Recent Improvements in Corporate Governance through Executive Compensation Reform

Abstract

There have been a lot of criticism on excessive executive compensation paid to high ranking corporate executives in poorly performed financial institutions amid recent financial crisis and global economic crisis. These criticisms can be tracked to Enron scandals in early stage of this century. In order to establish reasonable executive compensation system, U.S. has utilized SEC disclosure rules, IRS tax code and SOX clawback provision, however, these regulatory methods have revealed their inherent limitations in regulating compensation system effectively. From this perspective, many critics have stressed that there should be more fundamental reform methods, such as director reform and the adoption of Say-on-Pay system.In the same context, EESA and ARRA implemented corporate governance and executive compensation provisions in order to effectively regulated U.S. companies' compensation manipulation. The focus on this area is placed on the corporate governance reform in which corporate governance problems, including executive compensation, might be more effectively cured through this reform methods.Recent debates on this issue provide us with useful implications. As widely recognized, Korean compensation system does not mandate detailed compensation disclosure system regarding corporate executives/directors. Fair and transparent compensation system is essential elements in order to improve shareholders' and investors' value. Although corporate executives have rejected such a disclosure system on the ground of the protection of private information, we should note that these information be essential for investors as an important investment information.Furthermore, we should implement certain regulatory method to curtail influences by controlling shareholders and CEO on compensation setting process. Under the current provision of KCC, director compensation must be approved by shareholders in annual shareholder meeting. However, in practice, the direction of a shareholder meeting can be influenced by controlling shareholders. From this perspective, current reforming efforts of U.S. and Europena Countries provide us with useful implications.