Corporate Governance

Executive Compensation and Federal Preemption of Delaware Law: LImits on Executive Compensation Are Coming (Part 5)

By J. Robert Brown

We interrupt our coverage of the en banc hearing in the appear of the criminal conviction of Joe Nacchio.

The back and forth has continued on the Bailout Bill.  But one thing is for certain, Paulson and the White House have caved on executive compensation provisions, as we predicted they would.  As the WSJ reports:

• In give-and-take on Capitol Hill Wednesday, Mr. Paulson signaled his intention to relent on another key Democratic demand: that limits should be imposed on the compensation of executives at firms participating in the program. Mr. Paulson had previously argued against pay limits, suggesting they might deter companies from participating in the bailout. That argument proved to be a political loser.

• "We must find a way to address [executive pay] in the legislation, but without undermining the effectiveness of the legislation," Mr. Paulson told the House Financial Services Committee\

Said another way, Congress will to a limited extent preempt Delaware law in the determination of executive compensation, a reflection of the utter frustration with the escalation of pay and the lack of standards under state law.  A prediction?  The Delaware courts will suddenly start taking a harder line on executive compensation.  The Delaware couts are quite consccious of the surrounding dynamics and the risk of greater federal intervention (either by adopting addtional restrictions or by extending the ones in the Bailout Bill to other public companies).  This courts became slightly more flexible in the immediate  post-Enron era when there was significant risk of federal intervention.  The shift is, however, only temporary and abates once the risk of federal preemption recedes.   

Full post as published by The Race to the Bottom on September 25, 2008 (boomark / email).