Essay on Corporate Governance

Submitted By narae0810
Words: 644
Pages: 3

Although Corporate Governance consists of many key aspects of each functions, it is certain to say Compensation Committee is one of the most significant, and, yet, controversial aspect of corporate governance issue. Just as the corporate governance evolves more deeply with the society, compensation committee has evolved in such way that it became highly focused issue of a company, thus highlighting many of its critical best practices. In general, the key aspect and best practices of compensation committee includes oversight and alignments in businesses operation and compensation. Such alignment includes relationship between the financial compensation of key individuals with implemented business strategy. Specifically, aligning the financial interests of executives to shareholders, aligning performance with resulted compensation, and also comparing and aligning compensation of executives with other executives of similarly situated businesses. The ultimate goal of its best practices focus on balancing the compensation and its appropriately analyzed performance base. Resulting from above, the trend of compensation committee became more readable and explicit with foundation of rising guidelines and governmental acts such as Dodd-Frank Act and new issuances of SEC. Such guidelines as Dodd-Frank Act and new issuances of SEC evidently developed many best practices of compensation committee. These best practices include additions of Say on Pay, Say on Golden Parachutes from Dodd-Frank Act, and other enactments such as Pay for Performance Disclosures, Pay Ratio Disclosures, Clawbacks, and etc. The Dodd Frank Act was passed in July, 2010 in attempts to make significant changes to financial regulations not only to impact the federal financial agencies but every aspects of financial service industry in Nation. The Say on Pay was one of the most critical aspect of Dodd Frank which allowed shareholder to vote on compensation given to executives. Before Say on Pay, directors had authority to assign compensations for each executive which inevitably created conflict of interest. This conflicts with emphasized responsibility of directors of fiduciary duty to protect corporation and shareholders. By enforcing the Say on Pay, the agency problem or the conflict of interest was to be diminished or controlled by the implementation. Secondly, Say on Golden Parachute was imposed as a result of Dodd Frank Act. The Say on Golden Parachute proposed more specific and proper disclosure is required such "Golden Parachute" compensations resulting in activities such as merger, acquisition, consolidation, and more. The term Golden Parachute was originally used on situations described above (change in ownership), but in recent context, the term more specifically directs to concerns towards unreasonable and severance compensation unrelated…