Corporate Governance

Executive Compensation and the Board of Directors

By J. Robert Brown

The most interesting was the piece in the NYT on the role of the board of directors in the whole fiasco, a topic that has been a mainstay on this Blog.  The piece was essentially a book review of Money for Nothing. 

The review (and book) criticized the board for oversight lite and high pay.  Specifically, the piece noted that directors "attend 8 to 12 meetings annually" and "receive as much as $640,000 a year."  Of course, as we have pointed out, directors actually meet less often than that (although maybe during the financial crisis the number of meetings have been aberrationally higher) and can make well over $700,000. 

Surely, the number of meetings is not the sole measure of effectiveness.  Nonetheless, there is plenty of evidence that suggests boards exercise little meaningful oversight of the CEO's behavior.  As the piece noted:  

• The authors note that Rick Wagoner, the former General Motors chairman [and CEO], declared in 2008 that: 'I get good support from the board. We say, ‘Here's what we're going to do and here's the time frame,' and they say, ‘Let us know how it comes out.' ' (Memo to the board: your shareholders lost $52 billion in equity during Mr. Wagoner's watch.)

The book called for "public directors" appointed by a nonprofit organization and the separation of chairman and CEO.  We have called for the latter and while the former raises any number of issues and questions, certainly providing shareholders with access to the company's proxy statement would facilitate the election of non-management directors. 

Even this, according to the authors of Money for Nothing, would not be enough.

• But no amount or manner of structural change can ensure that directors will step up and take responsibility for their fiduciary duties to shareholders, the authors assert. Boards overwhelmed by the power and glory of corporate chieftains tend to commit sins of omission, like not asking probing questions and not challenging management presentations of 'fact,' rather than sins of commission like active participation in securities fraud.

This suggests extraordinary deference to the CEO.  Yet the deference comes from the legal standards.  Under Delaware law, directors are governed by the ostrich approach to information.  What they don't know in general can't result in liability.  As a result, they have an incentive not to ask, not to probe.  The way to change this ostrich approach?  Create legal standards that require questioning and probing, with liability on those who do not.  But as long as Delaware controls these standards, the ostrich approach will be the controlling standard.    

Full post as published by The Race to the Bottom on January 20, 2010 (boomark / email).