The Criminalization of Compensation

Yesterday, we posted on the relationship between lax standards under Delaware law for compensation decisions and the collateral consequence that penalties are imposed at the federal level, often through the use of criminal provisions.  The Reyes case is an example.  There are others.  The Corporate Fraud Task Force for the DOJ issued a five year report.  The report noted the following number of people subjected to criminal penalties over the five year period (five years coinciding with the Enron/Worldcom scandals and the five year anniversary of SOX):

214 chief executive officers and presidents;

53 chief financial officers;

23 corporate counsels or attorneys; and

129 vice presidents

As the report noted, the Task Force obtained 1,236 total corporate fraud convictions.  Some of these were for backdating, some for insider trading.  But even those that involved securities fraud in the form of false disclosure to the public no doubt typically contained allegations that the insiders benefited from the misstatements in the form of increased compensation, whether bonuses or options.  In other words, the DOJ is involved in the criminalization of compensation practices. 

Is this heavy handed?  Maybe.  But it arises in part because Delaware law resolutely refuses to impose meaningful supervisory obligations on directors in the area of compensation.  Where these practices subject to greater oversight and board involvement, one wonders whether the level of perceived abuse would be so high and whether the federal government would need to use criminal sanctions so resolutely to create the deterrence necessary to prevent recurrence. 

Lax standards at the state level have resulted in a considerable level of preemption, as Sarbanes-Oxely demonstrates.  The lax standards have also likely resulted in increased criminal prosecutions of management.  Tougher standards at state law would make both less likely.