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Theories of Corporate Governance, Remuneration: The payment packages…

- - - - A manager has an interest in receiving benefits from his or her position in a company, these include all benefits that come from status, such as a company car, use of company plane, a company house or flat, attendance at sponsored sporting events etc
      - A managers incentive to obtain these benefits is higher when they have no shares or only a few shares in the company
      - Eg senior managers may pursue a strategy of growth through acquisitions, in order to gain more power and earn higher remuneration even though take-overs might not be in the best interests of the company and its shareholders
    - - Managers may work less hard than if they were the owners of the company
      - The effect of this lack of effort could be smaller profits and a lower share price
    - - The remuneration of directors and senior managers is often related to the size of the company (measured by annual sales and revenue and value of assets) rather than its profits
      - This gives managers an incentive to increase the size of the company rather than to increase the returns to the company's shareholders
      - Management are more likely to want to reinvest profits in order to expand the company rather than pay out the profits as dividends
      - Companies might invest in capital investment projects where the expected profitability is quite small or propose high-priced takeover bids for other companies in order to build a bigger corporate empire
    - - Shareholders are concerned about the long term financial prospects of their company because the value of their shares depends on expectations for the long-term future
      - Managers might only be interested in the short term, this is partly because they might receive annual bonuses based on short-term performance and partly because they might not expect to eb with the company for more than a few years
  - - - The costs of paying directors and executive management
- - - - It is argued that changes in shareholder structure from direct investment by individual shareholders to wealth invested under management (asset managers, pensions, insurance) has led to what are often referred to as ownerless companies where no single investor has a large enough stake in the company to act as the responsible owner, checking the performance and behaviour of the board and management of the company
      - Even where asset managers, pensions and insurance companies group together under shareholder respresentative bodies such as Investment Management Association and Pensions and Lifetime Savings Association their focus tends to be on issues such as executive pay and board composition rather than the decision making of the board and management team
    - - tendency for company management to take actions that maximise short term earnings and stock prices at the expanse of the shareholders objectives of long term performance
      - A tendency to under-investment whether in physical assets or in intangibles such as product development, employee skills and reputation with customers and as a hyperactive behaviour by executives whose corporate strategy focuses on restructuring, financial re-enginerring or mergers and acquisitions at the expense of developing the fundamental capabilities of the business
      - A report in 2016 found that UK companies were not allocating capital to tackle the major challenges faced by the UK in infrastructure and research and development. Instead companies are choosing to pay out more of their cash to shareholders by way of dividends or share buy back programmes