Week 4: This Week Is Based On Three Readings On Good Governa

Week 4this Week Is Based On Three Readings Is Good Governance Good Fo

This week is based on three readings: "Is Good Governance Good for Business?", "The Worst Board in the Country," and "How Much Executives Should Be Compensated and Who Should Decide." Students are instructed to read, discuss, and analyze these materials.

Question: Who should decide how much CEOs are compensated? Should CFOs sit on the Board?

Paper For Above instruction

Corporate governance plays a pivotal role in shaping the effectiveness and fairness of executive compensation and board composition. One of the central debates revolves around who should determine CEO compensation. Traditionally, the compensation committee, composed predominantly of independent directors, is tasked with setting executive pay. However, given the influence of boards and the increasing complexity of executive compensation, there is a growing argument that external factors and stakeholders should have a more significant say.

The question of who should decide CEO compensation involves multiple perspectives. Proponents of internal decision-making argue that the board of directors, and specifically the compensation committee, are best equipped to align executive pay with corporate performance. Independent directors are expected to oversee executive remuneration objectively, ensuring that pay packages motivate long-term shareholder value without encouraging excessive risk-taking (Murphy, 2012). This approach emphasizes the fiduciary responsibility of the board to act in the best interests of shareholders and the company.

Conversely, critics suggest that reliance solely on internal boards can lead to conflicts of interest, with directors potentially influenced by personal or corporate relationships. This concern has been heightened by scandals involving excessive executive pay and misaligned incentives (Bebchuk & Fried, 2004). As a result, some advocate for greater stakeholder involvement, including shareholders, institutional investors, or regulatory bodies, in deciding executive compensation to enhance transparency and accountability (Hansmann & Ravid, 2014).

Incorporating external input may improve fairness and objectivity but also risks undermining corporate autonomy and nuanced understanding of internal company circumstances. Therefore, a balanced approach might involve a combination of internal governance and external oversight, where the board sets preliminary pay structures, and shareholders or independent review panels provide input or approval for the final decisions.

The debate over whether CFOs should sit on the board of directors is similarly complex. CFOs possess comprehensive knowledge of the company's financial health and strategic direction. Their insights can enhance board decision-making, especially regarding financial issues, risk management, and strategic planning (Cohan, 2009). However, conflicts may arise if CFOs serve as directors while also being part of the executive management team, potentially compromising their independence.

Advocates for CFOs on boards argue that their financial expertise increases the board’s effectiveness, especially during financial crises or complex transactions (Lin & Patrick, 2020). On the other hand, critics contend that CFOs who are also executive managers may lack the independence necessary to objectively challenge CEO decisions or oversee management effectively, which is crucial for good governance (Daily et al., 2003).

Much depends on the governance structure and the specific roles assigned to CFOs. Some organizations opt for CFOs as non-voting members or invite them as advisors, thereby gaining their expertise while maintaining a degree of independence. Others choose to exclude CFOs from the board to preserve objectivity and prevent conflicts of interest (Finkelstein & Mooney, 2003). Ultimately, the decision should consider the company's size, complexity, and governance culture.

The readings highlight that effective governance requires transparency, accountability, and balanced power. Whether deciding CEO compensation or determining CFO board membership, the key is to foster governance practices that prioritize long-term corporate health over short-term gains. Engaging external stakeholders, ensuring independence in oversight, and aligning executive incentives with shareholder interests are vital components of a well-governed organization.

References

• Bebchuk, L. A., & Fried, J. M. (2004). Pay without performance: The unfulfilled promise of executive compensation. Harvard University Press.
• Cohan, P. (2009). Money and Power: How Goldman Sachs Came to Rule the World. Vintage.
• Finkelstein, S., & Mooney, A. (2003). Not the usual suspects: How to use board process to make boards better. Academy of Management Executive, 17(2), 101-111.
• Hansmann, R., & Ravid, S. A. (2014). The role of compensation committees in corporate governance. Corporate Governance: An International Review, 22(4), 283-295.
• Lin, C., & Patrick, V. (2020). Financial expertise of CFOs and organizational performance. Journal of Corporate Finance, 62, 101583.
• Murphy, K. J. (2012). Executive compensation: Overview and countries comparisons. In G. C. Plesko & G. M. Walker (Eds.), The Oxford Handbook of Corporate Governance.