Treasury and Limitations on Executive Compensation: The CEO's Responsibility

The Treasury rules implementing the executive compensation provisions of TARP essentially impose on the compensation committee the obligation to consider the arrangements and to determine whether they cause excessive risk taking.  Nonetheless, the rules go further and essentially impose on the CEO the obligation of certifying that the compensation committee has performed its prescribed task.  In other words, the rules give oversight of the board's obligations to the CEO.

This of course stands the usual state of things on its head.  It is the board that is supposed to oversee the CEO, not the CEO overseeing the board.  But, of course, as we have noted often on this Blog, CEOs exercise considerable influence over the board.  They are invariably on the board and usually the chairman.  Boards, as Jon Macey at Yale has written, are susceptible to capture by top officers.  In other words, the idea that the board supervises the CEO is largely a fiction.  It is the CEO that controls what happens at the board level.

Treasury and TARP recognize this.  Rather than entirely leave matters to the board, they impose on the CEO the obligation to certify that board has done its job.  Of course, this will likely ensure that the CEO is always on the board (no great change) and that the CEO is involved in the compensation process to ensure that the standards in the rules are met.  This also confirms what anyone who watches this area knows.  CEOs of exchange traded companies cannot sit on the compensation committee (they must be independent directors) but can still participate in the process and exercise considerable influence over compensation decisions.  Neither the exchanges nor the Delaware courts prohibit this.  And Treasury and TARP confirm it.