[Open Forum] Regulating Executive Board Pay Too?

There have been calls to enact a law regulating executive compensation. This is because excessive pay given to executives at financial companies with poor performance has been identified as one cause of the financial crisis. During the 20th National Assembly, bills were introduced calling for strong regulation of corporate executive compensation. However, it is dangerous to adopt measures of unclear legal character and treat executive pay solely as an unconditional target of regulation.

The most fundamental problem with government management and oversight of compensation paid by individual companies is its legality. Compensation for directors determined through lawful procedures constitutes a contract binding on both the company and the director. In general, compensation for directors of listed companies is determined by setting the total amount at the general shareholders’ meeting or in the articles of incorporation, while the board of directors decides the amount for each individual executive. Once compensation has been determined through such lawful procedures, it is understood as a contract between the company and the director under a mandate agreement. Therefore, under such regulatory bills, reducing a director’s compensation, withholding payment, or clawing it back after the fact would in principle not only be invalid but could also seriously infringe on individual property rights.

Another problem with making executive responsibility a subject of government control is that it can discourage the inflow of talented people and undermine the development of proactive management strategies. Actively guaranteeing directors’ compensation is intended precisely to encourage corporate performance and innovation. Directors’ business judgments are inherently specialized, variable, and at times risky. If executives are held excessively accountable based solely on the results, the entrepreneurial spirit founded on bold judgment and challenge will inevitably be stifled.

Such regulatory bills are unnecessary. The argument that directors should be held accountable through pay cuts or clawbacks arises from the claim that the current provisions of the Commercial Act are insufficient to regulate compensation. In reality, however, if compensation is excessive in light of a director’s duties or the company’s financial condition, such a compensation decision is invalid. This is because it violates the duty of loyalty and constitutes breach of trust. In addition, if compensation constitutes unjust enrichment or a tort, the company can address it by refusing payment, seeking restitution of unjust enrichment, or claiming damages. Therefore, the provisions of the current Commercial Act alone are sufficient to prevent such problems.

It is not right to place in the government’s hands matters that companies are fully capable of resolving autonomously. This is all the more true when the government’s exercise of choice impedes individuals’ legitimate rights and corporate development. Instead, companies’ autonomous authority should be guaranteed. We should not forget that hasty legislation to regulate directors’ compensation may distort the essential function and role of compensation and, in the end, hinder corporate innovation.

Won Lee, Intern Researcher, Center for Free Enterprise (CFE)

Original title: [자유발언대] 기업 이사 보수까지 규제한다고?

Author: Won Lee

Date: 2022-10-07

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=7&idx=24996