Mission Impossible: A Legislative Solution for Excessive Executive Compensation

45 Pages Posted: 15 Aug 2014

See all articles by Robert E. Wagner

Robert E. Wagner

City University of New York (CUNY) Baruch College Zicklin School of Business Department of Law

Date Written: August 15, 2014

Abstract

One of the great dilemmas of corporate law is how to address the problem of excessive executive compensation without replacing it with excessive government intervention. This Article proposes for the first time that Article 36(b) of the Investment Company Act ("ICA"), which enacted fiduciary obligations for investment advisers, be applied to general public corporations. The effect of this proposal — termed Corporate 36(b) — would be to impose upon CEOs and other highly placed corporate executives a fiduciary duty with regard to their compensation packages. This would enable federal courts to genuinely evaluate the procedural and substantive nature of executive compensation negotiations. As scholars, the media, and politicians have pointed out, excessive executive compensation reduces shareholder wealth, increases hostility in the workplace, and provokes societal anger. The Article demonstrates that the legislative history of the ICA supports the application of its principles to general corporations. It further shows that the courts’ implementation of the ICA can be replicated in the context of general corporations. The Article argues that adoption of Corporate 36(b) will help to reduce executive demands, to empower and incentivize boards of directors, and to avoid undesirable federal regulation. The Article also addresses potential criticisms concerning the risk of nuisance suits and strike litigation, the vagaries of involving courts in business decisions, and the problems surrounding federalization of corporate law. The Article concludes with a brief description of how the proposed legislation could have been applied to deal with the controversial compensation package in the well-known case of Disney’s hiring and firing of Michael Ovitz.

Keywords: executive compensation, Investment Company Act, Michael Ovitz, corporations

JEL Classification: K22

Suggested Citation

Wagner, Robert E., Mission Impossible: A Legislative Solution for Excessive Executive Compensation (August 15, 2014). 45 Connecticut Law Review 549 (2012), Available at SSRN: https://ssrn.com/abstract=2480859

Robert E. Wagner (Contact Author)

City University of New York (CUNY) Baruch College Zicklin School of Business Department of Law ( email )

New York, NY
United States

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