the composition of boards and corporate investment strategies. The stock market atrophied and firms became dependent on state- underwritten bank debt. In this context, however, the number of public corporate enterprises proliferated. Given the states prominent influence, corporate managers directed their enterprises towards stakeholder rather than stockholder interests. Despite the proliferation of large corporations in the postwar period, ownership remained concentrated, not only because of the importance of public enterprises, but also because managers engaged in significant crossshareholding. The rights of minority holders were not well protected in French corporate law. Since the mid-1980s, following important financial system reforms, a series of major self-dealing scandals involving prominent managers and state officials, and pressures from the European Union to reduce the economic role of the state, French corporations have become more exposed to market pressures. The size and role of the stock market has increased and shareholding has gradually become more dispersed. GERMANY: Even earlier than in the United States, large-scale corporate enterprises played a prominent role in Germanys industrialization. Liberalization of incorporation law occurred in 1870 and was then reformed in 1884. Germans enthusiastically took to limited liability and the joint-stock company formthough the former principal was much more broadly embraced than the latter. German enthusiasm for the joint stock form was significant even though German law was ambivalent with respect to minority shareholder protections. In any case, there was space in the German economy, at least prior to World War II, for a variety of corporate governance forms. Closely-held family enterprises have predominated in the German political economy since the beginning of industrialization. But their share of all joint stock companies gradually declined between 1884 and 1933, destabilized after 1945 and began to decline again only in the 1990s. The decline of family ownership before 1933 was also accompanied by a gradual dispersal of shareholdings. But this trend was radically reversed after 1945, as concentrated holdings came to dominate the ownership structures of the 100 largest firms. Cross-shareholding, especially after 1945, became an important form of concentrated ownership. From the beginning of industrialization, German finance was bank-driven and universal banking was the norm. Banks extended loans and credits, provided bridging finance, facilitated the

transfer of ownership (securities underwriting) and participated in corporate governance through both the exercise of shareholders proxy votes and direct equity holdings. Despite the existence of these broad capacities, strong bank participation in corporate governance was a dominant feature of the German landscape only during the first few decades after World War II and began to weaken in the 1990s. This is not to say that there was no strong relation between banks and industry in Germany before World War II. But it was less common than is often believed. Indeed, nineteenth and early twentieth-century firms seldom relied on bank debt for financing and banks seldom took significant equity stakes in their clients. Indeed, recent research suggests that securities comprised a lower percentage of German than British banks assets prior to World War I though unlike their British counterparts, German banks tended to take strategic advantage of ownership stakes when they had them. Strikingly, given the breadth of bank capacities, financial institutions lived in apparent harmony with relatively, deep, active, and efficient securities markets prior to 1914. Political turbulence and shifts in the power of universal banks led to reduced significance for securities markets in the twentieth century, particularly after 1945. Stakeholders have traditionally played an important role in German corporate governance. When banks held positions of internal influence within German firms, they constituted a stakeholder interest that shaped the character of management calculation. This was always the case among widely held firms and it became more generally true during the first few decades after World War II. Even broader attention to stakeholders was written into the obligations of enterprise management after 1945 by co-determination legislation requiring labor representation on the supervisory boards of all corporations employing a minimum number of people. The Enterprise managers obligation to conduct business in the interest of stakeholders not otherwise defined was also written into the postwar West German constitution. Except for the twelve-year interlude of centralized National Socialist dictatorship, the German state has been federally organized with highly fragmented authority and a small central bureaucracy oriented toward the protection of market order (as opposed to free markets) and the coordination of public associational debate. Prior to 1918, this was done quasi-democratically with a systematic bias toward organized property groups (including joint stock enterprises). During the Weimar Republic, liberal and democratic norms governed the states relations with associations, but without formally conceding to them any public authority.

The liberal democratic Federal Republic formalized many of those concessions of public authority and relied more comfortably on associational governance. Associations representing property owners, employers, and employees play a significant governance role within the German economy, organizing wage determination, the development of training curricula, standards setting, and the organization of political debates regarding industrial and economic policies. JAPAN: Corporate governance in Japan has a distinctive history, with a caesura in the mid-twentieth century caused by the experiences of imperialism, war, defeat, and occupation. Prior to the militarization of Japan in the 1930s, there were three different patterns of corporate governance. The dominant pattern involved broadly-held joint-stock companies, supported by highly liquid securities markets, headed by professional management directing their companies in the interest of shareholders. Another pattern involved state ownership of enterprise where professional bureaucratic managers pursued public economic development goals. A third involved a limited partnership holding company structure where family owners controlled diversified networks of publicly-quoted enterprises, run by professional management known as zaibatsu. Interestingly, Japanese corporate law reflected this fragmentation of development paths in that it was both protective of and hostile to minority property interests. For its part, the financial sector remained much diversified and securities far outweighed bank lending as a source for industrial finance until the 1930s. Banks engaged in specialized arms length, mostly short-term lending. Relational banking did not exist, though there were some zaibatsu banks with very close relationships to zaibatsu holdings. But these relationships were not monitoring ones; nor were zaibatsu banks the primary sources of finance for the zaibatsu. In prewar Japan, professional managers directed enterprises in shareholders rather than stakeholders interest with the exception of state-owned enterprises, which pursued national economic development goals. Thus the state was a significant presence in the prewar Japanese corporate economy, but it did not dominate or even remotely direct vast reaches of the private sector. Beyond its (significant) direct holdings, the state governed the economy by establishing framework rules for private actors (in many cases adopting and adapting foreign models for public education, limited liability, stockownership, law, etc)

What is CORPORATE GOVERNANCE?

Corporate governance is "the system by which companies are directed and controlled". It involves regulatory and market mechanisms, and the roles and relationships between a companys management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees. Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders. Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have an impact on the way a company is controlled. An important theme of corporate governance is the nature and extent of accountability of people in the business. A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare. In large firms where there is a separation of ownership and management and no controlling shareholder, the principalagent issue arises between upper-management (the "agent") which may have very different interests, and by definition considerably more information, than shareholders (the "principals"). The danger arises that rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management. This aspect is particularly present in contemporary public debates and developments in regulatory policy. There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 2001-2002, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance.

Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfill its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The management of the company hence assumes the role of a trustee for all the others.

REGULATION:
LEGAL ENVIRONMENT: Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These may vary in many respects between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation (which is the general case) or from a statute to create a specific corporation, which was the only method prior to the 19th century. In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries, and various laws and regulations affecting business practices. In most jurisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum and] Articles of Association. The capacity of shareholders to modify the constitution of their corporation can vary substantially CODES AND GUIDELINES: Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a

rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. For example, companies quoted on the London, Toronto and Australian Stock Exchanges formally need not follow the recommendations of their respective codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance. One of the most influential guidelines has been the OECD Principles of Corporate Governance published in 1999 and revised in 2004. The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure. This internationally agreed benchmark consists of more than fifty distinct disclosure items across five broad categories: Auditing Board and management structure and process Corporate responsibility and compliance Financial transparency and information disclosure Ownership structure and exercise of control rights

The investor-led organization International Corporate Governance Network (ICGN) was set up by individuals centered on the ten largest pension funds in the world 1995. The aim is to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars and members are located in fifty different countries. ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics. The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on accountability and reporting, and in 2004 released Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. This document offers general information and a perspective from a

business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda. In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate Governance - the Foundation for Corporate Citizenship and Sustainable Business, linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability. Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision is the degree to which companies manage their governance responsibilities; in other words, do they merely try to supersede the legal threshold, or should they create governance guidelines that ascend to the level of best practice. For example, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting other companies to adopt similar practices.

PRINCIPLES OF CORPORATE GOVERNANCE:

Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports. 1. Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. 2. Interests of other stakeholders:

Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. 3. Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment 4. Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. 5. Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

PARTIES OF CORPORATE GOVERNANCE:

The most influential parties involved in corporate governance include government agencies and authorities, stock exchanges, management (including the board of directors and its chair, the Chief Executive Officer or the equivalent, other executives and line management, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns (risk) are necessarily lower for a controlling shareholder.

A board of directors is expected to play a key role in corporate governance. The board has the responsibility of endorsing the organization's strategy, developing directional policy, appointing, supervising and remunerating senior executives, and ensuring accountability of the organization to its investors and authorities. All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with corporate social performance. A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation. When this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action. There is substantial interest in how external systems and institutions, including markets, influence corporate governance.

INTERNAL CORPORATE GOVERNANCE CONTROLS:

Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. Examples include: 1. Monitoring by the board of directors: The board of directors, with its legal authority to hire fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are

thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.

2. Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting.

3. Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.

4. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior. 5. Monitoring by large shareholders and/or monitoring by banks and other large creditors: Given their large investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power, to monitor the management.

In publicly-traded U.S. corporations, boards of directors are largely chosen by the President/CEO and the President/CEO often takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). The practice of the CEO also being the Chair of the Board is known as "duality". While this practice is common in the U.S., it is relatively rare elsewhere. In the U.K., successive codes of best practice have recommended against duality.

EXTERNAL CORPORATE GOVERNANCE CONTROLS:

External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include: Competition Debt Covenants Demand for and assessment of performance information Government regulations Managerial Labor market Media pressure Takeovers

EXECUTIVE REMUNERATION:
Executive Remuneration (also executive compensation), is financial compensation received by an officer of a firm. It is typically a mixture of salary, bonuses, shares of and/or call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance. Over the past three decades, executive remuneration has risen dramatically relative to that of an average worker's wage in the United States, and to a lesser extent in some other countries. Observers differ as to whether this rise is a natural and beneficial result of competition for scarce business talent that can add greatly to stockholder value in large companies, or a socially harmful phenomenon brought about by social and political changes that have given

executives greater control over their own pay. Executive remuneration is an important part of corporate governance, and is often determined by a company's board of directors.

TYPES OF REMUNERATION:
There are six basic tools of Compensation or Remuneration: Salary Short term incentives (STIs), sometimes known as bonuses Long-term incentive plans (LTIP) Employee benefits Paid expenses (perquisites) Insurance

In a modern corporation, the CEO and other top executives are often paid salary plus short-term incentives or bonuses. This combination is referred to as Total Cash Compensation (TCC). Short-term incentives usually are formula-driven and have some performance criteria attached depending on the role of the executive. For example, the Sales Director's performance related bonus may be based on incremental revenue growth turnover; a CEO's could be based on incremental profitability and revenue growth. Bonuses are after-the-fact (not formula driven) and often discretionary. Executives may also be compensated with a mixture of cash and shares of the company which are almost always subject to vesting restrictions (a long-term incentive). To be considered a long-term incentive the measurement period must be in excess of one year (35 years is common). The vesting term refers to the period of time before the recipient has the right to transfer shares and realize value. Vesting can be based on time, performance or both. For example a CEO might get 1 million in cash, and 1 million in company shares (and share buy options used). Vesting can occur in two ways: "cliff vesting" (vesting occurring on one date), and "graded vesting" (which occurs over a period of time) and which maybe "uniform" (e.g., 20% of the options vest each year for 5 years) or "non-uniform" (e.g., 20%, 30% and 50% of the options vest each year for the next three years). Other components of an executive compensation package may include such perks as generous retirement plans, health insurance, a chauffeured limousine, an executive jet, interest free loans for the purchase of housing, etc.

STOCK OPTIONS: Executive stock option pay rose dramatically in the United States after scholarly support from University of Chicago educated Professors Michael C. Jensen and Kevin J. Murphy. Due to their publications in the Harvard Business Review 1990 and support from Wall Street and institutional investors, Congress passed a law making it cost effective to pay executives in equity. Supporters of stock options say they align the interests of CEOs to those of shareholders, since options are valuable only if the stock price remains above the option's strike price. Stock options are now counted as a corporate expense (non-cash), which impacts a company's income statement and makes the distribution of options more transparent to shareholders. Critics of stock options charge that they are granted without justification as there is little reason to align the interests of CEOs with those of shareholders. Empirical evidence shows since the wide use of stock options, executive pay relative to workers has dramatically risen. Moreover, executive stock options contributed to the accounting manipulation scandals of the late 1990s and abuses such as the options backdating of such grants. Finally, researchers have shown that relationships between executive stock options and stock buybacks, implying that executives use corporate resources to inflate stock prices before they exercise their options. Stock options also incentivize executives to engage in risk-seeking behavior. This is because the value of a call option increases with increased volatility (see options pricing). Stock options also present a potential up-side gain (if the stock price goes up) for the executive, but no downside risk. Stock options therefore can incentivize excessive risk seeking behavior that can lead to catastrophic corporate failure RESTRICTED STOCK: Executives are also compensated with restricted stock, which is stock given to an executive that cannot be sold until certain conditions are met and has the same value as the market price of the stock at the time of grant. As the size of stock option grants have been reduced, the number of companies granting restricted stock either with stock options or instead of has increased. Restricted stock has its detractors, too, as it has value even when the stock price falls. As an alternative to straight time vested restricted stock, companies have been adding performance type features to their grants. These grants, which could be called performance shares, do not vest or

are not granted until these conditions are met. These performance conditions could be earnings per share or internal financial targets.

REGULATION:
There are a number of strategies that could be employed as a response to the growth of executive compensation. Disclosure of salaries is the first step, so that company stakeholders can know and decide whether or not they think remuneration is fair. In the UK, the Directors' Remuneration Report Regulations 2002 introduced a requirement into the old Companies Act 1985, the requirement to release all details of pay in the annual accounts. This is now codified in the Companies Act 2006. Similar requirements exist in most countries, including the U.S., Germany, and Canada. A say on pay - a non-binding vote of the general meeting to approve director pay packages, is practised in a growing number of countries. Some commentators have advocated a mandatory binding vote for large amounts (e.g. over $5 million). The aim is that the vote will be a highly influential signal to a board to not raise salaries beyond reasonable levels. The general meeting means shareholders in most countries. In most European countries though, with two-tier board structures, a supervisory board will represent employees and shareholders alike. It is this supervisory board which votes on executive compensation. Another proposed reform is the bonus-malus system, where executives carry down-side risk in addition to potential up-side reward. Progressive taxation is a more general strategy that affects executive compensation, as well as other highly paid people. There has been a recent trend to cutting the highest bracket tax payers, a notable example being the tax cuts in the U.S. For example, the Baltic States have a flat tax system for incomes. Executive Remuneration could be checked by taxing more heavily the highest earners, for instance by taking a greater percentage of income over $200,000. Maximum wage is an idea which has been enacted in early 2009 in the United States, where they capped executive pay at $500,000 per year for companies receiving

extraordinary financial assistance from the U.S. taxpayers. The argument is to place a cap on the amount that any person may legally make, in the same way as there is a floor of a minimum wage so that people can not earn too little. Debt Like Compensation - It has been widely accepted that the risk taking motivation of executives depends on its position in equity based compensation and risky debt. Adding debt like instrument as part of an executive compensation may reduce the risk taking motivation of executives. Therefore, as of 2011, there are several proposals to enforce financial institutions to use debt like compensation. Indexing Operating Performance is a way to make bonus targets business cycle independent. Indexed bonus targets move with the business cycle and are therefore fairer and valid for a longer period of time. Two strikes - In Australia an amendment to the Corporations Amendment(Improving Accountability on Director and Executive Remuneration) Bill 2011 puts in place processes to trigger a re-election of a Board where a 25% "no" vote by shareholders to the company's remuneration report has been recorded in two consecutive annual general meetings. When the second "no" vote is recorded at an AGM, the meeting will be suspended and shareholders will be asked to vote on whether a spill meeting is to be held. This vote must be upheld by at least a 50% majority for the spill (or re-election process) to be run. At a spill meeting all directors current at the time the remuneration report was considered are required to stand for re-election. Independent non-executive director setting of compensation is widely practised. An independent remuneration committee is an attempt to have pay packages set at arms' length from the directors who are getting paid.

IMPLEMENTATION OF EXISTING SYSTEM:

1. Say on Pay: As a result of Section 951 of the Dodd Frank Act and the requirements of SEC rules that went into effect January 25, 2011, all but the smallest public companies have had to put their executive compensation practices to an advisory shareholder vote during the current proxy season. The practice of an advisory vote on executive compensation has been in place in many European counties for some time. Many U.S. companies and their advisors resisted the adoption of the requirement here, and others questioned the value of a mere advisory vote. In ways that may have caught some observers by surprise, it appears that even though the shareholder say on pay vote is purely advisory the implementation of the requirement for a say on pay vote is having a significant impact on executive compensation practices. As reflected in a May 2, 2011 Wall Street Journal article entitled Firms Feel Say on Pay Effect (here) , many companies, scrambling to win shareholder approval in the say on pay vote, have been pressured to alter pay practices. As the article says, despite some early skepticism, the prospect of such votes has sparked boardroom debate over executive-pay practices that were long-rubber stamped: The last minute changes that some corporations have put through to avoid negative votes have included some extraordinary steps. Just before the shareholder vote at Disney, for example, the company dropped certain provisions in its contract with its CEO Robert Iger, as well as other executives removing a provision that would have grossed up any compensation awards to these officials in the event of an ownership change. The net effect of this process, and boards desire to avoid a negative vote, is that certain compensation practices may fall by the wayside and all companies will face greater pressure to better align executive compensation and company performance.

2. Proxy Access: On August 25, 2010, the SEC adopted rules, in changes that were to be effective November 15, 2010, to require all but the smallest public companies to include in the proxy materials that board candidates nominated by shareholders who meet certain

qualifying criteria. In order to qualify to nominate a candidate, a shareholder or shareholder group must individually or collectively own at three percent of the voting power of companys shares and must have held those shares for at least three years. However, on September 29, 2010, the Business Roundtable and the U.S. Chamber of Commerce filed a lawsuit challenging the proxy access rules that the SEC had adopted. The petitioners contend that the new rules are arbitrary and capricious, violate the Administrative Procedures Act, and infringe on the First and Fifth Amendments. In response to this legal challenge, the SEC on October 4, 2010 issued a stay of the effectiveness of the rules while the legal challenge is pending. A ruling in the legal challenge is expected later this year. While the implementation of the proxy access rules are in abeyance and the outcome of the legal challenge is uncertain, the likelihood is that in the future shareholder will enjoy greater shareholder access by requiring a company to include in its proxy materials shareholder nominees to the board of directors. As two attorneys from the Saul Ewing firm wrote in an October 29, 2010 article in the Legal Intelligencer entitled Be Prepared: Shareholder Activism is Here to Stay (here), whether under the rules now being considered by the court or some revision thereof, the Dodd-Frank Act, and its focus on shareholder protection and access, ensures shareholder activism is here to stay.

3. Board Declassification: One of the long-standing objectives of corporate governance reformers has been the elimination of classified or staggered boards, whereby directors were elected for three years terms ensuring that in any given year only a third of the directors are up for vote. The Dodd-Frank Act does not have anything to say directly on this issue. Nevertheless reformers, led by the Florida State Board of Administration, have succeeded in obtaining the voluntary agreement of a number of companies to the declassification of their boards, pursuant to which the companies will put their entire board to an annual vote. As one recent commentator noted, the overwhelming trend in corporate governance is toward the declassification of boards. An April 26, 2011 press release from the Florida Board about its efforts can be found here. A May 10, 2011 commentary by Nell Minow on her Risky Business blog about the board declassification efforts can be found here.

4. Majority Voting: Another longstanding goal of corporate governance reformers has been the implantation of majority voting. In many U.S. public companies, director election requires only a plurality vote, so that a director candidate in an uncontested election who receives only one vote will be elected. In a majority vote model, a director in an uncontested election who fails to receive a majority of votes must offer their resignation. As discussed in an April 19, 2011 Westlaw Business article entitled Corporate Governance: Assertive Activist Investors (here), the 2011 proxy season is the culmination of a major drive to install majority voting standards, and shareholders at a number of companies have voted in favor of shareholder proposals calling for majority voting standards.
WHAT IT ACTUALLY MEANS?

1) Heightened Scrutiny: Not all companies are going to give in on executive compensation issues or on board process issues like board declassification and majority voting. (Indeed, there are certainly a number of serious commentators who question the value or even the wisdom of many of these reforms). But while different companies may respond to these developments in different ways, companies that resist these governance developments may face heightened levels of scrutiny, both from shareholders and from the media. A very recent example of this kind of scrutiny involves the Internet media company, LinkedIn, which has recently filed to conduct an initial public offering of its securities. In two interesting but highly critical commentaries on the Deal Book blog, University of Connecticut Law Professor Steven Davidoff takes LinkedIn to task for adopting a governance structure that not only disenfranchises its future shareholders, but contains elements that have been heavily criticized by corporate governance advocates. Among other things, Davidoff criticizes Linked In for its dual share class structure that ensures that the company founders will retain voting control of the company; for adopting a staggered board; and for instituting onerous by law provisions. In referencing Davidoffs critique of LinkedIn here, I am expressing no opinions in whether or not his criticisms are valid or whether LinkedIn fairly may be criticized.

Rather I cite his analysis to show the kind of scrutiny all companies are likely to face if they pursue practices or implement policies that fly in the face of the current trends in corporate governance reform. This level of scrutiny is only likely to increase as other reforms, such as the compensation ratio disclosure requirements, go into effect.

2) Increased Litigation Risk: Companies that resist shareholder driven reform initiatives may not only face scrutiny, but they (or their directors and officers) may also face an increased likelihood of litigation. In a recent post, the apparent trend in which companies who experience a negative say on pay vote may find that they are facing shareholder litigation relating to the companies compensation practices. As noted above, there are others of these current reforms for example, the clawback provisions that could also encourage shareholder litigation.

3) Changing Judicial Attitudes: A very strong principal traditionally informing judicial scrutiny of board processes and decision making has been a broad judicial deference to the boards themselves. With the shift towards greater shareholder empowerment, courts may also be less inclined than perhaps they were in the past to defer to boards. This notion that evolving corporate governance norms may affect judicial consideration of board process and functioning was highlighted in the Chancellor Chandlers August 9, 2005 opinion in the Walt Disney Shareholder Litigation, where Chandler observed that in this era of Enron and WorldCom debacles, and the resulting legislative focus on corporate governance, it is perhaps worth pointing out that the actions (and the failures to act) of the Disney board that gave rise to this lawsuit took place ten years ago, and that applying 21st century notions of best practices in analyzing whether those decisions were actionable would be misplaced. The Chancellors unmistakable implication is that heightened 21st century standards will be applied to 21st century board actions in other words, as corporate governance standards change, boards will be held to standards of conduct reflecting the changed governance norms and expectations. And in an era of growing shareholder

empowerment, that reality may translate into increased judicial expectation for boards to address shareholder initiatives. EXECUTIVE REMUNERATION: Economic Uncertainty continued to impact Remuneration: Challenging economic conditions coupled with ongoing regulatory changes saw companies approach executive remuneration with caution, with only a few companies making changes to the overall framework. While some companies have lifted salary freezes, increase to moderate salary across FTSE 250 and smaller companies. Volatile corporate financial performance resulted in lower levels of bonus and LTI vesting, particularly for smaller companies. 1. Focus on Shareholder Activism: The 2012 AGM session has seen a number of high profile shareholder rejections of company remuneration reports. While media attention has focused on large no votes in FTSE 100 companies, shareholders of several FTSE 250 companies also voiced concerns on remuneration practices. The increase in shareholder opposition and in particular greater media scrutiny on the issue has been linked to growing public concern over the levels of Executive Remuneration in quoted companies and rewards for failure against of backdrop of diminished shareholder returns and job losses for employees at lower levels. Large no votes in 2012 were generally attributed to: Significant increases in CEO remuneration quantum perceived to be misaligned with company financial performance, including excessive maximum annual bonus opportunity. Disconnect between bonus outcomes and returns to shareholders, including the exercise of board discretion to award payments despite key performance indicators not being met. LTI performance targets being perceived as insufficiently stretching Large termination payouts to CEOs despite poor company financial performance

2. Remuneration Governance continued to evolve: The UK Government responded to the Department of Business Innovation and Skills reviews on