Executive Compensation and the Upcoming Shareholder Proposal Season

To no great surprise, it looks like the upcoming shareholder proposal season will to a large degree focus on executive compensation.  The year 2008 was a period of high compensation and disastrous economic performance, with a number of high profile examples of executives receiving substantial exit packages despite having managed their company into oblivion. 

Companies have taken a few tiny steps, with some boards declining to pay bonuses to top management.  In addition, the various bailouts imposed an assortment of limits on compensation determinations, with the term sheet for the auto bailout requiring the CEO to certify under penalty of perjury that the board has examined certain factors in making compensation determination.

All of these changes, however, are limited in scope and limited in duration.  None of them seriously alter the legal standards put in place by the Delaware courts.  These standards essentially allow boards to approve any amount of compensation as long as it is approved by "independent" directors (eliminating fairness and the substance of the terms of the compensation from any subsequent legal challenge).  Shareholder activity reflects frustration with these standards, particularly excessive reliance on "independent" directors to protect the interests of shareholders (under Delaware law, they need not really be independent). 

The proposals put forth this year go further than in the past.   According to the Journal:

• Governance experts say the executive-pay proposals are more targeted and ambitious than those submitted in recent years. Last year, for instance, activists focused mainly on winning an annual advisory vote for shareholders on executive pay. That issue has receded because Congress is expected to consider such a requirement. Some shareholders also may mount campaigns against re-election of directors, particularly those on compensation or audit committees.

At the end of the day, the only real solution is to allow shareholders to elect the directors that they nominate.  These directors will not be "captured" by management and can generally be counted on to give executive compensation a more pro-shareholder perspective.  In other words, it all comes back to access.