Corporate Governance

Executive Compensation and the Best Interests of Shareholders

By J. Robert Brown

It seems that published reports suggest that Chrysler Financial (described as the financial arm to Chrysler) turned down additional bailout funds because of the limits on executive compensation.  As the article noted:

• The official said Monday that the Treasury Department denied Chrysler Financial's request for more aid because some of its top 25 executives would not waive their rights to legal claims against the government and Chrysler Financial regarding new caps on executive compensation. The official did not want to be identified because the decision has not been made public.

Chrysler Financial denied the contention, stating that it simply did not need the additional funds.  But the article highlights a serious problem with the current congressional approach to executive compensation.  Compensation is currently determined under the standards set by the Delaware courts, which is to say standards that are not particularly meaningful.  The courts have replaced substantive review (fairness) with process and not adequately enforced or given content to their own standards.  This is discussed at length in Returning Fairness to Executive Compensation.

Congress has done little to alter this state of affairs.  The efforts have been limited to restrictions on compensation for companies accepting TARP funds, mostly in the form of limits on bonuses for top officials and restrictions on golden parachutes.  The limits can be avoided either by not accepting TARP funds or by paying off the funds already received.  Goldman Sachs, for example, has indicated a desire to pay off the TARP funds. 

This raises the question of whether the motivation by management is really in the best interests of shareholders or the best interests of executive officers.  In other words, are they declining/repaying funds because the company (and shareholders) don't need them or is it because they want to return to the free wheeling environment of executive compensation without limits?  Certainly, state law doesn't ensure that the decision is in the best interests of shareholders.  The duty of care is comatose and the duty of loyalty transformed into a meaningless process.  (The topic is discussed in Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty). 

The only way to ensure that management acts without consideration of self interest is to make compensation limits more broadly applicable, not limited to those companies obtaining funds under TARP.  We have suggested a possible approach and solution.

Full post as published by The Race to the Bottom on April 30, 2009 (boomark / email).