Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Sunday, October 22, 2006

Can Courts Correct the Flaws of Shareholder Democracy?

Gretchen Morgenson hopes to see courts doing for shareholders what shareholders cannot seem to organize to do for themselves:

The Shot Heard Round the Boardrooms - New York Times: Gretchen Morgenson: IN his ruling last Thursday requiring Richard A. Grasso to return as much as $100 million in compensation to the New York Stock Exchange, Justice Charles E. Ramos opined colorfully and unequivocally that Mr. Grasso had breached his fiduciary duties by failing to disclose how mountainous his pay had become during his years as the Big Board's chairman....

Courts have been reluctant to wade into compensation issues in the apparent belief that directors and the shareholders who nominally oversee them can better manage such matters. But shareholders have been unable or unwilling to effect boardroom change, and compensation excesses have become alarmingly common. That seems to be changing; Justice Ramos's decision is the second indication of such a shift. The first was a decision last year by Leo E. Strine Jr., a vice chancellor in the Delaware chancery court, to reject a settlement in a shareholder suit brought against directors and officers of the Fairchild Corporation.

The plaintiffs had contended that Fairchild, an aircraft parts distributor, had excessively compensated its chief executive and certain of his family members and other top executives. The settlement to be paid to shareholders -- with a monetary value of $2.9 million -- was inadequate, the judge said, because it did not do enough to protect shareholders. The court told lawyers for the parties to adopt "real structural protections that may involve a real infusion of some backbone into the board."...

While Vice Chancellor Strine did not weigh in on the merits of the plaintiff's case, his ruling indicates a measure of sympathy to complaints about outsize executive compensation that had not been evident previously.... Justice Ramos's ruling refutes some of the more common arguments for why executives should be held blameless when pay goes through the roof. For example, Mr. Grasso argued that it would have been improper for him to advise the board and its compensation committee about the size of his retirement account. "Not only does nothing preclude Mr. Grasso as C.E.O. from making sure that the committee had all of the information it needed to make an informed decision, it was his affirmative fiduciary duty," Justice Ramos ruled.

And to Mr. Grasso's argument that he did not know the size of his retirement plan... Justice Ramos said: "That a fiduciary of any institution, profit or not-for-profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care."...

"After slogging through dozens of depositions and countless documents, it came down to a simple proposition," said Avi Schick, deputy attorney general. "Grasso took more than $80 million in pension benefits that were not disclosed to the board as they were accruing. The message to Grasso and directors everywhere is also simple: you must make full disclosure, you must operate with full transparency and you will be held fully accountable"...

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