Corporate Governance

Overturning the Delaware Model: Going Beyond Financial Institutions

By J. Robert Brown

The current proposals to regulate executive compensation, particularly the Fed's efforts to regulate compensation practices that threaten financial soundness, are limited to banks.  The same limits ought to apply to all public companies, not just those operating in the financial markets.  Excessive risk taking is not limited to a single industry.  Moreover, the failure to impose broader reforms leaves the balance of corporate America subject to the system put in place by the Delaware courts, which effectively leaves compensation unregulated and without limits.  

In that regard, it was of interest that the Journal reported on efforts by business groups to head off regulation by establishing voluntary standards with respect to executive compensation.  It turns out that a group of companies under the umbrella of the Conference Board intends to announce that they will alter compensation practices to more closely mimic the proposals of the current Administration.  The effort is apparently supported by Calpers. Presumably the approach will seek to move away from practices that encourage short term gains and encourage the payment of bonuses with stock in an effort to encourage longer term planning. 

This is a good idea.  The proposals are likely to reflect sound practices.  It is, however, unfortunate that the efforts had to wait until a financial crisis and looming federal intrusion.  With Delaware imposing few legal limits on executive compensation, public companies acted with little restraint.  As a result, these efforts may turn out to be too late. 

Full post as published by The Race to the Bottom on September 21, 2009 (boomark / email).