Corporate governance issues surrounding executive compensation and executive severance

This paper seeks to explain why and how executive severances of publicly-traded Canadian and U.S. companies have reached the financial levels they have, generating public and shareholder outrage and causing governments on both sides of the border to introduce new legislation. The paper investigates the role of the CEO, boards and shareholders in the setting of executive compensation. As the origins ofthe three roles lie in business corporation law, the legislative framework of Canadian and U.S. companies is presented to permit the reader to understand the legal accountabilities and rights of each of the three parties. The paper identifies that executives may exercise substantial influence over boards, possibly impeding effective governance. The paper concludes that effective governance, including greater board independence and board competence in executive compensation matters will help to improve board functioning and minimize the effects of the agency problem, cronyism and managerial power.