What does all of this tell us about the future of executive compensation as a matter of corporate governance?
As we have noted, the problem fundamentally rests with the states. Delaware, for the most part, merely requires a showing of proper process, with the amount and type of compensation largely irrelevant to the analysis. Process requires little more than a majority of "independent" directors and some modest amount of information. Nor is the definition of "independent" rigorously enforced. See Returning Fairness to Executive Compensation. Moreover, as Zucker illustrates, the safety valve of waste is no safety valve at all. The result is compensation without limits.
Given the lack of limits under state law, compensation will continue to escalate in amount. Pressure on Congress to intervene will also continue. Moreover, SOX and Dodd-Frank show that Congress is not afraid to intervene in the compensation process when circumstances dictate. These efforts effectively took authority away from the states and effectively transferred them to the Securities and Exchange Commission.
So far, however, Congress has chosen a second best solution in the regulation of compensation. Rather than directly address the problem by altering the fiduciary duty standards applicable to the determination of compensation, Congress for the most part has opted to add additional process (the ban on loans in SOX is a significant exception).
Some of the efforts, particularly say on pay, will engender positive changes. Boards will be under increasing pressure to make compensation more performance based. What the reforms will not do is decrease the amount (or more accurately the rate of increase) in compensation. While shareholders may not object to a significant amount of compensation tied to rising share prices, the public will react differently. To the public, the amount matters.
As the example of Britain shows, once executive compensation becomes a matter of public debate, pressure on politicians increases. Britain responded first by implementing say on pay then providing for a mandatory vote on compensation policies. There is no reason to believe that the pressure on politicians in Britain to intervene in the compensation process will stop with these reforms. The developments in Britain could be harbingers of what will happen in the United States. Pressure on politicians in Washington to address the issue of executive compensation will likely continue.
Is there any real solution? The best approach would be for states to take a firmer hand in regulating executive compensation. In the absence of this approach, Congress should consider adopting a federal fiduciary standard applicable to compensation decisions. In effect, this would accomplish what states ought to do. The approach would address the problem at its root and avoid second best solutions.