The Effectiveness and Remuneration of the Board of Directors. A Critical Analysis of the Corporate Governance Codes in the UK and Germany

Term Paper (Advanced seminar), 2016

29 Pages, Grade: 80%


Table of Content

List of Abbreviations

List of Diagrams

List of Tables

1. Introduction

2. Development of the two main principles in the UK
2.1 Principle development
2.2 Assessment after the financial crisis
2.3 Critical evaluation of Barclay’s board of directors

3. Development of the two main principles in Germany
3.1 Principle development
3.2 Assessment after the financial crisis
3.3 Critical evaluation of Deutsche Bank’s board

4. Conclusion

5. Appendices

6. References

List of Abbreviations

illustration not visible in this excerpt

List of Diagrams

Diagram 1: Total executive compensation BCS

Diagram 2: Board structure

Diagram 3: Development of CG Germany

Diagram 4: Company structure DB

Diagram 5: Total executive compensation

Diagram 6: Ratio of women in management positions DB

List of Tables

Table 1: CG development UK

Table 2: Assessment of E&R in BCS

Table 3: Boards remuneration BCS

Table 4: Performance related remuneration component BCS’s board

Table 5: CG factor development Germany

Table 6: Assessment of E&R in DB

Table 7: Comparison board remuneration DB –

Table 8: Performance related remuneration component DBs board

Table 9: Comparison of UK and German CG

Table 10: Employee pay

Table 11: Remuneration Policy

Table 12: Time commitment BCS

1. Introduction

Corporate governance in the UK and Germany has shown a strong development within the last 30 years. Especially after the financial crisis in 2008 significant demand for sustainable CG arose. Generally, it could be said that “the purpose of CG is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.” (FRC, 2014). The UK Corporate Governance Code, a set of standards defining good CG practise, addresses listed companies in the UK. The first version of the code was produced in 1992 by the Cadbury Committee in order to move business forward and a revised version has been issued in September 2014 by the FRC, which is responsible to draw up the UK CG.

Besides the “comply or explain” approach, which is the trademark of the UK CGC, there are five main principles of the code:

1. Leadership: defining how a company should be ran, led by an effective board pursuing the key objective of long-term success (FRC, 2014 , p. 7-9).
2. Effectiveness: setting the board and its committees required skills and experiences in order to act effectively (FRC, 2014 , p. 10-15).
3. Accountability: defining how the board should ensure a true and fair view of the companies positions (FRC, 2014 , p. 16-19).
4. Remuneration: stating that that the level of awards must be sufficient to attract, motivate, retain but most not be excessive (FRC, 2014, p. 20-21).
5. Relations with Shareholders: defining the boards responsibility to ensure a dialogue with the shareholder (FRC, 2014, p. 22-23).

The following report aims to compare and contrast the development of the principles effectiveness and remuneration in the UK and Germany. Firstly, characteristic factors of the two principles are worked out, their development in the UK is analysed and underlined by a critical evaluation of the role and responsibilities of ED and NEDs in Barclays. In a second step, the development of the carved factors in Germany is assessed and underlined by a critical analysis of the board’s role and responsibilities in Deutsche Bank. At last a brief conclusion is given.

2. Development of the two main principles in the UK

2.1 Principle development

The discussion about the right composition of companies’ boards has already started in the early 1990s (Davis and Kay, 1990; Edward Freeman and Evan, 1990). The proper start of the “revolution” of the UK CGC could be seen in the Cadbury Report (1992), reviewing the structure, outlining the need for effectiveness in boards of directors in listed companies and redefining the responsibilities of the company’s directors (Solomon, 2013, p. 77-78). Although the Cadbury report included some aspects of directors remuneration, rather the Greenbury Report (1995) set the main principles of determining directors’ remuneration, by addressing the importance of an independent remuneration committee and disclosure polices (Hughes, 1996; Solomon, 2013, p. 98).

Besides, numerous further academics picked up factors of effectiveness and remuneration and addressed their importance for successful CG in the UK (see table 1).

illustration not visible in this excerpt

Table 1: CG-development-UK-(Own-illustration-based-on-mentioned-authors-and-Solomon, 2013, p. 98)

Higgs addressed remuneration, internal control and compliance. He linked two essential CG mechanisms, the role of NED and institutional investors to reduce asymmetric information and bounded rationality as argued by the TCE-theory (Williamson, 1979). Moreover, proposals of providing shareholders with the right to vote on directors remuneration have been made in order to guarantee the mutual understanding of the companies objectives and to take fiduciary responsibility (Company Act, 2006; Solomon, 2013, p. 103). Donaldson & Davies (1994) addressed the agency theory and argued that splitting CEO and Chairman in UK boards could significantly reduce agency costs and avoid conflicts of interest.

However, Garrett (1996) argued that boards still spent too much time “managing” (being professional managers) instead of “directing” (showing the way). Moreover, Carpenter and Sanders (2002 ) addressed the missing link between CEO pay and company performance and Main and Johnston (1993) state that remuneration committees seem to have no positive impact on the incentive structure of remuneration. Therefore, the following section aims to analyse the success of the developed CG principles.

2.2 Assessment after the financial crisis

Although numerous principles had been developed, the attention paid to CG was still minor and only the global financial crisis caught real attention on the weaknesses of boards (Solomon, 2013, p. 77-78). The codes were still rather seen as a practical guide and light-hearted approach to define the key characteristics of board’s effectiveness (Carey, 2004). According to Walker (2009) deficiencies in NED role contributed to the global financial crisis which coincides with a survey published by Pugliese et al. (2009) showing that there is little consensus how boards contribute to corporate strategy. The ACCA published a report, sharing the idea of the Walker Review (2009), that companies’ boards need both ED and NEDs (ACCA, 2008, principle 5) to achieve effectiveness. In addition, a number of studies on women in boards has been conducted and showed that board diversity improves the company’s effectiveness (Cater et al., 2007; McKinsey & Company, 2007). Wilson and Altanlar (2009) underline these findings and argue that it is due to their higher risk aversion.

In 2008, more specific reports addressing R&E of CG in large UK financial institutions (such as banks) have been published. E.g. Walker defined a clear commitment of at least 30-36 days of directors. Moreover, shareholders have demonstrated their discontent with excessive remuneration (Cookson and O'Doherty, 2009) since it could be linked with “bad” CG (Core et al., 1999; Lambert et al., 1993). The ACCA published a report demanding not to create wrong incentives to board members through excessive remuneration (ACCA, 2008, Principle 8). The Turner Review (2009) highlighted the crucial need to establish effective remuneration structures, which do not over-incentivise risk-taking (Ashby and Waite, 2009). The necessity for further regulation was also picked up by the High Pay Commission (2011), setting the requirement for more diverse remuneration committees and a link of performance-related payment to the long-term success of companies. In addition, more and more institutional investors participated in the discussion of remuneration e.g. for Barclays, Citigroup, UBS in 2012 (Solomon, 2013, p. 103).

Concerning the relation of board structure and financial risk, the ACCA published a study on companies around the Walker Review (2009), stating that some companies indeed achieve a lower risk through a smaller board (>8 directors), whereas there are still entities with a higher risk due to a higher proportion of EDs than NEDs ( ACCA, 2012).

Cardinaels (2009) and Peetz (2015) picked up former studies of Higgs (2003) on excessive remuneration by creating the link of CEOs receiving a higher remuneration if the SB is less qualified, higher paid and less diversified. The FRC highlighted the importance of a formal, rigorous and transparent procedure for the appointment of new directors to the board” (FRC, 2014, p. 10) . This coincides with Dahya et al. (2002) proving in a study on UK companies around the Cadbury Report of that a higher turnover of the top management is statistically related to poorer financial performance. Moxey and Berendt (2008) called to pay more attention to qualified NEDs, training and recommended to create specific risk committees.

As shown by recent studies rather large firms link the top-management remuneration to performance (Cybinski and Windsor, 2013). The study of Hartzell and Starks (2003) as well as Resnik (2015) show, that a higher concentration of institutional owners leads to a lower level of compensation. However, Emerald (2013) calls to pay more attention to shareholders since they are not necessarily one group sharing the same interests. This coincides with the more recent studies of Drymioted and Sivaramakrishnan (2012) , Mangen and Magnan (2012) and Sweeney (2012) calling for tighter CG and outlining the benefits in companies.

Although the importance of diversity within boards is highlighted in literature (Bøhren and Strøm, 2010), according to (Goh and Gupta, 2015), conducting a recent study on NED remuneration in the UK, boards are rather homogenous with a relatively little share of females and a huge gender gap in remuneration. Moreover, their findings show a negative relation between director independence, which could indicate agency considerations since effective monitors of top management are paid less.

The studies of Jennings and Marques (2011) demonstrate a link between effectiveness and regulation, furthermore Sur (2014) shows that effectiveness can be measured by models. This coincides with a study of (Gonzalez and André, 2014) on 916 UK firms from 1992-2010 analysing the relationship between board effectiveness and short term systematic risk Besides, Main et al. (1996) proved a link between company performance and remuneration due to performance-sensitive remuneration packages, which reduces the principal-agent problems by bringing together the interests of the two utility-maximisers (shareholders and management). Moreover, Pass (2003) demonstrated with a study on 51 large UK entities from 1994-2001 that the LTIPs to reward EDs are undemanding rewarding average rather than exceptional performance. By contrast, Deschenes et al. (2015) criticise that empirical studies show that there is indeed a link between company size and CEO remuneration (Elston and Goldberg, 2003) but not between performance and top-management compensation. Moreover, they outline that SB factoring director independence, longer tenures and variable remuneration are most likely to work as a good counterbalance to the top-management.

Since CG is still highly discussed in literature (Curran and Totten, 2010), an analysis of Barclays board of directors is conducted in the following chapter in order to assess the more recent effectiveness of the codes.

2.3 Critical evaluation of Barclay’s board of directors

Barclays plc is listed on the LSE, has American depository receipts on the NYSE and is therefore generally subject to both the UK and US CGC. However, the NYSE’s CG rules exempt Barclays from the obligation to apply US CG rules through compiling with the UK CGC (Barclays, 2014).

The following table aims to apply the factors outlined in the previous chapters to Barclays and critically evaluate the role and responsibilities of EDs and NEDs.

illustration not visible in this excerpt

Table 2: Assessment-of-E&R-in-BCS-(Own-illustration)

As demonstrated in the table above, Barclays has made significant efforts to comply with the UK CG requirements for an effective board.

The aim of Barclays, as stated in the remuneration report to “maximise long term value for shareholders by ensuring that we do not pay more than is necessary while remaining competitive”, suggests that the company indeed changed its structures. Barclays, like other banks, requests its shareholders to vote at the AGM on bonuses (max. 200% of salary) for staff (Barclays plc, 2014).


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The Effectiveness and Remuneration of the Board of Directors. A Critical Analysis of the Corporate Governance Codes in the UK and Germany
University of South Wales
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effectiveness, remuneration, board, directors, critical, analysis, corporate, governance, codes, germany
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Marvin Müller (Author), 2016, The Effectiveness and Remuneration of the Board of Directors. A Critical Analysis of the Corporate Governance Codes in the UK and Germany, Munich, GRIN Verlag,


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