ABSTRACT
Corporate governance can be viewed as a 'system by which corporations are directed and controlled'. A corporate governance regime should be designed to legally and commercially regulate, inter alia, the activities of an organisation's managers to preclude acts of malfeasance. This chapter proposes that a fundamental organisational conflict of interest—between shareholders and management—and the way it has traditionally been addressed through incentive compensation schemes, particularly in Australia and the US, should be a primary consideration in any corporate governance reform debate. The financial collapse in March 2001 of HIH Insurance Limited, a major Australian public company, provides a case study for discussion and exposition of this argument. A review of developing literature on managerial incentive compensation arrangements highlights the theoretical limitations and lack of empirical validity underpinning the use of these schemes. A Royal Commission was established to inquire into and investigate the factors that caused the failure of HIH.
