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ACCA has invested considerable effort over the last year investigating the phenomenon known as the credit crisis. Many column inches and an increasing 'commentariat' have forced us to understand and come to terms with a new vocabulary and many new acronyms.

One of the key issues on which all commentators on the crisis seem to agree is that something has gone seriously wrong with remuneration and incentivisation packages for senior figures within the banking world. It seems that their design has become too closely linked to short-term, relatively easy to manipulate financial metrics. The traders of derivatives want to be able to 'book' profits immediately in order to have them recognised straightaway in the employers' accounts and, thus, in the bonuses that they are awarded that year.

In this respect ACCA has advocated that performance bonuses be related more closely to long-term financial performance and, importantly, to movements in cash flow, rather than profitability. This would at least give some comfort to the owners of banking stock that rewards are not paid out until proceeds have been banked.

But there are more fundamental and worrying trends occurring in the world of corporate governance in the Anglophone world's largest listed companies - sometimes positively occurring as a result of following recommended practice. And they are having a deleterious effect on the boards of directors of those organisations.

First, there is an overall increase in the number of non-executive directors (NEDs). The rationale for this increase is the important, independent, critical insight that such a role can fulfil. As business models become more complex - and nowhere have they become more complex than in the investment banking world - it is claimed that a fresh pair of eyes is vital to the health of the organisation. The problem is that complexity, combined with quantum leaps in computing technology, has made understanding the investment bank business model incomprehensible to all but the most dedicated insider. Those who sell computer hardware to such institutions are aware that 'performance per watt' is a key selling point, as the billions of calculations made daily come up against the energy and air conditioning infrastructure of the IT facility.

Secondly, there do not appear to be enough chairmen around to chair the boards of the world's largest listed companies. This is the only conclusion that can be reached from recent amendments to the Combined Code, which suggest that a chairman of a listed company in the UK may take on the chairmanship of more than one such corporation.

Both of these changes are undermining the traditional stability of the board of directors. Around the table are fewer people with insight into the increasingly complex business model and scale of some of the world's largest corporations.

But perhaps the most worrying trend of all is the increasing fetishisation of the role of chief executive. The business world has always adopted a cult of personality when it comes to considering the individuals who fill this role. There is burgeoning literature on leadership featuring machismo images of these great and good, mainly male, characters.

However, it is when one considers the trend in chief executive remuneration that one realises how dysfunctional things have become. A recent report on Executive Director Total Remuneration [1] contains some eye-watering statistics. The survey found, for example that from 1998 to 2007 the average FTSE 100 CEO salary rose 78% (c.7% p.a. compound) while total remuneration increased 287% (c.16% p.a. compound). In the same period, average UK earnings went up 47%, retail prices by 27% and the FTSE 100 index by just 15%. Directors did significantly better than shareholders and employees over the last decade. It is of course harder to establish the remuneration of other senior staff since it is not in the public domain. What the survey did establish, however, is that the gap between the chief executive's remuneration and that of his fellow board members has also been widening significantly over the same period.

All of which suggests we need to revisit some of the fundamentals of corporate governance as it is experienced in Anglophone cultures. A first step in that process would be evaluating the experience in other non-Anglophone jurisdictions. And indeed, considering other forms of ownership and management such as that found at the John Lewis Partnership in the UK, or the two-tier board model that exists in Germany.

What's your opinion?

Can there ever be an international standard for corporate governance? And can the incentivisation packages of the most senior leaders of listed corporations ever be designed to align the interests of shareholders, corporations, directors and employees?

Click here to join our online debate

Reference
1. The Executive Director Total Remuneration Survey May 2008, MM&K Limited, in association with Manifest.

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