Reforming Executive Compensation Regulation and Avoiding an International Race to the Bottom (Part 4)

This is the final post regarding the Financial Services Authority’s (FSA) adoption of a new “Remuneration Code” to regulate, for the first time, executive compensation in the UK’s financial sector.  Without question, the FSA understands its actions have international consequences.  So too will the action - or inaction - of other major international financial centers in addressing this issue affecting the FSA:

“The effectiveness of our approach in achieving real change will depend on our ability to gain international agreement to enforce similar principles in all major financial markets. In deciding whether to implement our plans we will therefore take into account whether we consider there is satisfactory alignment of implementation plans by the authorities in the major financial centres.” (See, Policy Statement, ¶2.16).

It is thus important to note – as does the FSA – that the race to the bottom can take on an international scope.  Traditionally, history, costs, culture, and proximity to entities’ capital supplies and target marketplaces limited the choices of corporate and financial giants about where to base their operations.  As globalization continues to press forward, firms’ desires to locate or relocate within favorable regulatory environments has also drawn considerable concern. 

The overwhelming tendency of corporations to locate in Delaware, due to that state’s industry-friendly courts, is the American example of the race to the bottom.  Now, aided by advances in internet and communication technologies, corporations and financial firms can now conduct significant businesses from distant locations with relative ease, perhaps opening the door to a era of a speedier international race to the bottom.  

Accordingly, the incentive for the world’s financial and corporate giants to engage in international forum shopping for regulatory safe havens has increased.  A recent report by the BBC highlights calls by G20 members and the broader international community for a coordinated international effort in the reforming of executive compensation regulations.  The report further states that the FSA has already suggested it will back down on enforcing its new code if other countries do not follow suit, another adverse effect of an international race to the bottom.  Without a coordinated effort, critics fear that companies may easily avoid efforts to regulate executive compensation and could see punishment as corporations and financial firms relocate to more jurisdictions with less aggressive regulatory landscapes.   

These are the primary fears of the Code’s critics who worry that increased regulation may adversely affect London’s status as a major center for international finance.  (See, Policy Statement, ¶1.13).  Generally, commentators have criticized the FSA for its seemingly ambiguous “principle-based” regulatory system that created an industry-friendly, race-to-the-bottom atmosphere due to a definite lack of concrete rules. (See, SEC v. FSA: Rules v. Principles).  However, now that the FSA has responded to the market crises by creating relatively bright-lined regulations for executive compensation, leaders of London’s financial industry fear that larger international firms may be compelled to move overseas to jurisdictions with softer regulations. (¶3.8).

The FSA cites these concerns in and responds by laying out a strategy for achieving “international alignment and implementation of remuneration principles” via lobbying the G20 member-states, the European Union, and the Basel Committee on Banking Supervision in Switzerland to adopt regulations that are either similar to or exactly the same as the FSA’s new Remuneration Code.  (See, Policy Statement §5).  However, even with an atmosphere of  relative consensus regarding the need for a coordinated international effort to regulate unchecked executive compensation, it remains to be seen if the political will exists within the legislative bodies of important G20 members and the broader international community to enact regulations similar to the UK’s new Remuneration Code.