Remu Rasi

European Business Organization Law Review 13: 599-637
2012 T.M.C.ASSER PRESS

doi:10.1017/S1566752912000377
599
Regulatory Regimes and Norms for Directors

Remuneration: EU, UK and Belgian Law Compared
Joseph Lee
.
1.
Introduction: regulatory failure and initiatives to curb excessive

remuneration .......................................................................................... 601
2.
2.1
2.3
2.4
2.5
Issues of directors remuneration ........................................................... 603

How to address the question of legitimacy of government
intervention ............................................................................................ 603
Concerted action in establishing necessary conditions for sustainable
development and for maintaining a level playing field.......................... 605
Adjusting the structure of negotiations .................................................. 605
Transparency as a legitimate value to the community ........................... 607
Claw-back (look-back) mechanism ....................................................... 608
3.
3.1
3.2
3.3
3.4
3.5
Socio-legal norms or agency costs......................................................... 609

More than just laissez-faire.................................................................... 609
Socio-legal norms .................................................................................. 609
Agency costs of market efficiency norms.............................................. 610
Example of socio-legal norms for directors remuneration.................... 611
The ECJ and negative integration .......................................................... 613
4.
4.1
4.2
4.2.1
4.2.2
4.2.3
4.2.4
4.2.5
The EUs agency costs-based approach and its limit ............................. 614
Agency costs are the primary basis for legislation................................. 614
The limits of EU legislation based on agency costs............................... 615
Board control ......................................................................................... 615
Committee control ................................................................................. 616
Shareholder control................................................................................ 616
Cost and benefit-determined structure ................................................... 617
Legal vacuum......................................................................................... 617
5.
The model of UK law in controlling directors remuneration:

common law, statutory law, regulation and soft law .............................. 618
Socio-legal norms in common law ........................................................ 618
Statutory provisions: a hybrid of the socio-legal norm and agency
costs norm.............................................................................................. 619
Compliance with the prescriptive rule ................................................... 620
The nature of soft law as a regulatory instrument.................................. 621
Socio-legal norms in English case law .................................................. 622
2.2
5.1
5.2
5.3
5.4
5.5
Joseph Lee, PhD (London), Lecturer in Business Law, Nottingham University Business
School, UK; Collaborateur scientifique, Faculty of Law, University of Lige, Belgium; Attorneyat-law, New York, USA.
600
5.5.1
5.5.2
5.5.3
6.
Joseph Lee
EBOR 13 (2012)
Excessive remuneration and conduct unfairly prejudicial to

shareholders ........................................................................................... 622
Directors conduct and remuneration..................................................... 624
Transposing the applicability of unfair prejudice to a listed public
company................................................................................................. 625
6.1
6.2
6.3
6.4
6.5
The Belgian governance regime: implementing EU agency costs

norm-based legislation........................................................................... 626
General legal framework ....................................................................... 626
Disclosure under the Companies Code .................................................. 627
Legal requirement of the remuneration committee ................................ 627
Golden parachute ................................................................................... 627
Employee-stakeholders role ................................................................. 627
7.
7.1
7.2
7.3
7.4
Different socio-legal norms leading to diverse enforcement ................. 628

Belgian private enforcement .................................................................. 628
Belgian public enforcement ................................................................... 629
Discrimination caused by capping ......................................................... 630
Divergence in enforcement and the role of the ECJ............................... 630
8.
8.4
Building socio-legal norms for the remuneration regulatory regime

into the European company law framework .......................................... 630
Current approach without substantive socio-legal norms ...................... 630
The limit of an agency costs-based legislative approach ....................... 631
The current European company law paradigm: legal personality,
limited liability, directors duty, shareholders rights, third parties
protection, and the CSR ......................................................................... 632
Risk management................................................................................... 634
9.
Conclusions............................................................................................ 635
8.1
8.2
8.3
Abstract
This article examines the regulation of directors remuneration in EU, UK and
Belgian law. The author argues that there are two categorises of norms for the
regulatory framework of directors remuneration: one is market-based, market
efficiency norms of agency costs; the other is socio-legal norms. The paper argues
that agency costs a responsive mode of governance alone cannot adequately
address the problems of directors remuneration. On the other hand, socio-legal
norms which are value and ethics-focused can better construct a paradigm
capable of addressing a broader issue of directors remuneration in the EU context. Agency costs-based regulation has been used by the EU whereas socio-legal
matters have been left to Member States. The article shows how socio-legal norms
could form the underlying basis of the regulatory regime by examining the laws in
the UK and Belgium. It is concluded that the European Court of Justice will need to
carry out the role of negative integration by harmonising these social values in
developing EU company law.
Directors Remuneration EU, UK and Belgian Law Compared
601
Keywords: directors remuneration, corporate governance, agency costs, sociolegal, stakeholders, claw-back, risk management, company law, European Union,
negative integration.
1.
INTRODUCTION: REGULATORY FAILURE AND INITIATIVES TO CURB

EXCESSIVE REMUNERATION
Despite many attempts of governmental institutions to safeguard market confidence

by establishing, implementing and then reforming the directors remuneration
regulatory regime, such an effort neither prevented the financial crisis of 2008 nor
removed directors remuneration from scrutiny. The G20 summit,1 the UN 2 and the
OECD 3 have all made attempts to review the regulatory regime for directors
remuneration. The EU, accounting for twenty per cent of the total world economy
in value, has also addressed this issue and taken initiatives to establish a regulatory
regime. However, the recurrence of systemic failure in the financial markets should
prompt one to reconsider whether the theoretical bases and the underlying normative principles accounting for the approach adopted so far can foster the objectives
of long-term and sustainable social and economic development.4 For instance, stock
options, a very much debated arrangement, have been used, on the one hand, to
align the directors interests with those of the company and, on the other, to prevent
short-termism; however, this remuneration system does not prevent the taking of
excessive and justifiable risks and the focus from being on short-term investment
strategies, which played a key role in causing the financial crisis.
It may be useful to briefly sketch out the responsive measures that the EU has
undertaken in regulating directors remuneration so far. In 2004, in the aftermath of
the Enron collapse, the EU Commission issued a recommendation to set the European standard for remuneration structures for listed companies within the internal
market. According to this recommendation, the remuneration governance structure
was to be built upon the following areas: (1) disclosure of directors remuneration,
i.e., the amount, the composition and the remuneration policy, (2) shareholders
control through general meetings, and (3) shareholders ability to vote on the
directors share option schemes.5 The recommendation was required to be imple.
1 Group of 20, Global Plan for Recovery and Reform: The Communiqu from the London
Summit; Group of 20, Leaders Statement: The Pittsburgh Summit.
2 The United Nations Environment Programme Finance Initiative (UNEPFI) 2009.
3 OECD, The Corporate Governance Lessons from the Financial Crisis (2009); Corporate
Governance and the Financial Crisis: Key Findings and Main Messages (2009).
4 In the US, legislation was passed in 2007 to make further requirements on the disclosure of
remuneration.
5 Commission Recommendation 2004/913/EC of 14 December 2004 fostering an appropriate
regime for the remuneration of directors of listed companies, OJ 2004 L 385/55.
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Joseph Lee
EBOR 13 (2012)
mented by Member States either through legislation or through soft law by 2006.6
In 2005, the Commission issued a further recommendation aimed at enhancing the
role of non-executive directors in the regulatory regime introduced in 2004.7 In
2007, the Commission issued a consultation paper on the matter of directors
remuneration with a view to introducing a directive which would provide for a
better enforcement mechanism. In 2009, the financial crisis once again prompted
the Commission to issue guidelines for directors remuneration for listed companies
as well as specifically for financial institutions.8
What are the theoretical bases and normative principles underlying the EUs approach to directors remuneration? This also begs the question of what is the central
axis of the EU regulation, even raising the existential question of the EU integration
project.9 Corporate governance is emerging as a basis for regulators to intervene in
the market economy and liberal society in order to regulate corporate exposure and
restore public and market confidence. Corporate governance has the objective of
maintaining market efficiency, but its more essential element is to establish normative principles as the condition for the market economy. In the EU context, the
regulation of corporate exposure is justified by its impacts not only on the market
players but also on the public confidence in the governments that set social goals
and projects, i.e., the European integration project. It is in this sense that intervention such as through tax measures is deemed legitimate.
This article identifies the key issues in directors remuneration and examines the
regulatory approaches under two broad categories: socio-legal norms and agency
costs. It then identifies what they entail, their implications and how they are played
out in the regulation. The law adopted at the EU level is examined against these two
categories. The law and approach adopted by the UK, with some references to US
law, is discussed to show how socio-legal norms can play a part in the regulatory
regime. Belgian law is investigated to discern the differences and similarities in the
approaches and legal norms between continental European systems and AngloSaxon paradigms. Finally, the article reviews the current European company law
paradigm and attempts to make some recommendations as to how to develop an
approach based on socio-legal norms at the European level for the directors remuneration regime.
Ibid., Art. 8.1.

Commission Recommendation 2005/162/EC of 15 February 2005 on the role of nonexecutive or supervisory directors of listed companies and on the committees of the (supervisory)
board, OJ 2005 L 52, 25 February 2005.
8 In the UK, the New Practice Code was introduced by the FSA and the new Walker Review
proposed new rules on this Code.
9 D. Chalmers, Europes Existential Question, 29 European Law Review (2004) pp. 435436.
6
7
2.
ISSUES OF DIRECTORS REMUNERATION
2.1
How to address the question of legitimacy of government

intervention
603
Questions of legitimacy of government intervention relate to governments normative power and functional effectiveness. Normative power can be provided, a
priori, by the express mandate laid down by law 10 or the implicit mandate based on
the relations government has with the subject matter 11 and the nature of governments regulatory role vis--vis the objectives which the community, in a broad
sense, aims to achieve. Functional effectiveness is a posterior authority since the
legitimacy is only conferred after such functional effectiveness has been proven.
Such legitimacy may be given based on the past experience or may be conferred
subject to further review of the effectiveness of exercising such a power.
How can the government legitimately regulate the practice of directors remuneration? It is evident that both the amounts of money involved in directors remuneration packages and the way in which remuneration has been paid to the directors
of a number of failing banks, especially those which received public aid in different
shapes or forms, have caused public outrage. Many investors, regulators, politicians, academics and the general public have also raised doubts about the effectiveness of the current arrangements for directors remuneration under the overarching
objective of corporate governance. It is well conceded that one of the objectives of
corporate governance is to hold the board to account in order to improve corporate
performance for the benefit of the shareholders and stakeholders alike as well as to
justify the existence of the corporate entity granted by law.12 Corporate accountability is both a civil and political value embedded in European political governance.
Different from other corporate governance issues, directors remuneration has
proven to be one of the most challenging areas for regulation, for the following
reasons. First, regulation of directors remuneration means direct intervention in the
wages of directors, which can appear as state control over the market price, hence
raising questions around legitimacy in a liberal society and efficiency in a market
economy where individual rights and freedom of contract are important constitutional conditions. As far as legitimacy is concerned, it is difficult to justify how the
state or public authorities can regulate the wages of private companies directors, as
such government intervention would deprive directors or companies of the opportunity and freedom to engage in private negotiations as well as of their liberty and
.
10 An input-oriented legitimacy. See the analysis of the EUs legitimacy in E. Jones, Output
Legitimacy and the Global Financial Crisis, 47 Journal of Common Market Studies (2009) pp.
1085-1105.
11 An output-oriented legitimacy. See ibid.
12 This view is conceded by the concession theory.
604
Joseph Lee
EBOR 13 (2012)
entitlement to property. From a market efficiency point of view, direct state control
over market prices could result in inefficiency and economic waste. Although state
intervention on the level of wages is not uncommon, an EU intervention on wages
will raise the question of the legitimacy of its regulatory role.
It may be safe to say that any direct intervention without good cause, or failure to
adhere to the liberal democratic principles endorsed by the EU, will be not only
illegitimate but also illegal. However, exposs of directors remuneration in the midst
of the financial crisis have threatened public confidence in many governments ability
to govern, because countless ordinary workers have lost their jobs, investors have lost
their savings and taxpayers money has poured into failing companies while directors
continue to receive handsome remuneration and termination packages according to
their contracts. Public outrage reached its highest point when failing banks, previously bailed out by the governments, could neither be stopped from giving high
remuneration to directors, a kind of benefit not enjoyed by ordinary employees, nor
claw back the money already handed out to failing directors. Furthermore, the difference in wages, or pay disparity, between managerial employees and ordinary employees is understood to be a necessary and unavoidable phenomenon, although the
gap between top executive directors and ordinary employees is widening and continues to be widened by, if correctly referred to, unregulated market forces. This poses a
risk to social stability, a necessary condition for financial stability where internationalisation and mobility of capital are to be promoted.
In response to public outrage and the necessity of maintaining confidence, governments in the most industrialised world economies, including those in the European Union, have pledged to respond to the many problems of the financial crisis,
one of which is directors remuneration.13 A plan of direct state intervention in
directors wages, such as setting appropriate levels for actual wages or bonuses, has
not been opted for. The closest form of direct state intervention is to use fiscal
measures and taxes on companies and banks profits and on directors bonuses in
order to reduce their net wages.14 In the US, under the Financial Crisis Responsibility Fee, there will be a levy on top US banks to reimburse financial bail-out
expenses incurred by the federal government.15 The UK government currently
imposes a 50 per cent levy on bankers bonuses which is applicable only to
13 European Commission, Green Paper on Corporate Governance in Financial Institutions

and Remuneration Policies, 6 February 2010; Department for Business Regulation and Skills, UK
Government Response to the Green Paper, July 2011.
14 P. Payne, Corporation Salaries and Bonuses and the Federal Income Tax, 12 Tax
Magazine (1934), at pp. 301-302; Tax Office Gives Warning on Directors Fees and Bonuses,
Business Wall Street Journal, 3 June 2011, available at: <http://www.theaustralian.com.au/
business/tax-office-gives-warning-on-directors-fees-and-bonuses/story-e6frg8zx-1226068257986>
(accessed on 10 December 2011).
15 President Obama Proposes Financial Crisis Responsibility Fee to Recoup Every Last
Penny for American Taxpayers, White House Press Release, 14 January 2010.
605
discretionary bonuses and not to contractual ones exceeding 25,000.16 The

problem of such a fiscal measure is its effectiveness and what it intends to
achieve. Furthermore, such a levy is not applicable to other entities such as insurance companies, asset managers and stockbrokers in the financial services sector.
Furthermore, social pacification, pay disparity, public means to aid ailing banks,
public consensus on directors remuneration, the maintenance of financial stability
for the promotion of capital mobility, the EU integration project, and constructing a
normative economic power based on civil values form the legitimate basis for the
EUs regulatory intervention in directors remuneration.
2.2
Concerted action in establishing necessary conditions for sustainable development and for maintaining a level playing field
The second difficulty lies in the very fact of global and international competition for
capital and human resources. The lack of international cooperation and concerted
action will signify that there is no universal recognition, at least at EU level, of the
objective and legitimate concern for regulating directors remuneration. At a practical
level, a country without regulation of directors remuneration will gain itself, at least
in the short term, a competitive advantage, which could defeat the goal of combating
excessive remuneration as well as the negative causes and effects associated with it. A
country with a more favourable tax system, i.e., without a tax on bonuses, will attract
executives, employees and capital. Without consistent and concerted action, there is a
risk that international banks and companies will shop around for jurisdictions with
more lenient policies for remuneration practices, which will eventually lead to a race
to the bottom problem in financial regulation. This defeats not only the idea of rules
harmonisation but also the protection of legitimate public interests, such as reducing
pay disparity, and the aim of removing distortions of competition within the EU. To
ensure there is a level playing field, there must be global and concerted action.
2.3
Adjusting the structure of negotiations
Further indirect controls can be implemented under the principle of freedom of

negotiation in the market economy. What governments or states can do is to adjust
the structure of negotiation to give more power, voice and say to parties who have a
right to participate, or are reasonably expected to have a say, in the negotiations
with directors.17 Therefore, directors will be made more accountable to these parties
16 Treasury Raises Tax Bill for Big Banks, Financial Times, 9 December 2010, available at:
<http://cachef.ft.com/cms/s/0/be339fa8-0381-11e0-9636-00144feabdc0.html#axzz1gRjoJBQL>
(accessed on 11 December 2011).
17 This is similar to having a collective bargaining structure rather than direct wage control
imposed by the state.
606
Joseph Lee
EBOR 13 (2012)
in order to reflect the foundations of a market economy and the civil values in the
civil society/community. This begs the question: who are the parties that have a
right to participate or are reasonably expected to have a say in these negotiations?
The principle of corporate legal personality seems to suggest that directors remuneration is a private matter to be decided within a company, in which case
corporate governance imposed by the state would be deemed to be interference in
private matters within an organisation. Such interference is justified to enhance
productivity, the protection of parties rights and interests in private companies, and
social pacification.18 Reforms following the financial crisis have all moved in this
direction. In the US, the Corporate and Financial Institution Compensation Fairness
Act 2010 requires an annual non-binding advisory vote by shareholders to approve
directors remuneration practices and packages, including golden parachutes in
public companies. It also requires disclosure of the pay disparity between the
remuneration of directors and that of the average workers in the company. In the
UK, the FSA Code increases disclosure requirements and strengthens the supervisory function of company committees on remuneration practices, in particular the
independence of committee members and their risk management tasks.19 Having
said that, corporate governance is a matter not only for current shareholders and
shareholder-oriented committees in a company, but also for prospective investors
and stakeholders such as employees, whose job security depends on the success of
the company, and consumers, whose purchasing power is linked to the company.20
In this sense, the directors remuneration, at least for certain types of companies,
can no longer be properly called a private matter for the company.
18 B. Caillaud, R. Guesnerie, P. Rey and J. Tirole, Government Intervention in Production and

Incentives Theory: A Review of Recent Contributions, 19 RAND Journal of Economics (1988) pp.
1-26; C. Bernini and G. Pellegrini, How Are Growth and Productivity in Private Firms Affected by
Public Subsidy? Evidence from a Regional Policy, 41 Regional Science and Urban Economics
(2011) pp. 253-265; V. Thomas and Y. Wang, Government Policy and Productivity Growth: Is East
Asia an Exception?, Policy Research Department, The World Bank, Washington DC, 1993; J.
Baffes and A. Shah, Productivity of Public Spending, Sectoral Allocation Choices, and Economic
Growth, 46 Economic Development and Cultural Change (1998) pp. 291-303; J. Lee, Government
Intervention and Productivity Growth, 1 Journal of Economic Growth (1996) pp. 391-414.
19 The Financial Services Authority Remuneration Code 2009; FSA, FSA Publishes Revised
Remuneration Code (2010), available at: <http://www.fsa.gov.uk/pages/Library/Communication/
PR/2010/180.shtml> (accessed on 10 December 2011).
20 R. Freeman, A. Wicks and B. Parmar, Stakeholder Theory and the Corporate Objective
Revisited, 15 Organization Science (2004) pp. 364-369; G. Charreaux and P. Desbrieres,
Corporate Governance: Stakeholder Value versus Shareholder Value, 5 Journal of Management
and Governance (2001) pp. 107-128; B. Ruf, K. Muralidhar, R. Brown, J. Janney and K. Paul,
An Empirical Investigation of the Relationship between Change in Corporate Social
Performance and Financial Performance: A Stakeholder Theory Perspective, 32 Journal of
Business Ethics (2001) pp. 143-156; S. Letza, X. Sun and K. James, Shareholding versus
Stakeholding: A Critical Review of Corporate Governance, 12 Corporate Governance: An
International Review (2004) pp. 242-262.
607
Agency costs analysis dwells mainly on the relationship between managers and
shareholders, assuming that shareholders are the principals.21 This denies that
employees could also be the interested parties to the agent-principal relationship or
representatives of the corporate principal. Should directors also align their interests
with those of their employees for the purpose of productivity, protection of employees rights and welfare, and social pacification? The German industrialist
model of co-determination combines the interests of the board and those of employees, and in this model the employees should also have a voice in and influence
on directors remuneration. Such a structural adjustment will cause directors
remuneration to reflect not only on the directors of other companies in the sector
(cross-sector comparison) but also on the employees (pay disparity review). The
growing gap between the top executives and the average employees poses a risk to
companies long-term interests, a factor of risk management that the board and
relevant committees should not fail to take into account. The objective of such risk
management is to enhance social stability, a condition sufficiently necessary for
maintaining financial stability so as to realise capital mobility.22 Competition within
the corporate sector tends to drive up the amount of remuneration rather than
exercise downward pressure on it.23 Such a structural adjustment will allow those
who set, oversee and approve remuneration to take into consideration the salary
figures of average employees in companies as well as throughout the sector.
2.4
Transparency as a legitimate value to the community
Transparency has been the basis for disclosure requirements.24 The rationale is that
the principals can then acquire the information possessed by the agents who are
21 B. Oviatt, Agency and Transaction Cost Perspectives on the Manager-Shareholder

Relationship: Incentives for Congruent Interests, 13 Academy of Management Review (1998) pp.
1-12; P. Tufano, Agency Costs of Corporate Risk Management, 27 Financial Management
(1998) pp. 67-77.
22 M. Jensen and K. Murphy, Performance Pay and Top-Management Incentives, 98
Journal of Political Economy (1990) pp. 225-264; J. Miller, R. Wiseman and L. Gomez-Mejia,
The Fit between CEO Compensation Design and Firm Risk, 45 Academy of Management
Journal (2002) pp. 745-756; J. Harter, F. Schmidt and C. Keyes, Well-Being in the Workplace
and Its Relationship to Business Outcomes, in C. Keyes and J. Haidt, eds., Flourishing: The
Positive Person and the Good Life (American Psychological Association 2003) pp. 205-224.
23 F. Allen and D. Gale, Corporate Governance and Competition, in X. Vives, ed.,
Corporate Governance in Theoretical and Empirical Perspectives (Cambridge, CUP 2000) pp.
23-94; M. Firth, P. Fung and O. Rui, Corporate Performance and CEO Compensation in China,
12 Journal of Corporate Finance (2006) pp. 693-714.
24 A. Fung, M. Graham and D. Weil, Full Disclosure: The Perils and Promise of
Transparency (Cambridge, CUP 2007); L. Lowenstein, Financial Transparency and Corporate
Governance, 96 Columbia Law Review (1996) pp. 1335-1374; P. Linsley and P. Shrives,
Transparency and the Disclosure of Risk Information in the Banking Sector, 13 Journal of
Financial Regulation and Compliance (2005) pp. 205-214.
608
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EBOR 13 (2012)
meant to act on behalf of the principals, so that agency costs can be regulated.
Oddly enough, the opponents to the transparency of directors remuneration argue
that the amount disclosed may cause employees to ask more from the company as
there is a danger that employees will bargain at a level above the optimal level,
which may lead to inflation. However, if company shares are dispersed within the
capital market, a high stock index when companies make handsome profits can also
drive up inflation.
2.5
Claw-back (look-back) mechanism
How do the interests, rights and expectations of other stakeholders such as suppliers
and consumers relate to the directors pay?25 Directors salaries can be linked to a
companys profits even when made in contravention of laws such as competition law,
consumer protection law or criminal law. The law should contain claw-back provisions 26 and not allow companies to cover directors liability, for instance, in criminal
matters. The legal basis for clawing back can be the law of restitution if the bonuses
or remuneration received (the unjust enrichment) were paid at the expense of suppliers, consumers or the general public, in which case the state will be the receiving
party of such restitutionary amount. The principle and structure of legal personality
leaves remuneration a matter privy to the members of the company members who
not only are shareholders but should also include employees. Suppliers and consumers do not have a say on the issue of remuneration and the design of the bonus system, even though they are members of the community with which the company has
dealings. The market economy requires dealing between the company and suppliers,
while consumers remain at arms length in the transaction process. The practical
difficulty also lies in the fact that if consumers and suppliers are allowed to have a
say, a company will also be able to interfere with the remuneration of its own suppliers and consumers. That is not to say that the suppliers and consumers have no link to
remuneration; rather, such a link offers a different form of participation from that of
shareholders and employees. A claw-back (look-back) mechanism may be contained
in the contract between a company and its directors, while any damages paid out to
consumers or suppliers will come from the claw-back fund. However, if this is not
made compulsory or set as best practice, it is questionable whether companies will
take it up voluntarily. The new UK Code of Corporate Governance issued by the
.
25 S. Marshall and I. Ramsay Stakeholders and Directors Duties: Law, Theory and Evidence,
33 Journal of Law and Society (2006) pp. 1-53; A. Bruce, T. Buck and B. Main, Top Executive
Remuneration: A View from Europe, 42 Journal of Management Studies (2005) pp. 1493-1506.
26 Lloyds Bank to Clawback Part of Chief s 1.45m Bonus, The Guardian (2011), available
at: <http://www.guardian.co.uk/business/nils-pratley-on-finance/2011/dec/02/lloyds-bankinggroup-bonus-clawback> (accessed on 10 December 2011); Lloyds Bank May Claw Back Former
Bosss 1.4m Bonus, BBC News (2011), available at: <http://www.bbc.co.uk/news/business16016155> (accessed on 10 December 2011).
.
609
Financial Reporting Council suggests a claw-back regime to enhance the appropriateness of directors remuneration practice.27
3.
SOCIO-LEGAL NORMS OR AGENCY COSTS
3.1
More than just laissez-faire
Laissez-faire liberal market theorists have written extensively on the cost, inefficiency and danger of government intervention in market movements and prices.
That is not to say that government can play no role in regulating directors remuneration. A governmental or institutional role in the regulation of directors remuneration is consistent with free market principles in so far as it is limited to the
enhancement of private control over directors remuneration such as by way of
giving shareholders or stakeholders more influence, through disclosure requirements or by instituting more internal controls through a number of committees
independent of the board. However, these approaches tend to exclude the interest
and the participation of other stakeholders, as well as the considerations of the civil
values embedded in society.
3.2
Socio-legal norms
This paper argues that there are two broad normative bases for the directors remuneration regulatory regime: first, socio-legal norms, i.e., essentially social values
manifested in legal norms.28 The norms are moral,29 ethical and value-based 30 and
emphasise personal obligations 31 within a civil society, including the personal duty
.
Schedule A, UK Corporate Governance Code.

Before 1850, legal justice was used to express the similar concept of social justice. Legal
justice was invented by Aristotle in his book of Ethics, which basically states that law-abiding
people made better citizens than gangsters. Thomas Aquinas developed this concept as a special
virtue which has a common good.
29 H. Kelsen, Pure Theory of Law (Berkeley, University of California Press 1967), at p. 62;
H. Kelsen, The Nature Law Doctrine before the Tribunal of Science, in H. Kelsen, What Is
Justice (Berkeley, University of California Press 1957); D. Berleveld and R. Brownsword, Law as
a Moral Judgement (London, Sweet & Maxwell 1986), at p. 8; J. Bentham, A Fragment on
Government, in J. Burns and H. Hart, eds., A Comment on the Commentaries and a Fragment on
Government (London, Athlone Press 1977); Bentham also emphasised the importance of
subjecting law to moral scrutiny.
30 A. Lisska, Aquinass Theory of Natural Law: An Analytic Reconstruction (Oxford,
Clarendon Press 1996).
31 O. Grierke, Chapter II: The General Theory of the Group (Verbandstheorie) in the Natural
Law, in E. Barker (transl.), Natural Law and the Theory of Society 1500 to 1800 (Cambridge,
CUP 1934) p. 95.
27
28
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EBOR 13 (2012)
to achieve the common objective, societal project, and political and economic
good,32 and the exercise of personal rights reflecting the underlying values of the
common objective, social project, and political and economic good. The obligations
imposed or the rights conferred are not to achieve the end of efficiency regulated
by the cost and benefit analysis of the market. The regulatory regime based on these
socio-legal norms is a normative legal institution, as opposed to responsive governance, for directing the individual acts towards the common objective, societal
project, and political and economic good.33 Socio-legal norms form a system to
maintain and promote a sense of order in the human sphere, capable of relating to
the wider environment.
These norms require their addressees to direct their good intentions towards the
common objective and orient the parties involved to act in a socially just manner,
with and through other parties. Through these just manners, a just wage can be
determined. On the basis of these norms, juridical and social institutions are established, which develop and shape the forms of economic as well as political life.
This is different from the statist approach of legislation, which is centred on the end
result without emphasising individual obligations and entitlements. For instance,
the state uses monetary policy, such as interest rate or exchange rate, to monitor the
labour wages. Another example of the statist approach of legislation is capping,
putting a ceiling, on remuneration. Socio-legal norms take into account the right of
the directors vis--vis the relations with the connected parties, i.e. investors, employees, consumers and suppliers, and offer protection based on the common values
and social good.34
3.3
Agency costs of market efficiency norms
Second, the agency costs approach is interest-based,35 founded on the principle of

arms length transactions where transaction costs can be calculated, focusing primarily on cost-return relationships and using the market for cost-effective regulatory policy.36 The regulatory model is responsive to costs in correcting market
32 T. Aquinas, Summa Theologiae (Madrid, Bibliotca de Autores Christianos 1951), Bonum

agendum et persequendum, et malum vitandum, in English: That good is to be done and
pursued, and evil to be avoided.
33 J. Bentham, Chapter II: The Ascetic Principle, in J. Bentham, The Theory of Legislation
(London, Routledge & Kegan Paul 1931) p. 4.
34 J. Eieder, The Social Organisation of Vengeance, in D. Black, ed., Toward a General
Theory of Social Control (London, Academic Press 1984) p. 131.
35 R. Posner, The Economics of Justice (London, Harvard University Press 1981), at p. 60; R.
Posner, The Economic Approach to Law, in F. Parisi, ed., The Economic Structure of the Law
(Northampton, Edward Elgar 2002) p. 41, at p. 57.
36 R. Posner, The Costs of Monopoly and Regulation, 83 Journal of Political Economy
(1975) pp. 807-827; R. Coase, The Problem of Social Cost, in R. Posner and F. Parisi, ed.,
Economic Foundations of Private Law (Northampton, Edward Elgar 2002) p. 207, at p. 250; I.
611
deficiencies.37 Currently, the approach to the regulation of directors remuneration

at European level is based on agency costs rather than on the socio-legal norms of
European jurisprudence, legal systems and perceived social and civil norms.38 Even
if the Commission has the competence to make company-related legislation based
on socio-legal norms, this approach has often been sidelined to give way to the
political expedience of agency costs analysis. The result of rules based on agency
costs is that compliance with these rules and norms is, in fact, pseudo-conformity,
as there is a deficient sense of justice. This is because the rules would fail to intuit
those they intend to regulate. Furthermore, rules based on these norms are prone to
being modified and reformed in response to given market circumstances. These
rules become flexible and are not part of the constant content that forms a condition reflecting the common objective, societal project, and political and economic
good.
3.4
Example of socio-legal norms for directors remuneration
A number of examples of socio-legal norms are as follows. Firstly, directors owe

personal fiduciary duties, such as a duty of loyalty to the company, as well as a duty
of no conflict of interests.39As such, directors must not set the remuneration themselves, nor allow the remuneration to be set by someone who is not independent of
the directors, nor receive an excessive and unreasonable amount. The latter two are
more difficult questions. What is entailed in the meaning of independence requires
a moral and political analysis reflecting the civil and political value in the community rather than a cost analysis. A deficient remuneration structure can encourage
excessive risk taking,40 causing damages to the company and those dependent on
the company. The board is also obliged to take this risk into account in setting
corporate strategies.41Setting the directors remuneration without identifying the
risk, employing an independent risk assessment, and mitigating the risk would
Ehrlich and R. Posner, An Economic Analysis of Legal Rulemaking, in Posner and Parisi, eds.,
supra n. 36, pp. 112-141; M. Adler and E. Posner, Rethinking Cost-Benefit Analysis, 109 Yale
Law Journal (2000) pp. 165-247.
37 See G. Hertig and J. McCahery, Legal Options: Towards Better EC Company Law
Regulation, in S. Weatherill, ed., Better Regulation (Oxford, Hart Publishing 2007) pp. 219-245.
38 Commission Communication to the Council and the European Parliament Modernising
Company Law and Enhancing Corporate Governance in the European Union A Plan to Move
Forward, COM (2003) 284 final.
39 Commission Recommendation 2004/913 fostering an appropriate regime for the
remuneration of directors of listed companies, supra n. 5, para. 2 of the Preamble.
40 J. Miller, R. Wiseman and L. Gomez-Mejia, The Fit between CEO Compensation Design
and Firm Risk, 45 Academy of Management Journal (2002) pp. 745-756; L. Bebchuk, A. Cohen
and H. Spamann, The Wages of Failure: Executive Compensation at Bear Sterns and Lehman
2000-2008, 657 Harvard Law School Discussion Paper (2009), at pp. 1-27.
41 E. Pan, A Boards Duty to Monitor, 54 New York Law Review (2009) pp. 717-740.
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place the board in breach of the directors personal duty owed to those whom it
ought to protect. Furthermore, what is excessive begs the question of reasonableness.
Secondly, shareholders have rights to protect their interests in the company,
which can include their right to express their views on the directors remuneration
or on the risks imposed by the companys remuneration practices.42 Since the
remuneration structure is heavily linked to risk management and corporate strategy,
shareholders should have a right to voice their concerns and exercise appropriate
oversight over a companys risk management policy. Even though they would in all
likelihood not have expertise in complex risk modelling, especially in assessing the
risk, they should have the right to ask questions and make sure that the risk management function is independent of the board.43
Thirdly, the protection of stakeholders 44 should mean that stakeholders interests
should be taken into account when setting the directors remuneration.45 As discussed before, the success of the company depends on the contribution of stakeholders such as employees, consumers and suppliers. Employees particularly
should also have a say on the remuneration issue, be it its structure, its practical
application or the actual amount in relation to their own pay. This will adjust the
negotiation structure. Such an inclusion is manifested in the German constitutional
principle of co-determination. As far as consumers and suppliers rights and
interests are concerned, if company profits are made at their expense, for instance,
by violating laws and regulations, a claw-back mechanism should be in place so
that adequate compensation can be demanded for their losses.
Fourthly, the concept of unjust enrichment,46 which is to control the case where
directors or executives are overpaid at shareholders or employees expense, can be
understood as a socio-legal norm. Such a norm should give not only the sharehold.
Commission Recommendation 2004/913 fostering an appropriate regime for the

remuneration of directors of listed companies, supra n. 5, para. 7 of the Preamble.
43 A. Admati, P. Pfeiderer and J. Zechner, Large Shareholder Activism, Risk Sharing and
Financial Market Equilibrium, 102 Journal of Political Economy (1994) pp. 1097-1130; L.
Gillan and L. Starks, Corporate Governance Proposal and Shareholder Activism: The Role of
Institutional Investors, 57 Journal of Financial Economics (2000) pp. 275-305.
44 G. Ferrarini, N. Moloney and C. Vespro, Executive Remuneration in the EU: Comparative
Law and Practice, ECGI Law Working Paper No. 09/2003 (June 2003).
45 See R. Mullerat, ed., Corporate Social Responsibility: The Corporate Governance of the
21st Century (The Hague, Kluwer 2005); C. Mallin, Corporate Governance, 3rd edn. (Oxford,
OUP 2009), at p. 137.
46 See the derivative suit filed against JP Morgan directors claiming breach of fiduciary duty
and unjust enrichment in connection with JP Morgans $88.3 million settlement with OFAC,
available at: <http://www.mondaq.com/unitedstates/x/152968/Financial+Services/Derivative+
Suit+Filed+Against+JPMorgan+Directors+Claiming+Breach+Of+Fiduciary+Duty+And+Un
just+Enrichment+In+Connection+With+JPMorgans+883+Million+Settlement+With+OFAC>
(accessed on 11 December 2011); D. Friedmann, Unjust Enrichment, Pursuance of Self-Interest,
and the Limits of Free Riding, 36 Loyola Law Review (2003) pp. 831-848.
42
613
ers but also the stakeholders the right to make a claim.47 In the cases of government
bail-out, directors can be overpaid at taxpayers expense. Taxpayers, represented by
the government or other public interest groups, should also be able to make an
unjust enrichment claim. Furthermore, it is a socio-legal norm to maintain a fair
ratio between ones contribution to the business and what one is paid, i.e., under the
pay-for-performance umbrella, the pay must be reasonably expected, proportionate
to set objectives, conscionable in comparison to the sector as well as the average
employees of the company, not wasteful, and given in a just and right manner with
honest intent and in good faith. This embraces the notion of no reward for failure,48 a concept expressed under the doctrine of waste in Delaware corporate law
in the US, a regulatory notion endorsed by many regulators. This will include
examinations of the services provided by the company, which should also have
been counted as part of the remuneration, such as tax and financial services, as well
as insurance policies taken out in the directors interest but paid by the company.
3.5
The ECJ and negative integration
These socio-legal norms do not form the bases for the EU directors remuneration
regulatory regime, and less so than under some national systems. For instance, the
fiduciary duty owed by the director to the company under English law,49 the doctrine of waste in Delaware law and the duty of good faith under Belgian law can all
be seen as expressions of socio-legal norms.
At a practical level, EU legislation based on agency costs will only partially
harmonise the laws of the Member States, because such a legislative approach will
not promise harmonised enforcement across the Union. That said, the ultimate goal
of harmonisation could be achieved by the European Court of Justice (ECJ) through
a process of so-called negative integration. A comparison of the directors remuneration regulatory regime under Belgian and UK law will identify the similarities
and differences in their socio-legal approaches. A set of common socio-legal norms
will assist the Court in developing the regulatory regime.50 It is therefore important
to carry out a comparative study in this area.
47 J. Brummer, Corporate Responsibility and Legitimacy: An Interdisciplinary Analysis

(London, Greenwood Press 1991), at p. 145.
48 House of Commons Treasury Committee, Banking Crisis: Reforming Corporate
Governance Pay in the City. Ninth Report of Session 2008-09 (2009), available at: <http://www.
publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/519/519.pdf>; R. Levine, The Corporate Governance of Banks: A Concise Discussion of Concepts and Evidence (2009), World
Bank Policy Research Working Paper 3404, at pp. 1-19.
49 Irvine v. Irvine [2006] 4 All ER 102.
50 For the reasons for harmonisation, see P. Mntysaari, The Law of the European Union, in
P. Mntysaari, ed., Comparative Corporate Governance: Shareholders as a Rule-maker (Berlin,
Springer 2005) p. 35; K. Hopt, Common Principles of Corporate Governance in Europe, in J.
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4.
THE EUS AGENCY COSTS-BASED APPROACH AND ITS LIMIT
4.1
Agency costs are the primary basis for legislation
Agency costs have been the basis for controlling directors remuneration at the
European level.51 It entails several models of analysis, revolving around agency
costs analysis.52 The extended analyses of agency costs are incentive analysis and
competitive analysis. Agency costs analysis treats directors as agents of the company or shareholders; therefore, their remuneration is a cost to the company as a
principal. As a result, such a cost needs to be monitored to achieve efficiency.
However, such cost control should not be carried out if in doing so firm and market
efficiency will not be achieved. For instance, cost control procedures must not be
too expensive and burdensome to the company; the control must not jeopardise the
directors incentives to pursue the companys overall interests; and the control must
not damage the companys ability to attract skilled directors to take up a directorship. Therefore, cost and benefit analysis is a major instrument that measures
reasonableness, fairness and the appropriateness of the rules, in other words, the
optimal level of the regulatory model.
In standard practices, a remuneration structure comprised of a fixed basic salary
and variable bonuses also includes discretionary bonuses and guaranteed contractual bonuses. Many argue that bonuses increase agency costs because they encourage excessive risk taking. However, oddly enough, directors variable bonuses are
intended as an instrument for reducing agency costs, and their design is a way of
aligning the interests of directors with those of the shareholders of the company. To
avoid directors adopting short-term strategies influenced by such a bonus system, it
is argued that a deferral system, through stock options, can create long-term incentives for directors. However, if such a long-term incentive scheme is too costly for
the company, especially when the company is not doing well financially, it is
suggested that the level of fixed salary should be increased to an appropriate level
in order to reduce the maximum level of the bonus available. As a result, what the
regulators care about is, on the one hand, the competitiveness of the firm, and, on
McCahery, P. Moerland, T. Raaijmakers and L. Renneboog, eds., Corporate Governance

Regimes: Convergence and Diversity (Oxford, OUP 2002) p. 175.
51 See the Commission consultation document on remuneration policies, available at: <http://
ec.europa.eu/internal_market/company/directors-remun/index_en.htm#OtherDocs>. Establishing
and maintaining remuneration policies ensures sound risk management. See also the Statement of
the European Corporate Governance Forum on Director Remuneration, available at: <http://ec.
europa.eu/internal_market/company/docs/ecgforum/ecgf-remuneration_en.pdf>. No reference is
made to the core values in controlling directors remuneration, but there is a relation to excessive
risks taken by the management relating to variable pay schemes.
52 G. Ferrarini, N. Moloney and C. Vespro, Executive Remuneration in the EU: Comparative
Law and Practice, ECGI-Law Working Paper No 09/2003.
615
the other, the excessive risk taking and long-term interest of the company. This
approach does not address the risk which the growing gap between the ordinary pay
of employees and the top managements remuneration poses to sustainable company growth.
Agency costs analysis overlooks the primary responsibility of the legitimacy of
government, which is to respond to the financial crisis beyond the issue of maintaining capital liquidity and designing a regulatory system that allows companies to
recruit and retain corporate directors. The legitimacy question is not only about the
liquidity efficiency of capital markets. How do agency costs answer the question of
why shareholders only have a consultative say rather than a binding vote regarding
directors remuneration? Is it legitimate to exclude employees from the same form
of consultation that is available to shareholders? Should transparency be limited to
certain parts of the remuneration package and not extend to the relationship between independent committees and the board, on the one hand, and the pay disparity between the directors and the average employee, on the other? How can such a
requirement of transparency be effectively enforced? How do agency costs address
the norm for sustainable growth?
4.2
The limits of EU legislation based on agency costs
At the European level, the structures of control for directors remuneration are built
on three areas: (1) board control,53 (2) remuneration committee control,54 and (3)
shareholders control.55 These form the institutional governance framework; however, how these institutions should exercise their control is not clear.
4.2.1
Board control
Regarding board control, emphasis is placed on the independent non-executive

directors who will exercise their judgment on the directors remuneration. However,
the law does not require non-executive directors to exercise their judgment according to a particular socio-legal norm, for instance, whether the remuneration is fair,
reasonable, proportional, not wasteful and conscionable. What the law does
require the non-executive directors to do is to check if the remuneration has been
set in compliance with the imposed procedure. There are two aspects of procedure:
first, the procedure to have the remuneration approved; and second, what is to be
taken into account when approving the remuneration. The latter is a matter for the
53 Commission Recommendation (EC) 2005/162 on the role of non-executive or supervisory

directors of listed companies and on the committees of the (supervisory) board, supra n. 7.
54 Ibid.
55 Commission Recommendation 2004/913/EC fostering an appropriate regime for the
remuneration of directors of listed companies, supra n. 5.
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national laws of Member States. However, compliance alone does not effectively
instruct the non-executives as to how to direct the executives to award themselves a
right, fair, just, not wasteful, reasonable and conscionable salary. Another debate
that has been directed by the agency costs theory focuses on the remuneration of
non-executive directors. It is said that they should not be subject to the same bonus
system as enjoyed by the executive directors, as this would compromise their
independence. Against this it is argued that without an optimal level of nonexecutive directors remuneration, these directors will not be able to carry out their
functions properly, not as far as independence is concerned, but as regards their
inputs required.
4.2.2
Committee control
In regards to the remuneration committee control, an additional external control

such as by an independent consultant or auditor should be included to complement
the function of the non-executive directors. Their focus would be similar to that of
the independent non-executive directors. The committee may be made accountable
to the shareholders as well as to the other controlling agents, for instance, the
supervisory board or the chairman. However, EU law is not clear on the committees accountability to the shareholders, the duties of the auditors and the duties of
the external consultant. This is because the committee has not been given a clearly
defined legal status: its relations with the board, the general meeting and the companys auditors have been left vague. Legal status could be given to the controlling
committees to enhance their ability to supervise the remuneration and to account to
the shareholders and stakeholders.56 Agency costs analysis cannot offer guidance in
this matter, nor can it offer guidance regarding the question of independence of the
committee members.
4.2.3
Shareholder control
As for shareholder control, shareholders cast their votes on certain measures pertinent to the control of directors remuneration. This can include voting on the directors remuneration package, on the remuneration policy itself and on the report
submitted by the committee. The outcome of the vote can be either binding on the
board or purely consultative. Giving a choice as to whether the vote should be
binding or not on the Member States will create regulatory competition within the
internal market. This defeats the aim of rules harmonisation and the legitimate
56 See the report The Remuneration of Elected Chairs of Boards and Traders (in French),
adopted by the French Parliamentary Committee on Constitutional Laws, Legislation and General
Administration, available at: <http://www.eurofound.europa.eu/eiro/2009/08/articles/fr0908029i.
htm>.
617
interest in creating a level playing field. The intention is to leave it to the investors
to decide the destination of their investment according to the legal environment. It
must be noted that shareholders approval for share option schemes concerns not
the control of directors remuneration, but rather the increase of share capital and
the dilution of shareholdings in the company.
4.2.4
Cost and benefit-determined structure
In order to achieve efficiency under the agency costs analysis, the cost of controlling directors remuneration must not outweigh the benefit that can be achieved. For
instance, for a small private company with just a few shareholders and directors,
such as a family-controlled closed company, it may be too costly to set up a remuneration committee if control can be carried out effectively in a general meeting.
On the other hand, if the general meeting cannot effectively and efficiently control
the cost, a remuneration committee or an alternative control mechanism such as
court proceedings may be required to carry out the task. Similarly, whether the
shareholders vote on directors remuneration should be binding or purely consultative must be determined by a cost and benefit analysis. However, what differentiates private and public companies must go beyond mere agency costs. A public
company has more power and rights to use public resources and engage in societal
development. Such rights and power should come with a higher responsibility and
accountability, which rests not only with shareholders but also with wider parties
who have an interest in or may be affected by the powers exercised by the public
company. The reason that a private company would not be required to be subject to
such greater control is not simply a cost issue, but rather the relation it has with
public resources, i.e., access to information and cheaper ways of obtaining capital.
4.2.5
Legal vacuum
One of the effects of such an agency costs-based approach is that the rules would
not be integrated into the legal paradigm where the rules are normative weights
reflecting the primordial and authentic stratum of collective self-identification. To
integrate these rules into the legal system, socio-legal norms must be furnished. If
the legislator has not done so, it is then the role of the ECJ to carry out this task.
This also suggests that a comparative study on the law of obligation across the EU
will be essential. Furthermore, the absence of the proposed Fifth Directive, regulating the structures and duties of the management, poses a crucial obstacle to the
development of the regulatory regime.
The practices of national governments should give some indications to EU regulators, as many governments have injected public funds into their ailing banks,
which, in turn, will not be able to receive bonuses or increase their pay in some
cases. In the US, the Emergency Economic Stabilisation Act of 2008 (EESA)
banned golden parachutes and disallowed tax reductions for executives whose
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annual compensation exceeds $500,000 and whose companies received financial

aid through the Troubled Asset Relief Programme (TARP). In the UK, banks
receiving government capital injections awarded no cash bonuses in 2008 and no
pay increases in 2009. The norms of no reward for failure and no reward at the
expense of capital contributors have been shown in these cases. The difference is
that this does not take place by the operation of a legal norm but through agreements, essentially on a contractual basis or through government pressure. This
shows that these concepts could be the legal norms incorporated into corporate
governance. The problem is that the shareholders or other stakeholders are not able
to demand that these norms be included in the companys articles or the directors
service contracts. The remuneration, audit and risk committees did not recognise, in
the past, that there was such a legal norm, subjective rather than procedural, in the
performance of their function.
5.
THE MODEL OF UK LAW IN CONTROLLING DIRECTORS REMUNERATION:

COMMON LAW, STATUTORY LAW, REGULATION AND SOFT LAW
5.1
Socio-legal norms in common law
It is said that common law is a functioning harmonisation of vision with tradition,

of continuity with growth, of machinery with purpose, of measure with need,
mediating between the commands of the authority and the demands of justice.
Common law offers a number of socio-legal norms reflecting tradition, practical
needs and civil values. In common law, both in the UK and US, one of the principles for regulating directors remuneration is based on directors fiduciary duty,57 in
particular the duty to avoid conflicts of interest.58 Many US courts also approach
the question of directors remuneration based on directors fiduciary duties.59 Such
fiduciary duty entails good faith, honesty, conscionability and reasonableness. A
rule designed to assist the board, such as a clause in the articles, in whitewashing
their bad faith or dishonesty should not give the board the green light to go
ahead with setting their own levels of remuneration and prevent further judicial
scrutiny. Furthermore, the US Supreme Court stated in Rogers v. Hill that remuneration could be so large as to constitute waste, irrespective of whether the remuneration was tainted by fraud or self-dealing.60 In addition, the conflicts of interest
rule is rooted in the personal obligation of exercising good conscience and loyalty.
57 In the US Delaware Chancery Court, it was held that directors spring-loading stock
options were in breach of directors fiduciary duty.
58 P. Davies, Gower and Davies. Principles of Modern Company Law, 8th edn. (London,
Sweet & Maxwell 2008), at p. 382; Halt Garage (1964) Ltd, Re [1982] 3 All E.R. 1016.
59 Delaware Court in Gantler v. Stephens 965 A.2d 695 (Del 2009).
60 Rogers v. Hill 289 U.S. 582 (1933).
619
This is why remuneration must be approved either by the board where there are
non-executive directors, or by an independent remuneration committee and/or by
the shareholders in a general meeting. The duty is imposed to assist the board not
only to avoid such a conflict of interest, but also to be guided in exercising good
conscience. This requires the directors to make full disclosure of any potentially
improper relationships or conflicts of interest that they might have in their negotiations with their companies.
Contract law also plays a role in controlling directors remuneration. This was
demonstrated in the bail-outs of Lloyds and RBS, two leading banks in the UK,
from public funds in which the government was able to negotiate with the banks not
to pay bonuses to directors in 2008 and not to increase pay in 2009. A companys
articles of association can be treated as a contract that binds its directors.61 For
instance, the claw-back provision contained in the new UK Corporate Governance
Code suggests that companies should incorporate such a provision into their practices. For example, provisions that purport to prevent reward for failure can be
inserted in the articles, which will give shareholders the right to control directors
remuneration in court. This will require the court to interpret clauses contained in
articles of association, for instance, what constitutes a failure under the contract.
The court may also develop legal rules to deal with the effects of any remuneration
given to directors that may be contrary to the articles of association.
Furthermore, a fiduciary duty to carry out risk management should also be developed. This is discussed in a later section.62
5.2
Statutory provisions: a hybrid of the socio-legal norm and agency

costs norm
In addition to common law control based on the directors fiduciary duty and the
companys articles of association, another form of control can be imposed by
statutory law, which places emphasis on external control by auditors,63 internal
control by shareholders 64 and internal control through general meetings. UK law
imposes reporting duties on the directors, such as disclosing the amount of remu.
61 Problems can arise when the company seeks to fix the terms of a directors remuneration
without complying with the articles, see Guinness v. Saunders [1990] 2 AC 662, HL; UK Safety
Group Ltd v. Hearne [1998] 2 BCLC 208.
62 This is discussed in section 8.
63 S 498(4) of the Companies Act 2006 requires the auditors to give the particulars of the
information not obtained in the report. The second part of the directors remuneration report
concerning the actual payments made to the directors is subject to audit. However, the companys
remuneration policy is not. See Parts 2 and 3 of the Schedule of Regulations 2008/410.
64 S 439 of the Companies Act 2006, on shareholders advisory vote, makes it cheaper,
otherwise it is only possible to vote on it if they requisitioned a resolution to be added to the
agenda of the accounts meeting or requisitioned an extraordinary meeting of the shareholders.
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neration in the directors report.65 These types of statutory control are different from
the provisions on the general duties of directors, as they are the specific reporting
duties imposed on directors to enhance the enforcement of their general duties.
These provisions are not normative in nature, but prescriptive. These prescriptive
duties can be altered if there is a change in circumstances, notably if the reporting
duty becomes cumbersome and unnecessary. However, the changes are likely to
reflect on the cost rather than on the changing relation between the board and other
parties.
This prescriptive nature of the duties is the reason why they are imposed only on
certain companies. Furthermore, the scope and extent of the disclosure of the
remuneration are linked to practical rather than normative concerns. For instance,
certain information is not disclosed and the amount of the remuneration packages is
not disclosed in individualised form. However, the legal basis for the distinction
between what is to be disclosed and what disclosure should be individualised has
not been given. Is this to protect a directors privacy right? Moreover, the auditors
must give their opinion as to whether the actual amount given to the directors is in
compliance with the performance criteria set by the committee, although the auditors are not required to comment on these criteria. Instead, the auditors role is to
give a fair and true view of the affairs of the company rather than of the performance of the committees. However, the confidence the public places in the auditors
opinion must go beyond the simple true and fair approach. Should the auditors
assess the independence of non-executive directors and the method(s) used in
justifying their remuneration?
Some of the rules on reporting and disclosure are prescriptive and made to complement broad socio-legal norms such as directors fiduciary duty. Furthermore, the
point of good faith honesty should not be overlooked in the whole process. In
addition, while auditors should ensure that their statements are true and fair, they
must carry out this exercise by focusing on the substance rather than on formal
compliance.
5.3
Compliance with the prescriptive rule
The specific regulatory models set up by way of prescriptive rules based on agency
costs are not in line with the socio-legal norms. One of the reasons for this is that
the committees entrusted with the enforcement of those models do not enjoy legal
status, and their duties and rights are not legally regulated to the same extent as
those of the boards directors. Hence, mere compliance with these rules cannot
exonerate the remuneration from further scrutiny. For instance, there may be questions about the independence of the committee and the adequacy of the time and
65 S 420 of CA 2006, on directors of quoted companies; Large and Medium-Sized Companies

and Groups (Accounts and Reports) Regulations 2008/410, Sch. 8.
621
effort put in by the committee in scrutinising the remuneration policy, market data,
the actual amount of the payment, and the information available to the committee to
carry out reasonable deliberations on the issue of remuneration.
5.4
The nature of soft law as a regulatory instrument
The Combined Code, based on the Cadbury and Hampel reports, the Listing Rules
on directors remuneration, the FSA Code on Remuneration Practices 66 and the
Corporate Governance Code issued by the Financial Reporting Council are representative examples of the use of the soft law-based regulatory model. Although soft
law has been used to regulate directors agency costs, neither the Combined Code
nor the Listing Rules require shareholders approval of directors remuneration. The
best practice on remuneration recommended by the Combined Code is that a significant proportion of executive directors remuneration should be structured so as
to link rewards to corporate and individual performance.67 Furthermore, payouts
under the incentive schemes should be subject to challenging performance relative
to a group of comparator companies in key variables such as total shareholder
return.68 The Corporate Governance Code 2010 clarifies that performance criteria in
relation to the payment of annual bonuses ought to be designed with the long-term
interests of the company in mind. Payments or grants made under incentives
schemes should be based on performance criteria, which include non-financial
performance metrics, if appropriate, and such remuneration incentives ought to be
consistent with the risk management policies and procedures of the company. In
addition, the provisions recommend that companies should consider the use of
provisions that enable them to reclaim variable remuneration in the case of misstatement or misconduct. The Listing Rules require shareholders approval for the
granting of options to the directors, as this can dilute the position of other shareholders. However, if the granting of an option is to facilitate the directors incentive
scheme, shareholders approval can be dispensed with. Such share option schemes
need to be disclosed in the next annual report.69 This shows that control under the
Listing Rules is not based on the socio-legal justice norm against excessive, unreasonable, disproportional and unconscionable remuneration.
Both the Combined Code and the Listing Rules do not enjoy the statutory force
of law. As a consequence, the interpretation and enforcement of their provisions are
subject to a different kind of mechanism. They are, however, more flexible.
Whether such an alternative to giving actual legal force enhances social value is
.
66 Available at: <http://www.fsa.gov.uk/pubs/policy/ps09_15.pdf>; see also Walker Review

of Corporate Governance of UK Banking Industry, available at: <http://www.hm-treasury.gov.uk/
walker_review_information.htm>.
67 The Combined Code, B1.
68 The Combined Code, Sch. A, para. 4.
69 LR 9.4.2-3.
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questionable. These codes do not have democratic legitimacy, nor do they reflect
the social value of the general public consensus. The argument of treating directors
remuneration as a private matter no longer justifies the use of soft law.
5.5
Socio-legal norms in English case law
5.5.1
Excessive remuneration and conduct unfairly prejudicial to

shareholders
Excessive (or wasteful) remuneration touches on the socio-legal issue rather than
on the matter of agency costs. Excessive (wasteful) remuneration of directors can
amount to unfair prejudice to shareholders.70 This is demonstrated in the High Court
case of Irvine v. Irvine,71 in which the minority shareholders brought a petition for
relief based on a statutory provision entitling shareholders to bring a petition for
relief if the companys affairs are being, or have been, conducted in a manner which
is unfairly prejudicial to the interests of the shareholders. The court held that the
director awarding excessive remuneration to himself amounted to conduct unfairly
prejudicial to the interests of the shareholders.72In deciding whether the remuneration is excessive, that is, to assess the fair value of the contribution to the business, the test is whether an intelligent and honest person in the position of director
would reasonably believe the level of remuneration to be appropriate.73 The court
also stated that directors remuneration must be justified by objective commercial
criteria.74 In assessing whether the remuneration was excessive, the court considered the evidence presented by expert witnesses in the field. It is safe to say that the
ratio established in this case was that if, against objective commercial criteria, an
intelligent and honest person would not reasonably believe the level of remuneration to be appropriate, the director receiving the remuneration would be likely to be
said to have conducted the affairs of the company in a manner unfairly prejudicial
to the interests of the shareholders.
However, this is not to say that a director awarding himself a high level of remuneration amounts to unfairly prejudicial conduct per se. For instance, it would
70 S 994(1) of the Companies Act 2006; Irvine v. Irvine [2006] EWHC 1875; Sam Weller &
Sons Ltd, Re [1990] BCLC 80; directors have fixed their remuneration in disregard of the
provisions of the articles governing that matter, see Ravenhart Services (Holdings) Ltd, Re [2004]
2 BCLC 375.
71 Irvine v. Irvine [2006] EWHC 1875 (Ch); for a comparable case in the US Supreme Court,
see Rogers v. Hill, 289 U.S. 582 (1933).
72 R. Goddard, Excessive Remuneration and the Unfair Prejudice Remedy, 13 Edinburgh
Law Review (2009) pp. 517-519.
73 Charterbridge Corporation Ltd v. Lloyds Bank [1970] Ch. 62.
74 The US Delaware Court also said, in Rosenthal v. Burry Biscuit Corporation, that the
directors services value must bear some reasonable relation to the value of the stock options
given. See Rosenthal v. Burry Biscuit Corp., 60 A.2d 106, 109 (Del.Ch. 1948).
623
not be a case of excessiveness if a large part of such remuneration given to the

director represented the dividend of the directors shareholding in the company for
the purpose of obtaining a favourable fiscal position. In the Irvine case, the fact that
the director never consulted the shareholders at general meetings before awarding
himself his remuneration was a crucial factor as to why such conduct was found to
be unfairly prejudicial.75 This may be an aspect that influenced the courts view on
the whole case. However, whether shareholders have been consulted at general
meetings may relate to issues other than excessiveness.
In this case, the factors that determine the issue of excessiveness of any remuneration include: (1) what is included in the remuneration package, such as salary,
bonus, expenses and dividends to which the director is entitled, and (2) how the
level and structure of the remuneration are justified, taking into account the directors personal contribution to the company. It is interesting to note that the court
considered that the directors personal connections with other companies, potentially a main factor to the growth of the company, did not justify a high remuneration. That is to say that a high level of remuneration, even though awarded in
accordance with a performance-based remuneration policy, can still be deemed
excessive, even if the attempted justification is that the company would not have
been able to make profits but for the directors contribution. As the court stated, the
director should have built a company that was able to grow not just because of his
personal connections. The court used the business jargon corporatised personal
connections to illustrate the directors duty to make his personal connections an
asset to the company. The directors personal connections that brought profits to the
company could not be regarded as extra to his general duty to justify an extra
reward.
The fact that the shareholders did not receive the dividends to which they were
entitled not necessarily a statutory legal right also influenced the view of the
court. The shareholders were said to have a legitimate expectation as to their entitlement to the dividends, depending, inter alia, on their relationships with the
directors and their involvement in the companys affairs. Therefore, even though
the shareholders did not have a strict legal right to receive dividends, the directors,
by refusing to declare dividends to the shareholders, may have been considered to
be in breach of duty not to exercise unfettered discretion.
However, a breach of the directors duty might not have been found to exist,
even if the remuneration was viewed as excessive, if:
(1) the company had adopted the dividend and remuneration polices agreed by the
shareholders;
(2) the shareholders had promptly been given proper notices to attend the general
meetings where they were to be consulted on the matter of remuneration; and
75
Irvine v. Irvine [2006] EWHC 1875 (Ch).
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(3) the remuneration could have been justified based on objective commercial
criteria such as using a comparative data survey.
Therefore, whether an excessive remuneration amounts to unfairly prejudicial
conduct, and whether the remuneration is excessive, should be distinguished.
Whether the remuneration is excessive is measured by an objective test of an
intelligent and honest person in the position of director against the reasonableness
and proportionality of such remuneration. The court did not expand on reasonableness and proportionality by giving a formula or providing a test, as it would normally do in administrative cases. Instead, it decided the issue of reasonableness
and proportionality by considering the evidence given by the expert witnesses
based on (1) their professional competence, and (2) the reliability of the methodology used by them. In conclusion, remuneration can still be excessive even if there is
(1) no breach of articles of association, (2) no breach of fiduciary duty, and (3) no
breach of shareholders legitimate expectation. The court neither affirmed nor
rejected the argument that there were direct relationships between the breaches and
the point of excessiveness. It may be safe to say, therefore, that the breaches or
conducts that fell short of the breach influenced the courts approach in deciding (1)
what an intelligent and honest person is, (2) what the concept of reasonableness and
proportionality is, and (3) what the professional competence of expert witnesses is,
such as the reliability of their methodology.
5.5.2
Directors conduct and remuneration
The conduct of the director and the excessive level of remuneration are the causes
leading to the conclusion that the directors conduct is unfairly prejudicial to the
shareholders. It can be said that the unfairly prejudicial conduct leads to excessive
remuneration being awarded, but such conduct is not the legal cause that determines whether such remuneration is excessive. A director may have fulfilled all his
statutory duties by complying with the requirements laid down by the Companies
Act, regulations and soft law, by observing his fiduciary duties owed to the company and by complying with the enhanced duties laid down in the articles of association, but this may not affect how an intelligent and honest person perceives the
excessiveness of the remuneration. Rather, these factors contribute to the assessment of whether the conduct of the directors is unfair and prejudicial to the shareholders.
Under the approach in Irvine, remuneration is likely to be treated as excessive
if the conduct is unfairly prejudicial, such as if there is a close or near breach of
directors duties, a breach of shareholders legal rights or if shareholders expectations have not be fulfilled. On the other hand, an excessive remuneration can also
amount to unfair prejudice to the shareholders.
This case demonstrates how socio-legal norms can be developed to be the basis
for a regulatory regime. In this case, one can see how unfair prejudice can be a
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reference for evaluating a directors conduct concerning the issue of remuneration.

The discussion is more than a matter of quantitative assessment, and once the necessary socio-legal norms can be established, the issue of the amount becomes an issue
of evidence to be taken into account. The crucial matters to be considered include the
shareholders expectations,76 the treatment of the shareholders by the directors 77 and
the corporate environment surrounding the directors conduct. Such a socio-legal
norm could also assist the shareholders while they exercise their votes on approving
the accounts and management strategies of the company in the general meeting.
This case also demonstrates that transaction-based compensation 78 and promotion may lead to corrupt practices contrary to companys policies and interests. The
audit committee, the board and the risk department should note such a risk associated with the compensation structure.79
.
5.5.3
Transposing the applicability of unfair prejudice to a listed public

company
Although an unfair prejudice petition is a legal model offering protection to the

minority shareholders of companies on a smaller scale, it is not easily available to
shareholders of larger companies, e.g., listed companies. Even though the law does
not prohibit shareholders from bringing petitions based on this provision, the reliefs
that the court may award discourage the shareholders from using it. If the court is
satisfied that there has been unfairly prejudicial conduct, it is empowered to consider a number of reliefs and grant the reliefs it thinks appropriate. These reliefs
include:80 a buy-out order,81 a sell-out order, allowing minority shareholders to bring
a derivative action against the directors,82 and regulating the future affairs of the
company.83 The first two types of relief can be viewed as redundant if there is a
ready market, because the shareholders can sell their shares in a ready market,
either at a premium or at a loss; it is only when the shares are sold at a loss that it
can be said that there is prejudice. Assuming the court could compel the majority
76 M. Duffy, Shareholders Agreements and Shareholders Remedies Contract Versus Statute,

20 Bond Law Review (2008) pp. 1-27; A. Raynaud, Decisions Based on Shareholder
Expectations, Nissan Annual Report (2004), at p. 53; L. Mitchell, The Legitimate Rights of
Public Shareholders, 66 Washington and Lee Law Review (2009) pp. 1635-1682.
77 E. Helland and M. Sykuta, Whos Monitoring the Monitor? Do Outside Directors Protect
Shareholders Interests?, 40 Financial Review (2005) pp. 155-172.
78 Remuneration awarded based on the number and amount of transactions entered into by
the directors as if they are a commission-based remuneration package.
79 J. Song and B. Windram, Benchmarking Audit Committee Effectiveness in Financial
Reporting, 8 International Journal of Auditing (2004) pp. 195-205.
80 S 996(2), CA 2006.
81 S 996(2)(e), CA 2006.
82 S 996(2)(c), CA 2006.
83 S 996(2)(b), CA 2006.
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shareholders to purchase minority shares not at a loss, which would be the case if
the shares were sold at the market price the issue is not whether the court can
interfere with the market price or the ability to evaluate the share price, but whether
it can ascertain the purpose of the reliefs granted. Should the reliefs be granted to
compensate the shareholders because of the excessive remuneration or to force the
directors to make restitutions for the remuneration received?
In the Irvine case, counsel for the respondent director asked the court to consider the relief of regulating the future affairs of the company by imposing a cap on
the level of remuneration. The court did not give reasons for not doing so. Surely it
is not because the court did not have the power to do so, but because doing so
would subject the court to certain criticism. For instance, the court might be blamed
for imposing the cap if the business failed and would not have failed had the alternative reliefs been given. However, this cannot be the sole reason for not imposing
a cap. Should the court consider the cash-flow problem of the company when
deciding the compensations and damages to be awarded to the victims of the company? Should the court be subject to criticism if it orders a monopolistic company
to split up into two companies, which results in less profit or even a loss-making
business? The answer must be no. If so, why should the court be afraid of imposing
a cap on remuneration when such remuneration has been found excessive? Furthermore, as the court could grant such other reliefs as it thinks appropriate, a
restitution order that compels the director to give back the excessive part of the
remuneration would not be seen to be disproportionate or unreasonable.
6.
THE BELGIAN GOVERNANCE REGIME: IMPLEMENTING EU AGENCY

COSTS NORM-BASED LEGISLATION
6.1
General legal framework
In Belgium, the main laws governing remuneration are the Companies Code (Code
des Socits), the Corporate Governance Act 2010 (Loi belge du 6 avril 2010) and
the Corporate Governance Code 2009 (Code belge de gouvernance dentreprise,
also known as Code Daems). The FSMA (Autorit des services et marchs financiers) has also issued a circular governing directors remuneration in financial institutions. The main obligations imposed by the law are on the board, the committee, the
non-executives and, to a certain extent, the auditors. Under the Companies Code,
the remuneration cannot be set without the authority of the general meeting or the
articles of association.84 Hence, the shareholders at the general meeting have a right
to approve the remuneration report in addition to the annual report which must
contain the remuneration report.
84
Art. 517, Code des socits.
6.2
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Disclosure under the Companies Code
The disclosure regime imposed by the Companies Code includes disclosure of the
remuneration policy 85 and the directors remuneration. The CEO (the executive)
should disclose individually the amount and composition of his remuneration.86 For
the other directors, group disclosure is sufficient. However, the shareholders may
have the right to demand the directors to publish their individual remuneration
through their right of questioning (droit dinterpellation).87 For non-executive
directors, individual disclosure of all direct and indirect advantages is required.88
.
6.3
Legal requirement of the remuneration committee
Unlike the British soft-law approach to the composition and duties of the remuneration committee, the Corporate Governance Act 2010 requires that the remuneration
report be established by a remuneration committee to be set up by the board. The
majority of the members of the committee must be independent.
6.4
Golden parachute
The Corporate Governance Act 2010, inspired by the EUs recommendation, further
regulates directors severance pay. A severance pay exceeding 12 months or 18
months if recommended by the remuneration committee must be approved by the
general meeting. If the severance pay is contrary to this law, the disposition of it
will be nullified. This position is not currently adopted by the UK law. The UK
Corporate Governance Code also imposes the same limitations but does not grant
shareholders the power to approve severance pay exceeding the 12-months and 18months limitations.89
6.5
Employee-stakeholders role
Belgian law also gives greater power to the employees to give their opinion on the
directors severance pay. This reflects what has been discussed in the earlier section
as the approach to adjusting the structural deficiency of negotiation. The Corporate
Governance Act 2010 provides that the works council or in case there is none, the
committee for prevention and protection at work or the trade union should be
informed at least 30 days prior to the general meeting of the boards intention to
85
86
87
88
89
Art 7.4, Code de gouvernance dentreprise.

Arts. 7.15 and 7.17, ibid.
Art. 549, Code des socits.
Art. 7.5, Code de gouvernance dentreprise.
Art. 9, Corporate Governance Act 2010.
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grant severance pay. Therefore, unlike in the UK, these stakeholders have the
opportunity to make known their comments and recommendations about the severance arrangements.
Before the enactment of this law, a certain controversy was created, notably in
the opinion issued by the Belgian Conseil dEtat, the Belgian supreme administrative court. The concern was that the requirement of shareholders approval for
severance pay exceeding the limitations may interfere with the Employment Contracts Act 1978, resulting in discrimination between executives with an employment contract and employees who may earn more than the executives but are not
considered as leading persons by the Corporate Governance Act 2010.90 The issue
will have to be resolved by the Constitutional Court in the future. This is an example of how these two legal institutions company law and labour law interfere
with the direction of the remuneration governance regime.
7.
DIFFERENT SOCIO-LEGAL NORMS LEADING TO DIVERSE ENFORCEMENT
7.1
Belgian private enforcement
Enforcement action under the remuneration regulatory regime imposed by the

Belgian Civil Code and the Companies Code may be taken either by the board or
by the shareholders. However, any legal action should be linked to the fault of the
directors.91 An action against the directors may be based on general tort or on
breach of contract under the Civil Code,92 on breach of companies articles of
association,93 on conflicts of interests,94 on management fault (.faute de gestion
simple)95 and on serious management fault (.faute de gestion grave et charactrise)96 if the company is liquidated under the Companies Code. A legal action
based on contractual liability concerns the individual liability of the director, and
the action action mandate 97 can only be brought by the company provided no
discharge has been granted to the directors by the general shareholders meeting. If
minority shareholders have not approved the discharge at the meeting,98 for in.
90 O. Debray and D. Lemberger, La nouvelle loi Corporate Governance et les limites la

rmunration et aux indemnits des dirigents denterpise, Forum Financier (2010/IV) p. 195.
91 Art. 527, Code de gouvernance dentreprise.
92 Art. 1382, Code Civil.
93 Art. 528, Sec. 2, Code des socits.
94 Arts. 523 and 524, ibid.
95 Arts. 527 and 528, ibid.
96 Art. 530, ibid. There is no need to establish a causal relationship between the serious
mistake and the bankruptcy. It suffices that the mistake contributed to the involuntary liquidation.
97 Art. 561, ibid.
98 Art. 562, Sec. 4, ibid.
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stance, non-approval for the severance pay under the Corporate Governance Act
2010, they can bring the action on behalf of the company provided they represent 1
per cent of the votes of the total shares or own shares which represent the capital for
a value of at least EUR 1,250,000.99 UK minority shareholders do not enjoy the
same legal right to bring an action against the board in these circumstances.
Shareholders can issue proceedings based on the causes of action mentioned above
through an action on behalf of the company (action sociale)100 or a minority action
(action minoritaire).101 Furthermore, the corporate governance statement published on
the companys website may be considered material information to be relied on by the
investors. Hence, if the company fails to follow the Code of Corporate Governance
2009 but it claims to have done so in the corporate statement, this may give rise to an
action in tort under Article 1382 of the Civil Code. As far as the stakeholders action
is concerned, Belgium follows the monist board structure, as opposed to the Germanstyle dualist structure, and the employee-stakeholders do not have the right to enforce
the requirements imposed by the Corporate Governance Act and Code.
7.2
Belgian public enforcement
As far as public enforcement is concerned, companies listed on the Belgian stock

exchange are subject to oversight by the FSMA, the Belgian financial services regulator.102 Firstly, the FSMA can enforce the Corporate Governance Act against listed
companies and the circular on remuneration 103 against financial institutions. Even
though the FSMA cannot enforce the Code of Corporate Governance 2009 directly, it
may be able to take action against a company that does not comply with its published
corporate governance statement, which has been relied on by the investors.104 Secondly, since the company should disclose its remuneration in the annual accounts,
which are relied on by the investors, the FSMA can take action against the company
if the disclosure does not comply with the requirements imposed by the Code of
Corporate Governance. Even though the Code is subject to the principle of comply
or explain, the reason for non-compliance cannot be capricious.105 The Belgian
FSMA does not have a code of practice on remuneration, as adopted by the UKs
Financial Services Authority. With such a code of practice, the UK FSA is therefore in
a better position to enforce the code. The FSMA and FSA may not treat all the com.
Art. 562, Sec. 2, ibid.

Art. 561, ibid.
101 Art. 562, ibid.
102 Law of 2 August 2002.
103 Circular No. 30 of 26 November 2009. It lays down requirements for remuneration in the
financial institutions.
104 Art. 7.4, Code des socits.
105 In this regard, the UKs financial services regulator FSA may enforce soft law if the
company publishes information stating its compliance with soft law.
99
100
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panys corporate governance statements as material information to be relied on by the

investors. It should also be noted that the sanctions for non-compliance may be
imposed against the issuers (companies) rather than the directors.
7.3
Discrimination caused by capping
In response to the public demand to regulate directors remuneration, the Belgian

government purported to regulate severance payment, the so-called golden parachutes. In April 2010, the Corporate Governance Act was passed to regulate golden
parachutes. Before the Act was passed, the Belgian Conseil dEtat had given a
negative opinion on the law on the grounds that the law was discriminatory in
nature. This is because it intends to impose a cap on payment to the directors
employees of the company but such a cap does not apply to other employees.106
This is another example of how these two legal institutions company law and
labour law interfere with the direction of remuneration governance regime.
7.4
Divergence in enforcement and the role of the ECJ
One of the implications of such diverse enforcement for the European harmonisation project is that the European Court of Justice would have to take an active role
in harmonising socio-legal norms for the remuneration regulatory regime. The
issues include the legal enforcement of soft law, the basis of shareholders right to
participate in the general meeting, the scope of the principle of equal treatment, the
legal basis of transparency, issues on the interests of the company, minority shareholders rights, the application of conflict of interest, and shareholders expectations
regarding public enforcement.
8.
BUILDING SOCIO-LEGAL NORMS FOR THE REMUNERATION REGULATORY

REGIME INTO THE EUROPEAN COMPANY LAW FRAMEWORK
8.1
Current approach without substantive socio-legal norms
The current approach to directors remuneration regulation is to follow the agenda

of European corporate governance.107 Despite the agenda of European corporate
106 J. Clesse, Les avantages financiers lis la sortie de certaines fonctions: contribution en
mode mineur sur les parachutes dors, in N. Thirion, ed., Lentreprise et ses salaris: quel
partenariat? (Brussels, Bruylant 2009) p. 393.
107 Commission Recommendation 2004/913/EC fostering an appropriate regime for the
remuneration of directors of listed companies, supra n. 5; Commission Communication on
Modernising Company Law and Enhancing Corporate Governance in the European Union A
Plan to Move Forward, supra n. 38.
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governance including other socio-legal norms, the normative basis for the legislation revolves around agency costs. Therefore, emphases are placed on the disclosure regime, the function of independent control through non-executive directors
and the remuneration committee, and the shareholders control in general meetings.
However, unlike domestic UK law, other normative legal bases of control of directors remuneration, such as duty of loyalty and duty of no conflict of interest, do not
exist in European company law. The shareholders right to express their views on
remuneration has been mentioned; however, it has not been expanded to become a
normative basis which will lead to a shareholders action in court when their views
have not been followed or taken into account.
8.2
The limit of an agency costs-based legislative approach
Agency costs can steer the direction of the regulation. Such a regulatory approach
based on agency costs has the effect of limiting the content of regulation to disclosure and the method of control to procedural compliance. The result is that such a
scrutiny does not probe into what is to be disclosed and for whose benefits and
interests. This involves the exercise of a cost and benefit analysis in which a number of factors such as firm competitiveness, inflation and market competitiveness
are taken into account. Competitiveness issues focus on how to set a regime that
can best recruit, motivate and retain directors. The aim of European regulation is to
bring disclosure and compliance standards to the European level; however, such an
approach does not aim at harmonising the normative legal basis for the governance
of directors remuneration. It may be the case that harmonisation of the normative
legal basis will take more time and effort as it involves more comparative analysis
of the substantive laws of the Member States. It is therefore less costly to focus
only on the procedural requirements, leaving the substantive socio-legal norms to
the Member States.
Furthermore, harmonising regulatory and procedural requirements, such as on
the information to be disclosed, the internal bodies that are to control the procedure
and the effect of such control, will not challenge the national normative legal basis,
in other words, the socio-legal norms of the Member States. Such a legislative
approach intends to create an expedient model of control rather than a normative
paradigm of a remuneration governance regime, which can form part of the legal
institution of European company law. It cannot, therefore, be a normative legal
paradigm as one may see in domestic company law. One of the reasons for this is
that European company law covers only limited areas: shares capital, corporate
accounts and reports, cross-border takeovers, corporate auditors and corporate
prospectuses of listed companies. The normative legal paradigm of European law
has not yet been formed. However, that does not mean that the current European
legislative framework and the European company law agenda cannot set in motion
the development of a remuneration governance regime based on a socio-legal norm.
What it does, nevertheless, is to leave the existing laws of the Member States to
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develop in parallel with European legislation. As the analysis of UK and Belgian

law has demonstrated, the domestic laws of the Member States can develop beyond
the theory of agency costs on the basis of corporate social responsibility norms.
However, if European legislation continues its development based on agency costs
and leaves the Member States to develop their own normative legal institutions, this
may result in further divergence, which will make future harmonisation more
difficult. As evident from the discussion of the Belgian governance regime compared to the UK regime, this can also lead to differences in enforcement.
8.3
The current European company law paradigm: legal personality,

limited liability, directors duty, shareholders rights, third parties
protection, and the CSR
If there were to be an emerging European company law paradigm, it would have to

be established based on the follow principles: (1) a company is a legal person rather
than a nexus of contracts;108 (2) shareholders liability is limited to their share
contributions rather than unlimited;109 (3) the directors owe duties to the company
and/or the shareholders;110 (4) shareholders have certain rights to participate in the
management and have their grievances addressed;111 and (5) third parties such as
creditors should also have their interests protected.112 There is a view that the model
should include the protection of non-capital contributors, such as employees, known
as stakeholders. With principles of free movement of capital and freedom of establishment in the background, important democratic values such as transparency 113
.
108 E. Werlauff, EU Company Law: Common Business Law of 28 States, 2nd edn.
(Copenhagen, DJF Publishing 2003), at p. 1. However, the legal system of the Member State
can also influence the development of such a doctrine. See F. Hallis, Corporate Personality: A
Study in Jurisprudence (London, OUP 1930).
109 Article 2(1) of the Twelfth Council Directive 89/667/EEC of 21 December 1989 on
single-member private limited-liability companies, OJ 1989 L 395, 30 December 1989, pp. 4042; Werlauff, supra n. 108, at pp. 39 and 140.
110 Proposal for a Fifth Council Directive; on duty of loyalty, Article 43(1)(7)(b) of the Fourth
Council Directive 78/660/EEC of 25 July based on Article 44(3)(g) of the Treaty on the annual
accounts of certain types of companies, OJ 1978 L 222, 14 August 1978, pp. 11-31; Werlauff,
supra n. 108, at pp. 44 and 420.
111 Proposal for a Fifth Council Directive; Werlauff, supra n. 108, at pp. 372 and 437.
112 First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards
which, for the protection of the interests of members and others, are required by Member states,
OJ 1977 L 26, 31 January 1977, pp. 1-13; it is also evident in the rules governing capital
maintenance, see Second Council Directive 77/91/EEC of 13 December 1976, OJ 1977 L 26, 31
January 1977, pp. 1-13; Werlauff, supra n. 108, at p. 411.
113 It is evident in the Directives requiring corporate disclosure and publication of accounts:
Fourth Council Directive 78/660/EEC, supra n. 110; Seventh Council Directive 83/349/EEC of
13 June 1983 based on Article 44(3)(g) of the Treaty on Consolidated Accounts, OJ 1983 L 193,
18 June 1983, pp. 1-17.
633
and accountability 114 are only just emerging in this development while civil values
are currently not yet fully integrated in the framework.
From the viewpoint of corporate legal personality, directors remuneration becomes an internal issue to be decided according to the companys articles of association and through shareholders general meetings. The current view is that once
the remuneration has been awarded according to the companys articles of association, and has been sanctioned by the shareholders at the general meeting, no question of substance can be raised thereafter.115 That is to say that shareholders may not
revoke what has been approved other than on the ground of procedural irregularity,
even if the remuneration has turned out to be excessive and unreasonable. Governments may be said to have no role in such an internal corporate affair other than to
protect the interests of the shareholders. However, it may be argued that since the
protection of legal personality is made possible by the state, the state can impose
conditions on such a possibility; it may choose to impose further regulatory requirements on the remuneration. A similar legitimacy argument can be made for
businesses that benefit from state aid. For instance, state aid to ailing banks legitimises the states intervention on such an internal affair as remuneration practice.116
The principle of shareholders limited liability allows entrepreneurs who lack
capital, or have limited access to capital, to be able to trade and gain a share in the
market economy. It is a further protection in addition to corporate legal personality.
An argument against such a principle is that it would encourage imprudent and
dishonest trading against the interests of the creditors. This is the case when the
directors are also the main shareholders in the company. One of the implications
that can be drawn with regard to directors remuneration is that directors could
award themselves a large amount of money against the interests of the creditors.
Such distrust has been, to some extent, moderated by provisions of wrongful trading and fraudulent trading: one against imprudence and the other against dishonesty. Nowadays, shareholders may not be involved in the companys affairs as
much as they once were when they were also the directors; if they fail to regulate
directors remuneration and thus encourage a high risk-taking strategy caused by
excessive rewards, their liability is only limited to their share contributions. The
dividends awarded or profits gained through shareholder trading are not subject to
creditors claims. Corporate legal personality prevents the shareholders from being
sued by the creditors or other stakeholders, even if they are the majority shareholders or shareholders having paramount influence. However, it should be reconsid.
114 Commission Recommendation 2002/590/EC of 16 May 2002 Statutory Auditors

Independence in the EU: A Set of Fundamental Principles (C(2002) 1873), OJ 2002 L 191, 19
July 2002, pp. 22-57.
115 Institutional Voting Information Service (2011), ABI Principles of Remuneration, available
at: <http://www.ivis.co.uk/ExecutiveRemuneration.aspx> (accessed on 10 December 2011).
116 S. Munoz, D. Enrich and P. Kowsmann, Just Dont Call It a Bailout, The Wall Street
Journal (2011), available at: <http://online.wsj.com/article/SB1000142405297020405840457710
8723777515602.html> (accessed on 10 December 2011).
634
Joseph Lee
EBOR 13 (2012)
ered whether this should continue to be the rule and whether the shareholders
should have legal or legitimate duties to regulate directors remuneration.
From the viewpoint of stakeholders, in the dual corporate management structure
employees may be represented on the board, where they can decide or supervise the
matter of remuneration. However, employees do not have the right to decide the
remuneration of the directors, and the directors do not need to consult the employees regarding their remuneration. Furthermore, with a profit-driven, cost-cutting
strategy, directors may be rewarded by cutting labour costs, which is in conflict
with the interests of employee-stakeholders.
The participation of other stakeholders in deciding directors remuneration is
limited. The difficulty lies in identifying who the stakeholders are. If the customers
of a bank are to be considered stakeholders of the company, this will include depositors, insurance policy holders, borrowers and mortgagors. Mortgagors may
argue that directors remuneration is at the expense of their high interest payment,
and that therefore they are justified in having a say on the matter or redress of
damages caused. Against such a view based on strict legal entitlement and enforcement it may be argued that a company should set the remuneration policy;
however, the stakeholders enforcement should be by social rather than legal
means, i.e., if a mortgagor is not satisfied with the banks policy on remuneration or
the level of the remuneration of the directors, he can choose other financial institutions from which to purchase the same or similar kinds of services. Although the
concept of corporate social responsibility (CSR) may reinforce certain common
values such as prudence, fairness, honesty and transparency, it is difficult to argue
which aspect of CSR is the basis for regulating directors remuneration. On the
contrary, directors may be rewarded with a higher level of remuneration if CSR has
been implemented, as an incentive for the directors to carry out CSR strategies.
8.4
Risk management
Remuneration and incentive systems have played a key role in influencing financial
institutions sensitivity to shocks and the development of unsustainable balance
sheet positions. Failure to employ the appropriate type of stress testing, scenario
analysis and adequate impact assessment and to introduce an adequate corporate
governance system with a sound risk management policy, ensuring a dialogue
between management and risk function, constitutes a management and board
failure. This should have a part to play in the remuneration of the board. If there is a
systemic failure or board failures on risk management, this should also reflect on
the boards remuneration. Furthermore, a high ratio of pay disparity between the
directors and the average employees in the company as well as the companies of the
sector also represents a management risk as well as a reputation risk. The board
should introduce the risk management concept into the companys corporate governance. Risk management requires the board to properly identify the risks of the
companys remuneration practice as well as the strategies relevant to the companys
635
remuneration policy, to assess the risk at both financial and social level, and to
mitigate these risks. Finally, the board should review its risk management on a
periodic basis. Failure to do so would constitute a breach of their duty and would
have repercussions on their remuneration.
9.
CONCLUSIONS
In this article, it is argued that the European legislative approach to directors

remuneration should focus on socio-legal norms, which are: (1) directors duties,
including the duty to avoid conflicts of interest, the duty to take the long-term
interests of the company into account, and the duty of risk management; (2) the
shareholders right to participate in the management and to promote the companys
long-term interest; and (3) the stakeholders right to participate in corporate governance. The more specific norms such as a balanced negotiation structure, no reward
for failure, and transparency should be incorporated into the governance regime. A
claw-back (look-back) regime should be made available to the stakeholders based
on the law of restitution. The legal status of various committees should be made
clear. Auditors accountability should be strengthened. The objectives of maintaining a reasonable ratio between the top managers and the ordinary employees,
fostering a sustainable development, should be incorporated into the regulatory
system. The current European approach to legislation on directors remuneration is
based on agency costs, using the cost-benefit analysis and the market as the basis
for the broader regulatory policy at EU level. All of the rules are made to reflect the
costs that are incurred or that could have been incurred by the directors to the
company and neglect the underlying normative social and legal questions. As a
consequence, the benchmark for measuring the correct rule is that the cost of the
rules should not outweigh the benefits that the directors could produce without
these rules. As shown, this has the effect of losing sight of the cost to the employees
of the company, which is a social issue. Furthermore, these rules are responsive and
temporary, because the choice of the optimal regulatory model is circumstantial and
the primary result of a cost and benefit analysis exercise. Under this approach, the
factors to be taken into account are: (1) whether the management cost to the company of adopting the procedure will be too expensive and burdensome; (2) whether
the control procedure will make European companies less competitive against other
counterparts; (3) whether disclosure rules will result in inflation; and (4) whether
harmonisation of the rules will reduce competition within the internal market. The
model is prone to be modified once market conditions change. The European
company law programme includes certain normative legal bases such as maintaining directors fiduciary duties, enhancing shareholders rights and third parties
protection, and promoting corporate social responsibility. These values, though
mentioned, have not yet been developed as the backdrop to the legislative process
for the directors remuneration governance regime.
636
Joseph Lee
EBOR 13 (2012)
By examining the Commissions recommendations on directors remuneration

for listed companies, as well as its consultation paper on directors remuneration for
financial institutions, it can be observed that the regulatory approach focuses on
procedural compliance, in particular the regime of disclosure and the structure of
independent control. However, a substantive normative basis has not been developed. It is argued that procedural compliance cannot per se legitimise directors
remuneration.
By the same token, it is argued that in order to maintain a common European
law founded on socio-legal norms, European legislation should focus not only on
procedural compliance based on agency costs to impose a positivistic form of law,
but also primarily on building a governance regime based on socio-legal norms
which are socially tested norms that reflect reality and are capable of growing
organically. The example given is the control model under the UK and Belgian
legal system in which there are similar procedural controls under different legislative regimes, both statutory and soft law-based, i.e., the Combined Code and the
Listing Rules. However, there are also normative legal bases for such control. One
of the examples is based on the statutory protection against unfair prejudice under
UK law, which describes how the affairs of the company relating to directors
remuneration can give rise to unfairly prejudicial conduct. Such unfair conduct
triggers shareholders action and the courts review of the remuneration as well as
the process of granting such remuneration.
If directors remuneration is about market confidence, the focus should be on
ethics and public consensus rather than agency costs. The Commissions approach
to regulating directors remuneration is based on the agency costs norm rather than
the socio-legal one. Due partly to domestic legal developments and partly to law at
the European level, both the UK and Belgian reforms towards the governance of
directors remuneration also follow the trend of focusing on regulatory compliance
rather than on normative legal development. However, this does not mean that UK
and Belgian law do not have normative legal institutions that can be developed for
the remuneration regulatory regime. It is evident that the UKs statutory concept of
unfair prejudice normative rather than responsive has been applied in a dispute
relating to directors remuneration. Equally, a number of normative legal bases
embedded in Belgian law can potentially be developed to form the governing basis
of directors remuneration.
The intervention by the Conseil dEtat in Belgium shows how the legal structure
can lead to an unexpected discussion. It may be the case that the agency costs-based
legislations of the Commission are easier for the Member States to agree to, because such an approach may appear to be value-neutral and the scope of application
is more limited. Therefore, the impact of these legislations on the domestic legal
structure will be limited. Nevertheless, the domestic legal structure can lead to a
different outcome than that intended by this type of legislation. Since most of the
directives do not state the modes of enforcement, the enforcement will depend on
the domestic legal structures of the Member States. It will, for instance, depend on
637
the directors duties, shareholders rights, the nature and duties of non-executive
directors, the concept of independence, other rights and the protection of the stakeholders, the relationship between public and private enforcement, and the legal
nature of soft law. This may lead to divergence in enforcement within the European
Union. It is then for the European Court of Justice to play a pivotal role in harmonising the enforcement, through so-called negative integration. One of the effects
may be to harmonise the fundamental legal basis across Member States. In this
way, the shortcoming of the Commissions legislative initiative to form a directors
remuneration governance regime based on agency costs can be remedied by a more
active Court of Justice. As in many areas of economic law, company law is influenced by political ideology, economic policy, international pressure, the law within
the legal system and public expectations. The ECJ will have the task of discerning
these elements in the multi-faced EU while turning them into legal science.
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European Business Organization Law Review 13: 599-637

2012 T.M.C.ASSER PRESS

Regulatory Regimes and Norms for Directors

Introduction: regulatory failure and initiatives to curb excessive

Issues of directors remuneration ........................................................... 603

Socio-legal norms or agency costs......................................................... 609

The model of UK law in controlling directors remuneration:

Excessive remuneration and conduct unfairly prejudicial to

The Belgian governance regime: implementing EU agency costs

Different socio-legal norms leading to diverse enforcement ................. 628

Building socio-legal norms for the remuneration regulatory regime

Directors Remuneration EU, UK and Belgian Law Compared

INTRODUCTION: REGULATORY FAILURE AND INITIATIVES TO CURB

Despite many attempts of governmental institutions to safeguard market confidence

Ibid., Art. 8.1.

Directors Remuneration EU, UK and Belgian Law Compared

ISSUES OF DIRECTORS REMUNERATION

How to address the question of legitimacy of government

13 European Commission, Green Paper on Corporate Governance in Financial Institutions

Directors Remuneration EU, UK and Belgian Law Compared

discretionary bonuses and not to contractual ones exceeding 25,000.16 The

Adjusting the structure of negotiations

Further indirect controls can be implemented under the principle of freedom of

18 B. Caillaud, R. Guesnerie, P. Rey and J. Tirole, Government Intervention in Production and

Directors Remuneration EU, UK and Belgian Law Compared

Transparency as a legitimate value to the community

21 B. Oviatt, Agency and Transaction Cost Perspectives on the Manager-Shareholder

Claw-back (look-back) mechanism

Directors Remuneration EU, UK and Belgian Law Compared

SOCIO-LEGAL NORMS OR AGENCY COSTS

More than just laissez-faire

Schedule A, UK Corporate Governance Code.

Agency costs of market efficiency norms

Second, the agency costs approach is interest-based,35 founded on the principle of

32 T. Aquinas, Summa Theologiae (Madrid, Bibliotca de Autores Christianos 1951), Bonum

Directors Remuneration EU, UK and Belgian Law Compared

deficiencies.37 Currently, the approach to the regulation of directors remuneration

Example of socio-legal norms for directors remuneration

A number of examples of socio-legal norms are as follows. Firstly, directors owe

Commission Recommendation 2004/913 fostering an appropriate regime for the

Directors Remuneration EU, UK and Belgian Law Compared

The ECJ and negative integration

47 J. Brummer, Corporate Responsibility and Legitimacy: An Interdisciplinary Analysis

THE EUS AGENCY COSTS-BASED APPROACH AND ITS LIMIT

Agency costs are the primary basis for legislation

McCahery, P. Moerland, T. Raaijmakers and L. Renneboog, eds., Corporate Governance

Directors Remuneration EU, UK and Belgian Law Compared

The limits of EU legislation based on agency costs

Regarding board control, emphasis is placed on the independent non-executive

53 Commission Recommendation (EC) 2005/162 on the role of non-executive or supervisory

In regards to the remuneration committee control, an additional external control

Directors Remuneration EU, UK and Belgian Law Compared

Cost and benefit-determined structure

annual compensation exceeds $500,000 and whose companies received financial

THE MODEL OF UK LAW IN CONTROLLING DIRECTORS REMUNERATION:

Socio-legal norms in common law

It is said that common law is a functioning harmonisation of vision with tradition,

Directors Remuneration EU, UK and Belgian Law Compared

Statutory provisions: a hybrid of the socio-legal norm and agency

Compliance with the prescriptive rule

65 S 420 of CA 2006, on directors of quoted companies; Large and Medium-Sized Companies

Directors Remuneration EU, UK and Belgian Law Compared

The nature of soft law as a regulatory instrument

66 Available at: <http://www.fsa.gov.uk/pubs/policy/ps09_15.pdf>; see also Walker Review