61 Pages Posted: 3 Sep 2009
Date Written: Winter 2004
For two decades, publicly-traded corporations' executive officers amassed large fortunes through equity-based compensation arrangements rewarding short-term performance benchmarks. As corporate stock values rose, and corporate executives, shareholders and employees all profited from increasing equity values, little attention was paid to the disconnect between short-term productivity and long-term productivity.
Then, the accounting scandals and bear markets of 2001 and 2002 placed a bright spotlight on executive compensation. Executives at Enron Corporation, WorldCom, Inc. and other executives had used hook or crook to manipulate stock values, driving their stock grants to new heights, and then selling their holdings before creative accounting or other revelations drove stock value down. With no dog left in the race, shareholders, employees, and even taxpayers were left holding the bag following earnings restatements and other revelations.
This Article examines America's endorsement of equity-based compensation as the dominant means of rewarding top corporate executives and how that endorsement created a misalignment of management and shareholders' interests by focusing management's attention on short-term productivity at the expense of corporate long-term productivity. It also evaluates corporate governance reform measures enacted by Congress, the Securities Exchange Commission, and Self-Regulatory Organizations in response to corporate greed and misdeed. Finally, it concludes that these measures do not provide meaningful change to executive compensation corporate governance practices, and recommends additional statutory and regulatory corporate governance reforms that will promote the realignment of management and shareholders' interests and promote corporate long-term productivity.
Keywords: Publicly traded corporations, equity-based compensation, corporate goverance, corporate goverance reform, executive compensation corporate goverance practices
JEL Classification: K20, K22
Suggested Citation: Suggested Citation
McClendon, Janice Kay, Bringing the Bulls to Bear: Regulating Executive Compensation to Realign Management and Shareholders' Interests and Promote Corporate Long-Term Productivity (Winter 2004). Wake Forest Law Review, Vol. 39, No. 4, 2004. Available at SSRN: https://ssrn.com/abstract=1466902
By Arthur Pinto