The seminar today at the Widener University School of Law on the above topic, described in more detail here, addresses an area of law that is certain to be of interest to readers.
I am only able to attend the first part of the seminar, which addresses executive compensation issues. The panels throughout the day include members of Delaware’s Court of Chancery and Supreme Court as well as the Bankruptcy Court for the U.S. District Court for the District of Delaware, and leading practitioners before those courts.
Professor Charles Elson observed that the framework of corporate governance allows the board of directors to ultimately approve what the compensation is for officers.
Vice Chancellor Leo Strine, Jr. observed that, in general, the courts recognize the deference due to independent directors under the business judgment rule. However, challenges to executive compensation are more difficult when the majority of a board is independent. He noted the historical aspects of the rise in CEO compensation. which in part has its origin in the shift to stock options as a large part of compensation (due largely to the cap on deductions for cash compensation), coupled with the substantial increase in the stock market value. These developments are juxtaposed with the lack of job security for CEOs and how quickly they can be jettisoned when there is a precipitous drop of a company’s stock value.
Bruce Grohsgal, a leading member of the Delaware Bankruptcy Bar, commented on the executive compensation of managment of corporations in a Chapter 11 bankruptcy, which often focuses on a very narrow window of a few months, which results, in effect, in a "performance based analysis".
Other bankruptcy experts on the panel recognized a familiar pattern that led companies into bankruptcy: Companies borrowed money that they could not pay back–even when the company was previously profitable. Often times, this excessive loan burden arose in connection with an LBO or similar transaction with a hedge fund. Naturally, the question that must be asked is: What was the board thinking when it borrowed more than it could pay back? The answer at least sometimes is: "They were not thinking carefully enough".
Even though boards may not have performed in an exemplary manner when it comes to executive compensation, Prof. Elson does not think the solution to the issue is to have an outside third-party control the amount of compensation because in part it would emasculate the role of the board. Moreover, the outside party (e.g., the pay czar now used by the federal government), is no more qualified to make the decision. Another member of the panel noted that the intrusion of the federal government may not be ideal, but there is a sense that something must be done and that "something" is not being done by the states.