Corporate Governance

Executive Compensation, the Delaware Courts, and Congress (Part 3)

By J. Robert Brown

As we noted, Delaware courts defer to compensation decisions made by compensation committees so long as the directors are informed and independent.  We noted that the courts have not made the informed element meaningful.  Almost any report supporting the compensation decision will do, with the courts not permitting any real examination of the neutrality of the relevant consultant or the quality of the report.

The other problem is with independence.  The Delaware courts include a definition of independence (discussed at great length in my article, "Disloyalty without Limits")  that does not ensure that independent directors are independent at all.  The best example?  The definition does not take into account directors fees.  Thus, directors can be paid extraordinary amounts of money yet be treated as independent and neutral, as if the amount did not affect their decision.  So, for example, the directors at Countrywide, while they were paying bountiful compensation to Mozilo, were themselves making in the vicinity of $500,000.  Yet rather than treat directors making this kind of money as beholden to management, the courts treat them as independent. 

It was, therefore, of interest to note that in a non-judicial source, VC Strine admitted in his piece published in the Journal of Corporation Law that "[m]any directors . . . derive important elements of their net worth from board service."  In other words, he admits (as is obvious anyway) that fees are often material and that they can impact the decision making process of directors.  How can he square this with his failure to take the fees into account when boards are approving compensation for the CEO?  He believes that the desire to retain the fees makes directors bend over backwards to do what shareholders want, not what management wants.  Apparently he believes that the compensation paid to Angelo Mozilo was done out of desire to appease shareholders.  Shareholders and many in Congress would beg to differ. 

Full post as published by The Race to the Bottom on March 10, 2008 (boomark / email).