Legal Issues of Company Directors Remuneration - Assignment Example

?a) Summarize the law regarding company directors’ remuneration. Company law explains the directors’ remuneration. Although Companies Act 1985 defines many of the provisions about the directors’ remuneration, yet an updated version of directors’ remuneration has been implemented since 2003. This new version is defined as the Directors’ Remuneration Regulations 2002. The purpose of the new regulations is to include some essential elements surfaced in respond to the recent giant collapses such as Enron, WorldCom. Before going to summarize the essential points relating to the directors’ remuneration, it is important to explain the term “remuneration”. But, before that director’s role must be defined. Section 741 of the companies Act (CA) 1985 defines the term director: any person occupying the position of director, by whatever name that position occupying person is called (Corporate and business law (UK), exam kit, 2007/08). Primarily, this definition does not much focus on the definition of the director rather it emphasizes on the function the person performs; this stipulates that whether he is a director or not. Remuneration may include the following benefits received by directors: gains on the exercise of share options; benefits either received or receivable under long-term incentive schemes; payments received for the loss of office (as defined in the section 215); benefits and contributions receivable for the purpose of providing benefits , with respect to the past services of person as director or in any other capacity while director; (legislation.gov.uk, web); consideration paid to or consideration receivable by third parties for making available the services of a person as director or in any other capacity while director. The above given elements amounts to remuneration and benefits received by a director. In addition, grants, credit and advances, salaries and bonuses received or receivable and other benefits received or offered are also included in a package of remuneration given to the director. Contents of directors’ remuneration report 1. The Secretary of State may consider making provision by regulations as to- The information that is needed to be contained in a directors’ remuneration report, What is to be the auditable part of the directors’ remuneration report, How much of information relating to the directors’ remuneration is to be included in the report. Additionally, it is the duty of any director of a company and any other person who is or has at any time in the preceding five years been a director of the company, to bring into the notice of the company of such matters either relating to himself as may be significant for the purposes of regulations under this section. If a person in the above mentioned capacity makes default in complying with these regulatory requirements commits an offence; as a result, he is liable and accountable on summary conviction; as a result, he would be fined for that offence according to the level 3 on the standard scale. Approval and signing of directors’ remuneration report The board of directors is authorised to approve the directors’ remuneration report and this report must be signed on behalf of the board by a director or the secretary of the company (under section 422 (1), chapter 4, Annual accounts, Companies Act 2006(c.46)). In most of the quoted companies, it is the responsibility of the company secretary to sign the directors’ remuneration report. In case, the secretary of the company is not available, any director may be authorised to sign on behalf of the board. If a directors’ remuneration report is approved but it is unable to satisfy the requirements of the Act, every directors of the company commits an offence who knew that the report did not qualify the requirements, or who failed to take appropriate steps to ensure the compliance with the Act requirements. Any person found guilty of an offence under this section will be responsible and may face a legal action provided in the company’s law. Quoted companies: members’ approval of director’s remuneration report A quoted company is defined as a company whose equity share capital has been included in the official list in accordance with the provisions of Part 6 of the Financial Services and Markets Act 2000, or is officially listed in an EEA State, or is admitted to dealing on either the Nasdaq or the New York Stock Exchange (Legislation.gov.uk). Section 439 is consisted of the elements necessary for the members’ approval of director’s remuneration report. A quoted company must send a notice to the members of the quoted company. In the notice, it must be mentioned that during the forthcoming meeting an ordinary resolution would take place relating to the directors’ remuneration report for the financial year. Additionally, the existing directors must ensure that the resolution is put to the vote of the meeting. Section 440 provides a guideline relating to offences in connection with the procedure for approval in the quoted companies. If the resolution is not put to the vote of the accounts meeting, each existing director commits an offence. In the subsequent sub section 440 (3), it is mentioned that a director guilty of an offence under this section is accountable for this action and he is liable on summary conviction to a fine. Many causes have necessitated to the introduction of Companies Act 2006 on the issue of directors’ remuneration. Before the Companies Act, Companies Act 1985 was followed by the companies. in fact, the Companies Act 2006 is the latest version of the Companies Act 1985; amendments and the inclusion of certain matters have been made part of this Act. In the recent history, many companies collapsed such Enron and WorldCom. After the collapses, it was highlighted that the directors in these companies were hugely paid at the cost of the shareholders. They were given 6 digits salaries and huge lucrative bonuses and so on. This situation was revealed by the later investigations carried out on the causes of these collapses. As a result, the Combined Codes and corporate governance practices are introduced. These new practices also require the directors to be more responsible and duly paid for their services rather they be overpaid. Discuss the business ethics of making large payments to a director where company made a loss Answer Business ethics echo in the corridors of the corporate world. Much focus is being given on their application in the business world. This debate and demand for business ethics increases after the collapses of giant multinational companies. In these multinational companies, the directors were hugely paid with benefits. in these companies ,on the one hand, companies were being shown as financially growing, on the other hand, the directors were given huge salaries and highly attractive salaries. When the growth drama reached to its climax, the multi-billion dollar companies imploded as they never existed in the financial world. Ethics are defined as the moral principles of right and wrong. These moral principles are mostly followed in the social interaction. However, business ethics cannot be the same as the motives in the business world are considerably different to those which are practised in the social interactions. In the corporate world, business ethics cannot be simply understood as learning what is right or wrong and then acting upon the right step. Despite simple in their meaning, their practical application is considerably opposite to its conceptual level. If all ethical aspects found in specific cases of honesty or theft, then the dilemma could be resolved quickly by gaining the approval of those involved in the situation (Bakehouse, 2004). Managerial mischief and moral mazes of management are the two broad areas of business ethics (Madsen and Shafritz, 1990). They explain that managerial mischief includes illegal, questionable or unethical practices of organisations or business managers; it also includes causes and remedies of such behaviours. In the second area, various ethical problems such as potential conflicts of interest, improper management of agreements and contracts, and the mismanagement of resources. Enron collapsed in 2001. A multinational energy giant, Enron saw a rapid increase in its share price and in its financial growth in the period of 1999 to 2000. During this period, its share price touched to the mark of $90. On the face of it, Enron looked financially stable and growing company besides being ranked one of the stable corporations in the US. Suddenly, US financial markets shocked when they heard the news about the bankruptcy of Enron in the year of 2001. Many analysts did not believe on the news. Since the corporate perception of the Enron was considerably strong and the investors and shareholders had never thought about it, the news of Enron collapse created panic in the financial markets. What were the causes that hide so much corruption inside the Enron? Many authors have analysed the situation and put most of the blame on the political link. However, there are some authors who believe that it was the role of unethical business practices which were being carried out by the directors of the Enron. For example, they say that in the year of 2001 the compensation for each Enron director was reported by the New York Times as $380,619 in cash and stock, and it was the seventh highest director remuneration in the United States. On the basis of this highly unethical problem, many observers do not disagree that the high compensation of Enron’s directors may have brought the element of compromise in their objectivity in monitoring and evaluating management on behalf of shareholders (Brick et al, 2005). The issue of overpaid directors was also contributed in the collapse of the Enron. A company is owned by the shareholders but run and managed by the directors. Within this context, the directors are the employees of the company. They have fiduciary duty and they are required to be paid according to their performance. If the company is constantly making loss and the directors are not willing to reduce their benefits and remuneration. In this sort of situation, shareholders may find it appropriate either to liquidate the company or replace the existing directors with the new directors who could serve their corporate interests in the most appropriate way. They instead of making loss, bring back the company to a revenue generating entity. Since the company is formed to earn profits, the shareholders may not prefer allowing those directors who are getting benefits at the cost of the shareholders. References 1. Companies Act 2006, [available at: http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf] [ accessed: 8 April, 2011] 2. Definition of quoted companies, [Available at : http://www.legislation.gov.uk/ukpga/2006/46/part/15/chapter/1/crossheading/quoted-and-unquoted-companies/enacted ] [ Accessed: 8 April, 2011] 3. ACCA Exam kit, 2007/2008(UK) Corporate and Business Law, Berkshire, Kaplan. 4. Brick, IE, Palmon, O, Wald, JK, 2005, ‘CEO Compensation, director compensation and firm performance: Evidence of Cronyism? [available at: http://www.concernedshareholders.com/CCS_CorporateCronyism.pdf ][ Accessed: 8 April, 2011] 5. Bake house, G2004, ‘Big Brother, ACCA student Accountant Magazine,[available at: http://www.accaglobal.com/students/student_accountant/archive/2004/48/2191656 ][ Accessed: 8 April, 2011] 6. Madsen, P and Shafritz, J M (eds), 1990, Essentials of Business Ethics, Penguin Books Read More