Enhancing Firm Sustainability Through Governance

Enhancing Firm Sustainability Through Governance

The Relational Corporate Governance Approach

Corporations, Globalisation and the Law series

Francesco de Zwart

This important book presents a fresh perspective on corporate governance and how the relationship between governance mechanisms, processes and variables should be understood through a new unifying theory: the relational corporate governance approach. The approach acts as a tool for analysing the governance health of individual companies and suggests the actions required to remedy sub-optimal governance arrangements. A wide selection of articles, empirical studies and literature have been translated into an original theory which complements existing law and economics models of the firm.

Chapter 10: Empirical studies Key Field No 4 (Part 4): ‘Good’ corporate governance and director, CEO and management compensation

Francesco de Zwart

Subjects: business and management, corporate governance, international business, law - academic, corporate law and governance


The design, structure (including performance, incentives and shareholder ‘say-on-pay’) and development of director, CEO and management compensation was highlighted in the era of the GFC and continues today. The examination of the consequent effect on agency costs and firm governance of the compensation variable has been undertaken by commentators including, notably, Professor Bebchuk and Professor Hill. In the relational approach, Chapter 10 highlights areas or studies of particular relevance to director, CEO and executive compensation and incentives in the context of the Enron corporate collapse discussed in Chapter 5. In Chapter 5, the compensation and incentives variables were examined by a review of aspects of the undermining of director independence and the risk management function by equity holdings and share options and the use of ‘off-balance sheet’ entities to mask debt and executive payments. Attention will also refocus on the effect of CEO, executive and director compensation and incentives on the practice of earnings management by Enron including the effects of short-term share options.

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