Ethics and Governance

Running head: ETHICS AND GOVERNANCE
Ethics and governance
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ETHICS AND GOVERNANCE
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
Description of CEO remuneration as an issue of corporate governance:..................................3
Critical review of governance structure of organization:...........................................................5
Strategies used by Commonwealth Bank of Australia to successfully align the CEO
remuneration with its objectives:...............................................................................................5
Identification of the corporate governance issues criticizing organization regarding CEO
remuneration:.............................................................................................................................9
Recommendation for suggested improvement of corporate governance issue:.......................10
Conclusion:..............................................................................................................................11
Reference list:...........................................................................................................................12

ETHICS AND GOVERNANCE
Introduction:
The report is prepared to critically analyze the corporate governance issue of the
organization with regard to the executive remuneration. For the purpose of analysis, the
chosen organization is Commonwealth bank of Australia that had faced the issue of corporate
governance concerning the remuneration of its executive. The remuneration of CEO has
become a highly controversial topic with the level of executive pay becoming an issue in the
corporate governance areas. This particular topic is at the forefront of debate that constrains
the compensation of executives and result in reforming of structure of corporate governance.
This particular paper explores the issues of corporate governance with regard to remuneration
of CEO of Commonwealth bank of Australia. The report intends to create a linkage between
agency cost perspective and corporate governance about the relationship between the
existence of executive compensation and corporate governance providing a basis of social
performance.
Discussion:
Description of CEO remuneration as an issue of corporate governance:
The relationship between CEO remuneration and corporate governance can be
explained by agency theory which depicts that the act of management is in accordance with
the best interest of shareholders. The well being of team members form the basis of well
being of an individual member within the organization although, each of the team member
act in their own self interest. The agency problem is characterized by the separation of
management and ownership which is the reason of the return provided to executives in the
form of salaries, stock option, remuneration, bonuses and shareholders receiving capital gains
and dividends (Aguilera et al. 2016). Therefore, the authority is used by the management

ETHICS AND GOVERNANCE
themselves to pay themselves excessive salaries and benefits. In lieu of reducing the financial
risk, the management rather than paying out profits as dividends decides to retain the profits.
Moreover, the attitude of avoiding risk by the shareholders and management is different due
to influence on the pay resulting from operation. It is only when the pay is related to
profitability and size of the company; the management would do their best for improving the
financial performance of company. Consequently, the behavior of executives are influenced
and controlled by shareholders by designing the directors incentive schemes so that the
directors and shareholder interest are aligned. Therefore, for maximizing the wealth of
shareholders, directors are rewarded and on contrary, they are not rewarded when they are not
able to create value for shareholders (Bell and Van Reenen 2016).
The executive compensation packages include requirements concerning the
performance of company and its relationship with the pay received by the executives of
company. The significance of corporate governance and executive remuneration can be
observed due to the accusation of failure rewards for lack of accountability and failure,
prevailing financial climate and financial collapse of well known organization. The
problematic side of executive remuneration is reflected by the criticism from different
background as the related practices of corporate governance cannot completely handle it.
Therefore, the compensation of executives can bond them to enhance the value of
shareholder. On other hand, moral hazard and managerial entrenchment can be impoverished
by the dysfunction of the mechanism of corporate governance. The corporate governance is
eroded due to excessive amount of pay to executives and thereby sending the message to
shareholders that their money is spent without appropriate supervision (Sauerwald et al.
2016). Therefore, it can be said that the payment of remuneration to executives is associated
with the issue of corporate governance.