Regulating Excessive Executive Compensation - Why Bother?
Journal of Business & Technology Law, Vol. 2, No. 2, 2007
72 Pages Posted: 11 Nov 2010
Date Written: 2007
In the 1930s, corporate governance reformers attacked excessive executive compensation through lawsuits, claiming that corporate directors were breaching their fiduciary duties by making excessive bonus payments to executives. That effort was unsuccessful because the courts found themselves unable to devise a workable formula for determining when executive compensation becomes excessive. Another effort would be made in this century to use fiduciary duties to challenge a particularly gross case of over-compensation at the Walt Disney Company, but it too failed on the same grounds - the courts are institutionally unable to deal with this issue.
Another executive compensation reform effort was folded into Franklin Roosevelt's declaration of war on corporate America when he ran for and was elected President in 1932. A centerpiece of that assault was the enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC). President Roosevelt also sought to confiscate excessive compensation through high marginal income tax rates and death taxes, but that campaign also proved to be a failure. High tax rates only discouraged risk taking and encouraged avoidance and evasion of payment. Criminal prosecutions and civil tax trials were another part of Roosevelt's war on high profile corporate moguls. Those cases met only mixed success and were eventually abandoned, for the most part, until recent years.
Following the stock market crash in 2000, prosecutions were again directed at the highly and excessively compensated heads of failing companies, such as those at Enron, Adelphia and WorldCom. Again, those prosecutions met only mixed success, but several of those trials resulted in lengthy sentences for the executives. As in the case of other judicial proceedings aimed at compensation excesses, however, those prosecutions required extended and expensive investigations, and equally long and expensive trials. In the end, these trials did nothing to slow the rise in executive compensation.
This Article traces corporate governance reform efforts to curb excessive executive compensation, describes how those efforts failed and how, ironically, they actually encouraged abuses in executive compensation. The Article then discusses the most recent set of reforms that followed those abuses and explains why they too will only encourage ever greater levels of compensation. Finally, the Article addresses the issue of whether executive compensation should be taken out of the hands of the reformers and left to the marketplace, ever how inefficient it might be.
Keywords: Executives, compensation, disclosure, corporate governance, Walt Disney Company, Securities Act of 1933, Securities Exchange Act of 1934, Securities Exchange Commission (SEC), Franklin D. Roosevelt, Enron, Adelphia Communication, WorldCom, Sarbanes-Oxley Corporate Reform Act of 2002, Robber Barons
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