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JOURNAL FOR THE CAPITAL MARKETS INDUSTRY - UGANDA

                                      JULY - SEPTEMBER 2016

broadened to include things like      I suspect most people would say       For as long as people continue to
ethics, CSR and supply chain          no, and that the objective should     be greedy or stupid or reckless
issues. There is more and more        instead be to bring down the          or dishonest – or, in other words,
overlap with other public policy      levels of excessive pay. If that      human – there will continue to be
objectives and more and more          were the test, you would have to      governance failures.
political considerations arise –      say that regulation has failed. I
“something must be done”              think that there is a certain degree  Nobody is or should be surprised
                                      of inevitability about this given     that theft and murder continue
Executive remuneration                the way it was set up. Arguably       to happen despite murder having
                                      it is a fundamental misallocation     been regulated since Cain slew
Nobody is going to argue that         of responsibility and no amount       his brother Abel; and both crimes
regulatory intervention to date       of further reporting requirements     having been regulated since
has brought executive pay in          will ever fix that.                   the Ten Commandments! Yet it
the UK under control – that is                                              appears we do not have the same
not a defence of excessive pay        At the same time, companies and       realism when it comes to failures
but what the purpose of these         investors need to understand that     of judgment or behaviour. Why?
interventions is.                     compliance with regulations and
                                      codes can never be a substitute       The most that a regulator can ever
If the intention is to use market     for taking responsibility and         achieve is to reduce the likelihood
discipline to align pay more          exercising judgment. One of the       of a governance or other failure.
closely with actual performance,      things that worries me most is
then disclosure and voting may        if a company asserts: “We have        Effective regulation can make
be the best tools available, for      complied with the Code, so we         it more difficult for people to
all their shortcomings. If the        are all right”.                       behave badly, neglect their
idea is that exposure will shame                                            responsibilities or take the wrong
directors into changing their         This so-called “compliance            decisions – but it cannot stop
ways, that may be a legitimate        culture” in relation to governance    those things happening.
objective but obviously it has not    that many directors complain
worked.                               about is often generated              Culture
                                      internally. Like all unwanted
But if the real objective is to       cultures, if it is present in their   This links to the remaining
counter public outrage at             organisation then ultimately it       challenges. Much of the focus of
the amounts involved then             is the directors’ responsibility to   regulation has been on process. It
giving the enforcement role to        drive it out. The culture of the      is important – a good board can
shareholders, who are motivated       organisation is a matter for the      be undermined by poor process –
by what is the best interest of       board.                                but even the best process will not
themselves or their clients, NOT                                            prevent people from behaving
the best interests of the public      Of course, the way in which           badly.
at large, then regulation has not     rules and codes are written and
succeeded.                            enforced has a significant impact.    There is clearly a job still to do
                                      However box-ticking by some           here. This is the difficult stuff
The official objective of             companies, investors and their        as it boils down to how people
the regulation of executive           advisers would not be eliminated      behave. Boards are effectively the
remuneration in the UK is “to         by taking all the detail out of the   “regulators/ enforcers” of their
promote an improved dialogue          Corporate Governance Code;            own company. In theory they
between companies and those           the box-tickers would simply          have the tools at their disposal,
that invest in them and a             construct other boxes.                and they find it difficult – because
greater symmetry between pay                                                it is all about managing people.
and performance”. Measured            Unrealistic expectations
against that objective, arguably                                            Common weaknesses
there has been some impact in         Finally, it is unrealistic of         of external regulation in
specific cases for example where      politicians and the public to         dealing with “culture”
remuneration policies have been       expect that by producing rules
voted down.                           and codes intended to reduce          One of the main weaknesses of
                                      governance failures, such failures    external regulation is the very fact
But if one asked the general public   can somehow be eliminated.            that it is ‘external’. There is a limit
whether that is the right objective,                                        to what observation or influence
                                                                            from outside can achieve as

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