Corporate Governance Principles: Imperative Business Essay

Question:

Describe about the Corporate Governance Principles for Imperative Business.

Answer:

Relevance of Article

The given article has immense relevance when viewed under ASX Principle 8 as per which it is imperative to compensate the directors in a fair and responsible manner. One of the key aspects of the remuneration policy is that it should ensure growth of the firm in the short term and long term. Also, while a fair remuneration is required to retain and motivate talent but simultaneously, it is imperative that excessive remuneration must not be given. Also, the remuneration of the senior executives and management should be decided by the remuneration committee which must not have any interference from the executive directors (ASX, 2014),

However, in the given case, the above principle has been violated. This is apparent from the fact that the company Mylan has put in an incentive package for executives which is very aggressive and clearly is detrimental to the long term interests of the company. This is because the executives are meeting their target by steeply increasing the price of one drug i.e. Epipen Due to steep price increase, it is apparent that its sales in the long term would be adversely impacted and hence the company’s profitability would dip. Also, this case is an example of excessive compensation being doled out to executives which is apparent from the staggering figure of $ 82 million to only five executives of the company (Snider, 2016). Further, it seems unlikely that the company had a remuneration committee manned by non-executive directors as it is unlikely that such bonus plans would be framed by such a committee (Neokleous, 2013). Hence, it is apparent that while the variable component of compensation which is performance linked is imperative but the same should be within reasonable limits and linked to realistic performance targets (Talha, 2009).

Personal Reflection

The most significant aspect of the unit on corporate governance for me was the role of non-executive directors or independent directors, They play a key regulating role in various committees such a nomination committee, audit committee but undoubtedly their greatest role is with regards to remuneration committee (E&Y, nd).The responsibility of remuneration if given in the hands of the executive directors could play havoc as they would essentially be driven by the short term interests and try to maximise their performance linked bonuses. The independent directors play a critical role in safeguarding the interest of shareholders by acting as a check to the unfettered powers of the executive directors (Popli & Popli, 2015).

I was earlier working for this large family business in the construction space. Due to lack of adherence to sound corporate government principles, the independent directors only had namesake value and their integrity was compromised. As a result, the executives tend to misuse the available powers to draw heavy compensation from the company by linking it to various ambitious targets related to sales. However, in reality those sales only took on paper and the cash inflow never happened due to which the company now is under debts.

References

ASX 2014, Corporate Governance Principles and Recommendations, ASX Website, Available online from

E&Y nd, Corporate governance: Changing regulatory scenario and the role of the independent director, Ernst & Young Website, Available online from (Accessed on September 4, 2016)

Neokleous, CL 2013, Executive Remuneration as a Corporate Governance problem, EurActiv Website, Available online from (Accessed on September 4, 2016)

Popli, GS & Popli, R 2015, Corporate Governance and the Role and Responsibility of Board of Directors in India with Special Focus on Independent Directors, Available online from S (Accessed on September 4, 2016)

Snider, M 2016, EpiPen maker ties bonuses to profit targets, USA Today, Available online from (Accessed on September 4, 2016)

Talha, M 2009, ‘Corporate Governance And Directors’ Remuneration In Selected ASEAN Countries’. The Journal of Applied Business Research, Vol. 25, No.2, pp. 31-40

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