The availability of experienced directors in the labour market is a challenge, as acknowledged in King III (IoD, 2009). This could have two severe implications for the governance process: 1. that directors could possibly not be as independent as would be advisable, because they serve on various boards due to the demand for their skills, and they might therefore display some collegiality with other serving members, including the chief executive officer; and 2. the concern that, should less experienced directors be appointed, they would be subjected to mentoring and induction by existing board members, making them susceptible to coaching into the currently prevailing groupthink. These members might then be predisposed to support proposed remuneration packages.
Elhagrasey, Harrison, and Buchholz (1999, p. 317) indicate that;
Executives at times appoint friends to the boards, where they are catered to, handsomely
paid, and are then expected to have the favour returned when it is time for the board to ratify a remuneration plan.
This highlights the importance of effective board composition; that while there might be a shortage of skills, the independence of serving board members is vital to corporate governance and equitable executive remuneration. Döscher and Friedl quote Brick et al.
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(2006, p. 403) where they report on the investigation of CEOs' and directors' remuneration and claim the results to be “consistent with excessive remuneration due to mutual back scratching” (2011, p. 310). While good reasons may exist to have non-executive directors on the board for the sake of their skills and knowledge, these directors, who would likely be considered ‘independent,’ are often sympathetic to the executive directors' views and may not argue when it comes to approving the proposed executive remuneration package (Nichols & Subramaniam, 2001). According to Perel (2003), to circumvent resultant conflict of interests, a board relies on a remuneration committee to set executive remuneration.
The remuneration committee of a board is responsible for setting and administrating remuneration policies in the long-term interests of the organisation (IoD, 2009). According to Elhagrasey et al. (1999, p. 316), the use of board committees “projects the appearance of legitimacy and accountability for organisational decisions to the external constituents. Members are however exposed to informational and social influence, conformity pressures, and the necessity to justify their actions, which together with their visible position in decision making increased their identification with and commitment to the organisation.” Elhagrasey et al. (1999, p. 316) further postulate that many of the precursor circumstances for groupthink, which promotes conformity, are present in the remuneration committee: “high cohesiveness, group insulation, and directive leadership.” Maharaj (2008, p. 75) believes that groupthink may “cause the group to overestimate their power and morality, causing the members to ignore the ethical or moral consequences of their decisions.” Seegers (2010, p. 2) of PriceWaterhouseCoopers SA notes that the remuneration committee needs to become more challenging and should not be afraid to exercise its discretion. He further advises that this might require committee members to increase their reliance on appropriate and truly independent advisers and specialists, and cease to be overly dependent on historic data with limited relevance.
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The same argument can also be applicable to board members ‒ that a mere rubber- stamping of the proposal from the remuneration committee might not sufficient. As Perel (2003, p. 383) indicates, many “corporate boards function as entrenched and passive clubs, closely allied with the executive and not prone to exercising strong challenges.” Other organisational boards have long-tenure members who have become “part of the very culture they are supposed to challenge.” This sentiment is echoed in the Walker Report: “Walker stated that boards have been ‘under-qualified and overly collegial’ ” (Kirkpatrick, 2009 & Leblanc, 2010, p.27).
Bearing the above concerns in mind, it becomes clear that mere adherence to or compliance with rules and regulations will not resolve the concerns regarding executive remuneration. King III is quite clear in its principles and recommended practices related to executive remuneration. Nonetheless, it is important at this stage to note that corporate governance practices and principles are dynamic and of an evolving nature (IoD, 2009). If this dynamic and evolving nature of corporate governance is acknowledged, it becomes clear that concerns about executive remuneration can hardly be resolved by mindless application of the letter of the principles in King III, as this would not take cognisance of the changing world of work. What would probably be required is an appreciation and application of the spirit of corporate governance.
In the South African context, corporate governance, specifically as guided by King III, is premised on an approach of ‘apply or explain’. King III also contains clear principles and recommended practices in relation to executive remuneration. However, the unease concerning executive remuneration is current and on-going. If mindless compliance and the ticking off of requirements do not equate to adherence to the spirit of corporate governance as applied to executive remuneration, what would adherence to the spirit of corporate
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governance imply with regard to executive remuneration? The question can be answered by examining what behaviours would hinder or undermine adherence to the spirit of corporate governance, and what behaviours would reinforce or strengthen adherence to the spirit of corporate governance.
2.5 Chapter integration
A comprehensive literature review was undertaken, which assisted in establishing a thorough understanding of both corporate governance and executive remuneration in the South African context. This clarified that, while there might be clear guidelines and principles in corporate governance in relation to executive remuneration, the question of how these should be applied remains unanswered. The next chapter outlines the research method utilised to answer the research question of the present study.
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CHAPTER 3: METHOD
3.1 Introduction
The previous chapter provided a review of the literature. In this chapter, the research method is discussed via the research design and paradigm. The discussion on the choice of research methodology and strategy is followed by a discussion of the choice of data-gathering method and sampling procedure. The data analysis process is discussed, with concluding thoughts on strategies to ensure quality research, as well as ethical considerations.
3.2 Research Method
3.2.1 Research design.
Henning (2005, p. 33) believes that “the methods selected to capture and process the data must be chosen according to the needs of the research question and the simultaneous unit of inquiry of analysis.” Henning raises an important consideration, namely that the methods are unique to the research question. In the present study, the term 'design' refers to the uniqueness of the chosen method in its application to the posed research question of what adherence to the spirit of corporate governance would be with regard to executive remuneration. Tredoux (2002, p. 311) believes that research design is too frequently taken to mean a fixed set of procedures and methods, and that it is perhaps better to think of research design as a plan or protocol for a particular research study. In other words, the research design becomes the structure through which the researcher aims to answer the research question, while aiming to achieve a balance between ideal research and practical constraints. No single design could be applicable to all research questions; each research question necessitates its own unique design to investigate a specific research question. The research design that was decided upon to best answer the research question is depicted in Figure 1.
42 Ethical c o nsidera tions Research design
This is determined by the specific research question
Research paradigm Interpretivist paradigm Methodology Qualitative research Research strategy Phenomenological approach Data-gathering method
In-depth interviewing (Semi-structured)
Data analysis
Systematic content analysis
Sampling
Purposive- and snowball sampling
Strate gi es for qual ity re sear ch
Figure 1. Research design
The research design could be viewed as the framework or plan of action that serves as a connection between the research question and the way in which the research will be conducted (TerreBlanche & Durrheim, 2002). Although Figure 1 might create the impression that the process is fairly linear and fixed, this is not the intention. Research is fluid and iterative and, as such, Figure 1 is interpreted as a guide to the research design. The first step
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is the choice of research paradigm or the philosophy through which one comes to know (Henning et al., 2005). The philosophy applicable to the present study is discussed in greater detail in Section 3.2.2. The methodology is determined by the aim of the research question, whether it be understanding or quantification. The aim of the present study was to gain an understanding of the adherence to the spirit of corporate governance with regard to executive compensation.
The research strategy or approach adopted in the research will determine the sampling techniques, research setting, data gathering, and data analysis. While all these elements form part of the research design, it is of importance to remember that, when conducting research, ethical considerations remain imperative at all steps and levels to minimise the risk of any potential harm.
The research process, as applicable to the present research study and depicted in Figure 1, is discussed in more detail below.
3.2.2 Research paradigm.
This research design is influenced by the researcher in a definite way. Not only is the researcher empowered to make decisions regarding the design of the research to answer the specific research question, but researchers also bring with them their own specific manner of defining reality, otherwise referred to as 'ontology.' Terre Blanche and Durrheim (2002, p. 6) believe that “ontology specifies the nature of reality that is to be studied, and what can be known about it.” There are different ways through which the researcher can come to know, or as Henning (2005, p.16) states, “different philosophies of knowing” or “theoretical paradigms.”
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Henning (2005, p.16) distinguishes between three different theoretical paradigms or “philosophies of knowing” ‒ positivist, interpretivist, and constructionist. This categorisation is in line with that suggested by Terre Blanche and Durrheim (2002). The present study is positioned within the interpretivist paradigm. Reasons for this choice will be briefly explored. In view of the research question, Adherence to the spirit of corporate governance
with regard to executive remuneration, the focus is to understand and interpret the way in
which adherence to the spirit of corporate governance is implemented or manifests in organisations. Henning (2005, p.19) proposes that an interpretivist paradigm is intended to facilitate understanding and interpret meaning. Terre Blanche and Kelly (2002, p.127) agree, in that they believe that “interpretive researchers want to make sense of feelings, experiences, social situations or phenomena as they occur in the real world.” This would be supportive of the research question, as the research question aims to gather information that would facilitate an understanding of the phenomenon of corporate governance as it manifests in executive remuneration.
Each of the three above-mentioned paradigms within which a research question might be located has its own unique ontology, epistemology, and methodology. “Researchers working in this [interpretive] tradition assume that people’s subjective experiences are real and should be taken seriously (ontology) so that we can understand others’ experiences by interacting with them and listening to what they tell us (epistemology) and that qualitative research technique is best suited to this task (methodology)” (Terre Blanche & Kelly, 2002, p.123). In other words, ontology could be viewed as the nature of reality. In the present study, the researcher aimed to understand this reality by engaging with participants and discovering the meaning that they attach to the spirit of corporate governance with regard to executive remuneration, which was an epistemological approach, where the researcher is bound to be subjective to some extent while engaging and interacting with the participants
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(De Swardt, 2005). It is in light of the aforementioned that the present researcher considered the choice of qualitative methods to be more appropriate than a quantitative method, as it lends itself to uncovering and understanding the subject matter as experienced by the participants.