The effect of incentive based directors' remuneration on ethical decision making in organisations

Van der Walt, J. C. (2003-12)

Thesis (MPhil)--University of Stellenbosch, 2003.

Thesis

ENGLISH ABSTRACT: The historical development of the role of directors in public listed companies contains inherent tensions by reference to the fiduciary responsibility of directors and the method in which directors are remunerated. The nature of incentive based remuneration is such that it will compel directors, in certain circumstances, to weigh their interests against those towards whom they owe a duty of care and a moral responsibility to act with prudence and temperance. The modem day corporate environment is complex and calls for directors with strong ethical views. This assignment endeavours to identify some of the complexities that contribute towards directors finding it difficult to stay on the ethical "straight and narrow" and attempts to weigh the effect of those factors against the effect of incentive remuneration, both as detractors from ethical behaviour. Both the shareholder supremacy business model and the stakeholder approach are analysed to identify those factors present in each that may add to the ethical complexity that directors have to deal with. The advent of the stakeholder approach in particular, adds an enormous amount of complexity. The case studies deal with two South African financial services companies that have both ceased trading as a consequence of unethical behaviour. The incentive remuneration models of both companies have been found to have played a major contributing role in the decision making processes in the companies, and have contributed to the demise of these organisations. Lessons are taken from the case studies and applied against the backdrop of the various principles of ethical behaviour namely rights, utility, justice and the ethics of responsibility. The finding of this study is that there is a role for incentive remuneration of directors, provided that the ethical pitfalls that this causes are recognised and steps taken to address them. Some of these steps are identified.

AFRIKAANSE OPSOMMING: Die historiese ontwikkeling van die direkteursrol, en spesifiek van openbare genoteerde maatskappye bevat inherente teenstrydighede met verwysmg na direkteursvergoeding en die vertrouensverpligtinge wat op direkteure rus. Die aard van direkteursvergoeding met 'n aansporingskomponent is so dat dit 'n direkteur van tyd tot tyd in 'n posisie plaas waar hy tussen sy eie belange en die van die ander belanghebbendes in 'n maatskappy, aan wie hy dit verskuldig is om met verdrag en versigtig op te tree, moet kies. Die hedendaagse maatskappyomgewing is kompleks van aard, en vereis direkteure met sterk etiese oortuigings. Hierdie werkstuk poog om sommige van die komplekse faktore wat afbreuk doen aan 'n direkteur se vermoe om ten alle tye streng eties op te tree, te identifiseer en op te weeg teen die effek wat direkteursvergoeding speel - beide as items wat afbreuk doen aan etiese optrede. Hier word ondersoek ingestel na beide die sogenaamde "aandeelhouersmodel" asook die" belanghebbende" model waarvolgens besigheid bedryf word. Die ontsluimering van die belanghebbende model veroorsaak spesifiek 'n aansienlike hoeveelheid etiese kompleksiteit. Die gevallestudies behandel twee Suid Afrikaanse fmansiele instellings wat hul bedrywighede gestaak het as gevolg van onetiese optrede deur direkteure. Die aansporingskomponent van die vergoedingsrnodelle in daardie maatskappye blyk 'n groot bydraende faktor te wees in die onetiese besluitneming wat plaasgevind het, en wat uiteindelik tot die ondergang van die ondernemings gelei het. Laastens, word die lesse wat geleer is uit die gevallestudies, toegepas in gewysigde format, en getoets aan die hand van die verskillende beginsels wat etiese besluitneming onderhou, naamlik die beginsels van regte, regverdigheid, utiliteit en die beginsel van etiese verantwoordelikheid. Daar word tot die slotsom gekom dat daar wel ruimte vir aansporingskemas vir direkteure is, maar dat dit slegs eties regverdigbaar sal wees mits ag geslaan word op die lesse wat uit die gevallestudie voortspruit, tesame met die impementering van sekere korrektiewe maatstawwe.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/49796
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