Corporate Governance and Executive Compensation

Shareholders have at best a marginal role in selecting directors of public companies or, as Lynn Stout from UCLA puts it, "shareholders in public corporations have little power to remove directors." Of course, that would not only apply to removal but also nomination and election in the first instance.

Excessive compensation is often mentioned as evidence that boards do not sufficiently watch out for the interests of shareholders. Despite plenty of evidence of excessiveness, many argue that in fact there is no problem with executive compensation, that the results are dictated by the market. Forget that compensation is often determined by boards of directors that are beholden to the CEO (after all, they will not be defeated for reelection by shareholders; the only way to lose the comfortable and lucrative sinecure on the board is to not be renominated, something that most likely will occur where a director has an antagonistic relationship with the CEO).

In determining whether top officers are overpaid, the latest piece of evidence comes from the top officers themselves.  TheNational Association of Corporate Directors recently reported that (according to an article in the Financial Times) most CEOs in a recent study felt that executive compensation was too high.  According to the article: 

• Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance.
• Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”.
• Their views were backed up by outside directors, with more than 80 percent of them saying chief executives were overpaid.

The evidence continues to accumulate about the excessiveness of executive compensation.  For the outside directors to have the opinion suggests that they approve compensation knowing that it is too high.  This represents further evidence that boards do not act in a fashion independent of the CEO.  The only way to ensure board independence?  Allow shareholders greater opportunity to elect their own candidates.  Access in a word.