Elgar Financial Law series
Chapter 2: An analysis of the role of executive compensation
As referred to briefly in the introductory chapter, it is common for market prices to be used as a reference point for calculating executive compensation. Regulatory and legal provisions in Anglo-American markets are based on the view that the market is efficient, and that market prices capture true value, even in the short term. This view of the efficiency of the market has been a central axiom of corporate regulation for more than 50 years, and is explicitly recognised in much legislation. Whilst recent events in financial markets have demonstrated some of the fallibilities of these views, the notion that prices convey fundamental value remains a powerful assumption. Moreover, there are strong political and economic traditions at play. In the US, in particular, the regulation of private contractual bargaining is frowned upon: there is a generally held view that the market should be left to regulate the conduct of participants and, thereby, corporations, and their employees. The private sector is trusted to deliver superior competitive efficiencies, which ought to translate into greater total accumulated wealth, and increased economic prosperity. On this basis, progressively more politically conservative governments on each side of the Atlantic have rolled back government regulation and replaced it with privatisation of regulation and market-driven codes to regulate behavioural standards and free economic actors from so-called ‘excessive’ regulation.
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