Study On Legal Regulation Of Executive Compensation In Listed Companies

As one of the core issues of corporate governance, executive compensation hasalways been a focus of concern. While study the history of corporate governance, itcould be found that the rapid growth of executive compensation was one of theprimary causes of modern corporate governance movement in the UK in1990s.Nowadays, not only the problems of executive compensation have remained largelyunsolved, but have even become much worse. Since the2007subprime crisis, theextremely high compensation of executives in financial firms has become thebull's-eye of public criticism, and the current executive compensation practice inpublic companies has also been widely questioned and criticized. In this context, thevoices advocating for enhancing legal regulation of executive compensation areincreasingly rising. Compared with the executive compensation level in the U.S. listedcompanies, which amounts to millions of dollars, the current average executivecompensation level in China's listed companies is still far from "excess", but there arealso many other similar problems with China's current executive compensationpractice, and the solutions to these problems will largely depend on the effective legalregulation. Therefore, this dissertation chooses "legal regulation of executivecompensation in listed companies" as its object of study, by combining current corporate governance practice with legal regulation and drawing on the advancedlegislative experience of the U.S., rethinks the related regulations in China and givessome legal suggestions. In addition to the "foreword" and "conclusion", thisdissertation is divided into6chapters. The context of each chapter is as following:Chapter1: Overview of Regulation of Executive Compensation in ListedCompanies. This chapter starts with the definitions of core concepts of this study,including executive, executive compensation, and regulation. Since executiveincentive is the logical starting point for executive compensation study, this chapterthen discusses the emergence of executive incentive issue in modern corporations, andanalyzes the necessity of executive incentive. Actually, the regulation of executivecompensation is not merely a legal issue, and it involves a series of practical issues,such as whether the law should intervene in the executive compensation issues? If theintervention is necessary, in what way would it be effective? If legal regulation is theeffective method of intervention, what would be the proper extent and content of theregulation? The answers to the above questions would greatly depend on theexecutive compensation practice. Therefore, this chapter further discusses thehistorical development and current state of executive compensation practiceon both the domestic and international fronts, on the basis of analyzing the problemsin executive compensation incentive mechanism in China, gives a discussion on thepractical demand for regulation of executive compensation.Chapter2: Autonomy and Regulation of Executive Compensation in ListedCompanies. This chapter focuses on the interactive relationship between autonomyand regulation of executive compensation in listed companies. By analyzing theinherent weaknesses of the internal supervision mechanism under corporate law aswell as the external regulation's supplementary function in coping with theseweaknesses under economic law, this chapter discusses the interaction betweencorporate law and economic law on executive compensation issues. Though the aboveanalysis generally reveals the justification of legal regulation of executivecompensation in listed companies, the external regulation also has its limitations andcould not replace the basic role which internal supervision mechanism plays, therefore, external regulation is required to coordinate with internal supervision while it playsthe supplementary role. In this sense, the legal regulation of executive compensationin listed companies should also have its own limits. Accordingly, this chapter providesa further discussion on the extent of regulation of executive compensation. Basis onthis discussion, this chapter points out that: on the one hand, since executivecompensation is an internal affair of a corporation in essence, no legal regulationsshould place any limits on specific contents, such as amount, structure, of executivecompensation arrangements; on the other, in order to correct failure of the incentivemechanism, legal regulations should focus on enhancing the independence ofexecutive compensation decision-making process and the transparency of the relatedinformation.Chapter3: The Theoretical Basis for Legal Regulation of ExecutiveCompensation in Listed Companies. The undue influence over their compensationarrangements by the executives has been a focus of criticism. Especially after LucianA. Bebchuk and Jesse M. Fried's managerial power theory, how the executivecompensation is influenced by the executives becomes an important dimension ofexecutive compensation study. Thus, basing on the managerial power approach, thischapter reviews the optimal contracting theory and analyzes the current executivecompensation practices, by discussing the defects in corporate governance whichcause the executive compensation problems as well as the limits of various marketforces and constraints that act on these practices, reveals the necessity of regulatingexecutive compensation in listed companies. It should be noted that the root causesand characteristics of managerial power may vary due to different economic bases,legal systems and corporate governance models. Clarifying these related issues woulddefinitely contribute to the localization of overseas experience. Accordingly, thischapter follows a complete analysis of the managerial power in China's listedcompanies, which includes: the emergence and causes of managerial power in China'slisted companies, the manifestations of managerial power in China's listed companies,and managerial power's influence over executive compensation in China's listedcompanies. Chapter4: Legal Regulation of Compensation Committees of Listed Companies.Regulating the compensation committees of listed companies is an important measureto reduce the undue influence over executive compensation decision-making processby executives, and helps to enhance the independence and effectiveness of theexecutive compensation decisions. In the U.S., the compensation committees aremainly regulated by the self-regulatory organizations, such as New York StockExchange ("NYSE"), NASDAQ, and therefore this chapter would begin with theself-regulatory rules of NYSE and NASDAQ. Generally, both NYSE and NASDAQregulate the compensation committees by standardizing the establishment of thecompensation committees, strengthening the independence of the compensationcommittee members, and imposing disclosure obligations on compensationcommittees. Since compensation committees are the principal decision-makers withrespect to executive compensation, the above measures would undoubtedly makegreat contributions to develop an independent and objective compensationdecision-making process, thereby effectively regulating the executive compensation.After studying the U.S. experience, by analyzing the rules on compensationcommittees and current state of compensation committees in China, this chapter thenrethinks China's legal regulations of compensation committees of listed companies.On the basis of drawing on the advanced legislative experience of the U.S., it givessome legal suggestions on regulating the compensation committees of China's listedcompanies. Specifically, the improved regulations should at least cover followingaspects: the purpose of compensation committee, the organization and operation ofcompensation committee, meeting requirements of compensation committee,obligations of compensation committee, the assessment of compensation committee'sperformance, and the nomination of compensation committee members.Chapter5: Legal Regulation of Executive Compensation Disclosure. Disclosurehas always been a traditional measure to regulate executive compensation in listedcompanies. The regulation of executive compensation disclosure is mainlyimplemented through the disclosure rules promulgated by theSecurities and Exchange Commission ("SEC") in the U.S. Among all the SEC rules, the2006revised executive compensation disclosure rules are by far the mostimproved, and thus with respect to the U.S. law, the analysis of this chapter wouldfocus on2006disclosure rules. Although there are also some shortcomings in2006disclosure rules, the rules have improved the readability and transparency of executivecompensation information, and have provided a solid base for shareholder's internalsupervision over executive compensation in listed companies. But, in contrast, thecurrent provisions of executive compensation disclosure in China are too general andfar from developed, which causes many problems to China's current disclosurepractice, such as scattered executive compensation information,monotonous disclosure mode, inadequate disclosure of compensation structureinformation, lack of information about compensation committee, no disclosurerequirements on the relationship between executive compensation and performance.Therefore, after discussing the problems mentioned above, this chapter concludes thatit is necessary for China to learn from the U.S. executive compensation disclosurelegislations, and proposes that China should improve the relevant regulations byamending the disclosure mode, broadening the scope of information disclosed, andenhancing the transparency of compensation committee's decision-making process.Chapter6: New Legislation Developments in Regulating ExecutiveCompensation in the U.S. after the Subprime Crisis and Their Inspiration to China. Inresponse to the subprime crisis of2007-2008, the U.S. Congress passed "TheDodd-Frank Wall Street Reform and Consumer Protection Act of2010("the Act").Most of the Act deals with financial regulation. Several provisions of the Act,however, impose new corporate governance regulations not just on Wall Street firmsbut also on all Main Street public corporations. Besides the new requirements oncompensation committee independence and executive compensation disclosure, theAct creates a so-called "say on pay" mandate, requiring periodic shareholder advisoryvotes on executive compensation, and expands Sarbanes-Oxley Act's rules regardingclawback of executive compensation to regulate the executive compensation in listedcompanies. This chapter will introduces and discusses the say on pay andcompensation clawback provisions respectively, and basing on the corporate governance practice in China, gives a specific analysis on their inspiration to China.In brief, while the special ownership structure and securities market environment aretaken into account, say on pay may not be useful in China, thus it should not beintroduced currently. On the other side, since the clawback of improper executivecompensation helps to constrain the executive's behaviors and contributes to developa reasonable incentive mechanism, China could establish its own clawbackrequirements to improve the regulation of executive compensation.