Executive Compensation, the Delaware Courts, and Congress

We have been discussing the article by VC Strine that was recently published in the Journal of Corporation Law. We note that he is unhappy with "professional" independent directors and the activism of institutional investors. He does not like majority vote provisions (that allow for withhold campaigns) and say one pay. The article entirely ignores the role of the Delaware courts in the current debate over corporate governance.

We have more to say about the article itself and will resume that discussion tomorrow. We take a moment, however, to discuss recent hearings in Congress on executive compensation. They relate to our current topic and raise the obvious question of the role played by the Delaware courts in the current debate over corporate governance, a topic not addressed in VC Strine's article.

On Friday, the House Committee on Oversight and Government Reform held hearings on executive pay, with a number of CEOs from companies mired in the subprime mess present. As a memorandum for the committee noted: "During the five-year period from January 2002 through December 2006, the stock of Countrywide, Merrill Lynch, and Citigroup appreciated, and the three CEOs collectively received more than $460 million in compensation." Having been compensated nicely during the good times, what happened when the bottom fell out? According to the same memorandum:

• Despite steep declines in the performance and stock price of the three companies resulting from the mortgage crisis, Mr. Mozilo, Mr. O'Neal, and Mr. Prince continued to be well rewarded: Mr. Mozilo received over $120 million in compensation and sales of Countrywide stock; Mr. O'Neal was allowed to leave Merrill Lynch with a $161 million retirement package; and Mr. Prince was awarded a $10 million bonus, $28 million in unvested stock and options, and $1.5 million in annual perquisites upon his departure from Citigroup.

Paid extraordinarily well in good times, paid extraordinarily well in bad times. The data suggests that there is a significant problem in the legal regime governing executive compensation, that apparently this type of approach to compensation is completely consistent with fiduciary responsibilities. It illustrated the meaningless nature of fiduciary standards when it comes to executive compensation. This is a direct consequence of the standards developed by the Delaware courts. Moreover, the compensation approved by these boards puts into perspective the claim that "professional" independent directors are overly solicitous towards shareholders. No evidence of that claim exists at these hearings.

As Congress moves closer and closer to federal preemption, at least in the compensation area (with Say on Pay the most recent example), it can be seen as a direct consequence of an excessively pro-management set of courts that consistently refused to develop meaningful responsibilities with respect to the determination of executive compensation.