The Bailout and Corporate Governance (Part 2)

In many ways the corporate governance provisions of the Bailout Bill are a major step towards federal preemption of executive compensation. 

There are clawbacks applicable where the relevant criteria are "later proven to be materially inaccurate."  This will probably cause some increased care both in the determination of criteria and in the selection of criteria.  The provisions do not ban golden parachutes but prohibit payments during the relevant period.  Since golden parachutes apply in the context of changes of control, they will probably dampen enthusiasm for acquisitions.

The most notable provisions, however, are those that seek to exclude incentives that cause officers to "take unnecessary and excessive risks that threaten the value of the financial institution."  Treasury will have to adopt regulations implementing these provisions and presumably they will entail prohibitions on certain compensation practices. 

In the end, the extent of the intrustion into the compensation process will depend upon the standards adopted by Treasury.  It is likely that the restrictions will have limited impact.  Nonetheless, they will probably cause a more conservative approach to business and a more conservative approach to compensation, at least during the period of government investment.  To the extent that financial firms take a more restrained approach to compensation, it will demonstrate that the only way to restrain executive compensation is through federal preemption of the Delaware approach. 

Comments

[Herrick Lidstone]

Jay:

Excellent series of blogs. I am waiting for the "I told you so" since you have been making similar points and criticizing both the SEC's approach and Delaware's approach for as long as I have been reading the blog. I guess it depends on what Treasury actually accomplishes.

Herrick

[Law Student]

Bailout? The most immediate threat comes to us from Congress. Had Congress just done the right thing and stayed out of the way, the market would have corrected itself. Some would fail and others prevail. But this push-pull game Congress is playing with investors is about the worst thing they could have done. Investors already don't trust each other, and now they don't trust Congress either. What a mess.