Corporate Governance and Directors' Remuneration: Views from the Top.

This article summarises the views of 342 company chairmen at London-listed companies of all sizes on issues of corporate governance and directors' remuneration. In the wake of the Hampel Committee Report, the authors used a fax survey to canvass their views on a range of topics including accountability, business prosperity, rewarding non-executives and relations with shareholders. The results of the survey suggest company chairmen are deeply divided on most of these important issues: the authors suggest that policy-makers are right to stick to basic principles rather than detailed prescriptions - and to tread carefully in this minefield. Like the Hampel Committee itself, many company chairman think that the pendulum of regulatory concern may have swung too far in the direction of accountability, to the detriment of company prosperity. Nearly half also thought that increased disclosure requirements had had the effect of ratcheting up directors' pay, rather than moderating increases. The use of external advisors and pay surveys are prevalent - universal in large companies - and the survey chronicles the way in which they are used.

June 1998 saw the publication in the UK of a new "Combined Code" which is to be appended to the Listing Rules of the London Stock Exchange. From December 31 1998, London-listed companies will be required to disclose how they have applied its principles and complied with its provisions. The new Combined Code is the product of the Committee on Corporate Governance, the so-called "Hampel Committee", named after its Chairman, Ronald Hampel, the Chairman of ICI. This Committee produced an interim consultation document in 1997 before its final report early in 1998.

The Combined Code was published after the Hampel Committee report and is the latest in a long line of official statements and codes of "best practice" in many countries urging or requiring directors (and the managers who technically report to them) to adopt this or that mechanism of accountability and control within their companies (see references for recent UK reports). Much has been written both on the extent to which past codes and recommendations have been followed in practice (see eg Conyon and Peck 1997). There is also much evidence, particularly of the anecdotal variety, on what the public and company directors think of the regulation of corporate governance.

The aim of the research reported in this article is to provide up-to-date information which is both coherent and statistically valid on the views of top managers on some of the key issues in the corporate governance debate today. We collected the data at a time when the respondents' minds were particularly focused on these issues - soon after publication of the Hampel Committee report, and while they were preparing their companies to comply with the Combined Code.

As individuals, company chairmen often express views publicly. But what are their collective attitudes on the issues raised by the Hampel Committee report? Do leading directors mostly support or mostly oppose the governance reforms currently underway in UK companies? Do they think the current remuneration arrangements are working or not? Indeed, do they have a coherent view at all as a group - or do they disagree with each other? In short, what do the people who are actually running UK-listed companies think of the governance and remuneration arrangements which so exercise the public and the politicians - and what does this mean for the direction and effectiveness of policy?

We use survey data to report the views of 342 company chairmen, and chairmen of remuneration committees. This data is supplemented by comments and observations from a smaller number of nonexecutive directors collected separately by Price Waterhouse Coopers and forming part of ongoing collaborative research into board effectiveness. Our analysis probes seven related issues.

* Accountability and firms' prosperity

Several best practice reports have been produced in recent years on issues of accountability and control in listed companies. Do chairmen think that the right balance has been struck in the corporate governance debate?

* Executive pay

This important aspect of corporate governance shapes the incentives for management to promote shareholders' interests. Do chairmen think that the recent increase in disclosure has moderated executive pay increases or ratcheted them upwards?

* Role of remuneration committees

The main vehicle by which directors' pay is set in most companies is a remuneration or compensation committee. What status should this committee have? Should it determine the pay of executive directors? Or should it simply recommend decisions to the main board?

* Input to remuneration committees

The effectiveness of a remuneration committee depends on the quality of information it receives both from inside the firm and from professional advisors outside the firm. Do remuneration committees need more access to internal advice to enhance their effectiveness?

* Pay of non-executive directors

The method of paying non-executive directors has received …