Wall Street's Corporate Governance Crisis

Abstract

The board of directors of a public company is only responsible for a relatively few of the almost infinite number of decisions that are made at a public company over any period of time. Yet, when a corporate board does make a decision, for example, the appointment of a chief executive officer or the approval and recommendation to shareholders of a merger agreement, the decision can have a major impact on the firm. Now, based on the fallout from the financial crisis of 2008, we can add corporate board approval of company-wide compensation policies to the list of board decisions that are of potentially major significance to the firm, at least for those public companies we can refer to as "Wall Street" firms (financial institutions with large financial trading and investment banking operations whether or not they are based in proximity to lower Manhattan).

The significance of these employment policy decisions cannot be overstated. By comparison, what was at stake in the much publicized litigation involving the Walt Disney Company was almost trivial, since the facts of the Disney litigation did not involve a threat to the company's existence or billions of dollars of capital outflows.

The elevation of company-wide compensation policies to the fore of corporate governance issues facing Wall Street firms requires both a change in perspective on how these policies should be implemented as well as a reconsideration of whether the protections of the business judgment rule as applied to corporate board decisions under corporate law need to be adjusted accordingly.

Keywords: corporate law, corporate governance, clawback

JEL Classification: G34, K22