Corporate Scandals, Executive Compensation, and International Corporate Governance Convergence: A U.S.-Australia Case Study

Jacob Barney

Abstract

The first decade of the 2000s began with a rash of large-scale corporate scandals touching every corner of the globe, and it draws to a close in the midst of a worldwide recession which, somewhat ironically, has brought to light gargantuan executive compensation packages, resulting in widespread public outcry. Given the global nature of these two sets of corporate crises, it stood to reason that there would emerge a universal movement to revise the laws and practices controlling executive compensation. However, the mere fact that such a movement has emerged does not mean that the response to this movement will be uniform.

This Article takes a closer look at two countries, the U.S. and Australia, to determine whether there is such a uniform response—or, in other words, whether corporate governance systems are converging in response to common challenges. This study finds that there is little, if any, evidence suggesting that convergence is occurring in these two countries, which should be strong candidates for convergence, given their commonalities: legal systems based in the English common law, strong and modernized economies, and the striking similarities in the corporate scandals which rocked the two countries over the past decade.

This Article first addresses the theoretical basis of convergence in corporate governance, as well as what some might consider its polar opposite: path dependence theory, which posits that cultural and normative differences between jurisdictions are often strong enough to prevent adoption of more efficient corporate governance alternatives. Path dependence theory is uniquely connected to executive compensation as one aspect of a corporate governance framework precisely because executive compensation is so closely linked to cultural values and perceptions of how much pay is simply too much.

This Article then summarizes the major scandals affecting the U.S. (Enron) and Australia (HIH and One.Tel) and analyzes each country’s response to these scandals in an executive compensation context, both in terms of laws and regulations and in terms of prevailing practices and pay levels. Not only did the U.S. and Australia take vastly different regulatory approaches to resolving the compensation-related issues brought to light by these scandals, but actual pay levels also became scarcely similar in the years following the scandals. This Article also summarizes the executive compensation implications of the current global financial crisis and, again, finds little evidence that common governance challenges in the U.S. and Australia have led to common responses. In the end, it appears that culture is the ultimate determinant of overall levels of executive pay and approaches to compensation regulation; thus, cross-border convergence in this field is limited by the extent that culture remains static.