Be alert to compensation issues

Board independence can be critical in the area of com-pensation, a hot-button issue for the last two decades in developed markets.

Sensational compensation scandals have been far more prevalent in U.S. companies than in other parts of the world. But The Economist noted in 2008 that American-style bonuses and incentives for top executives have be¬come commonplace in many European companies, and the trend has only become more pronounced since then.

Exchange-listed companies often disclose compensation in proxy statements, the ballot sent to shareholders before the company’s annual meeting. Often this is the place where companies make disclosures about not only annual salaries for top executives, but also bonuses, benefits, share options and changes in retirement or separation agreements and pay.

Many stock exchanges in emerging markets do not require or enforce disclosure on executive compensation, so journalists may find these numbers hard to find. A study by the CFA Institute Centre for Financial Market Integrity, for example, found that compensation disclosure in Asian markets lagged behind international best practice and needed improvement to protect investors.

“The current practice in Asia deprives share owners of their right to know how much of the corporate funds they helped build are going to the individuals whom they have entrusted to run the business,” the report says. “It also turns a blind eye on individual accountability.”

In emerging markets, under-compensation, or even the lack of any compensation for non-executive directors, is a more pressing issue. Some companies pay non-executive board members a small stipend for each meeting, in¬stead of the preferred annual retainer. Failing to compensate non-executive directors adequately may lead them to seek several board positions to boost their personal income, possibly diluting their interest in each company and their sense of responsibility.