Executive Compensation and Board Behavior: Integrity, Candor and Courage

BNA has issued a report (apologies that the link requires a password) on some remarks given at the conference of the National Association of Corporate Directors.  It includes remarks by Kenneth Feinberg, the Pay Czar who, as rumors would have it, plans to cut the compensation for the top executives at the seven largest recipients of bailout funds by 50-90%. According to BNA, he noted the “incredible chasm between Wall Street perceptions and Main Street perceptions.”

The conference also received remarks from David Swinford, president and chief executive officer, Pearl Meyer & Partners.  Swinford indicated that boards must have integrity, candor, and courage.  He is of course correct and, with these three qualities (along with adequate information), boards might be able to adopt appropriate pay packages.  But, while directors no doubt try to do their best, these three qualities are not encouraged by the existing system of regulation.

As we have noted often on this Blog, the only significant way a director can lose his/her sinecure on the board is not to be renominated by management.  Shareholders almost never run a competing slate of directors (too expensive) and majority vote provisions are a myth that merely heighten the board's, rather than shareholders', discretion.  With pay for directors sometimes climbing to the vicinity of $700,000, there are many directors who do not want to lose the position.

The best way to not be renominated (short of committing a felony or engaging in other adverse public behavior) is to irritate the CEO.  Thus, those directors who demonstrate integrity and courage may irritate the CEO (denying him/her the right to use the corporate aircraft for personal travel, for example) and not be renominated.

What directors need is an assist on the courage front from the legal regime.  They need to be able to say to the CEO that, nothing personal, but the compensation sought might violate legal requirements.  This won't come from the Delaware courts.  They resolutely decide cases that uphold even the most poorly informed compensation decisions (see Disney).  But a federal prohibition on excessive compensation would provide the necessary ammunition and allow these directors, who have integrity and candor, to invoke the courage that is needed to say no.