CEO Retention

Posted: 8 Jun 2013 Last revised: 11 Nov 2013

See all articles by Lee Harris

Lee Harris

University of Memphis - Cecil C. Humphreys School of Law

Date Written: June 6, 2013

Abstract

Again and again, economists, corporate law scholars, and Congress have turned to reforms, like executive compensation reforms, as a solution to executive misbehavior. The root of the evil, they muse, is sky-high pay with only a flimsy connection to managerial performance. If CEO pay can only be rejiggered on the frontend and tied to performance, the argument goes, executives can be expected to pursue shareholder interests, put aside egos, and firms will prosper. This Article argues that such reforms are, despite the best of intention, fool’s gold. The fallacy is not in thinking that CEOs and other executives who have abused their position and have failed to live up to expectations should be paid less. They should. However, this Article argues that when CEOs and other executives fail, they should be out of a job altogether. This Article goes on to describe how to create a right of retention by drawing the analogy to the public sphere. Specifically, this Article argues that one way to curb CEO misconduct is through periodic up-or-down votes, the same kind of retention-style elections a plurality of states use to give voters a say in whether judges should be ousted. Importantly, in states that use them, retention elections have treaded lightly — they have created a monitoring device to hold in check the worse abuses without undermining the authority of public officials (governor and judicial nominating committees) from making their selections about whom should be appointed. Thus, this Article suggests that retention elections provide a useful path, after bad conduct occurs, to checking corporate executive abuses. Incidentally, as I have suggested in the past, this Article demonstrates that, once again, a solution from the public sphere might mitigate another long-standing problem in the private sphere — this time, CEO accountability. Finally, this Article proposes a new classification scheme for efforts to rein in CEO misbehavior and promote accountability. This Article argues that expected success of efforts to rein corporate leadership abuses depends, crucially, on timing. This Article argues that reforms have more a chance of achieving their goals if the focus is on actual (or past) performance, not anticipated performance. Thus, this Article makes some initial claims about when to create prospective incentives for good behavior versus retrospective punishments for bad behavior.

Suggested Citation

Harris, Lee, CEO Retention (June 6, 2013). Florida Law Review, Vol. 24, 2013 Forthcoming ; University of Memphis Legal Studies Research Paper No. 124. Available at SSRN: https://ssrn.com/abstract=2275359 or http://dx.doi.org/10.2139/ssrn.2275359

Lee Harris (Contact Author)

University of Memphis - Cecil C. Humphreys School of Law ( email )

One North Front Street
Memphis, TN 38103-2189
United States
901-678-1393 (Phone)

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