Suchergebnisse

Shareholder and public dissatisfaction with executive compensation has led to calls for an annual shareholder advisory vote on firms' compensation practices and policies, so-called "say on pay." Proposed federal legislation would mandate "say on pay" generally for U.S. public companies. This Article assesses the case for such a mandatory federal rule in light of the U.K. experience with a similar regime adopted in 2002. The best argument for a mandatory rule is that it would destabilize pay practices that have produced excessive compensation and that would not yield to firm-by-firm pressure. This has not been the U.K. experience; pay continues to increase. The most serious concern is the likely evolution of a "best compensation practices" regime which would embed normatively-opinionated practices that would ill-suit many firms. There is some evidence of a U.K. evolution in that direction. This problem might be more pronounced in the U.S. because shareholders are even more likely than their U.K. counterparts to delegate judgments over compensation practices to a small number of proxy advisors who themselves will be economizing on analysis. The Article argues instead for a federally provided shareholder opt-in right to a "say on pay" regime, which would change the present reliance on precatory proposals in the issuer proxy, which are in turn subject to the power delegated to shareholders under state law. Secondarily, the Article argues that any mandatory regime should be limited to the 500 largest public companies by public market float and should not cover the more than 12,000 firms subject to SEC oversight. Compensation practices at key financial firms present a distinct set of safety and soundness issues because of potential systemic risk from a failure of such firms. These concerns should be addressed separately.

The current debate over shareholder access to the issuer's proxy statement for the purpose of making director nominations is both overstated in its importance and misses the serious issue in question. The Securities and Exchange Commission's ("SEC's") new e- proxy rules, which permit reliance on proxy materials posted on a website, should substantially reduce the production and distribution cost differences between a meaningful contest waged via the issuer's proxy and a freestanding proxy solicitation. No matter which avenue is used, however, the serious question relates to the appropriate disclosure required of a shareholder nominator. Should the nominator be subject to the broad-ranging disclosure requirements now associated with the freestanding contest? Or should there be curtailed disclosure for a nominator (who disavows control motives) of a limited number of directors whose election will not change control? The inescapable costs lie in disclosure, not so much because of the drafting costs, but because of the liability standard associated with the current proxy solicitation rules. A party may be subject to a private suit for material misstatements or omissions in connection with a solicitation even without a showing of scienter. Disclosure under such a regime entails not only the up-front costs of precaution, but also the uncertain (and potentially high) costs of litigation. These costs – not the production, distribution, or other solicitation costs in an e-proxy-eligible world – will constrain director nominations made by a "good governance" activist without a large stake or a control motive. The current regulatory round associated with the SEC's sidestepping of the Second Circuit's proxy access opinion in AFSCME v. AIG is a sideshow, diverting attention from this important issue.

Between 1950 and 2005, the composition of large public company boards dramatically shifted towards independent directors, from approximately 20% independents to 75% independents. The standards for independence also became increasingly rigorous over the period. The available empirical evidence provides no convincing explanation for this change. This Article explains the trend in terms of two interrelated developments in U.S. political economy: first, the shift to shareholder value as the primary corporate objective; second, the greater informativeness of stock market prices. The overriding effect is to commit the firm to a shareholder wealth maximizing strategy as best measured by stock price performance. In this environment, independent directors are more valuable than insiders. They are less committed to management and its vision. Instead, they look to outside performance signals and are less captured by the internal perspective, which, as stock prices become more informative, becomes less valuable. More controversially, independent directors may supply a useful friction in the operation of control markets. Independent directors can also be more readily mobilized by legal standards to help provide the public goods of more accurate disclosure (which improves stock price informativeness) and better compliance with law. In the United States, independent directors have become a coplementary institution to an economy of firms directed to maximize shareholder value. Thus, the rise of independent directors and the associated corporate governance paradigm should be evaluated in terms of this overall conception of how to maximize social welfare.

Between 1950 and 2005, the composition of large public company boards dramatically shifted towards independent directors, from approximately 20% independents to 75% independents. The standards for independence also became increasingly rigorous over the period. The available empirical evidence provides no convincing explanation for this change. This Article explains the trend in terms of two interrelated developments in U.S. political economy: first, the shift to shareholder value as the primary corporate objective; second, the greater informativeness of stock market prices. The overriding effect is to commit the firm to a shareholder wealth maximizing strategy as best measured by stock price performance. In this environment, independent directors are more valuable than insiders. They are less committed to management and its vision. Instead, they look to outside performance signals and are less captured by the internal perspective, which, as stock prices become more informative, becomes less valuable. More controversially, independent directors may supply a useful friction in the operation of control markets. Independent directors can also be more readily mobilized by legal standards to help provide the public goods of more accurate disclosure (which improves stock price informativeness) and better compliance with law. In the United States, independent directors have become a complementary institution to an economy of firms directed to maximize shareholder value. Thus, the rise of independent directors and the associated corporate governance paradigm should be evaluated in terms of this overall conception of how to maximize social welfare.

The starting question for public policy analysis in the retirement security area ought to be this: "Is retirement security possible?" My text is drawn from the classic trust case Harvard College v. Amory, decided in 1830, in which the Massachusetts Supreme Judicial Court announced the prudent investor rule by stating, "Do what you will, the capital is at hazard." The modern understanding of that text is not that there are no "risk free" assets. After all, the United States government assures the timely payment of principal and interest on Treasury securities backstopped in turn by Treasury's unlimited call on the money-creation capacities of the Federal Reserve. Rather, we understand that even if principal and interest are paid as promised, that still leaves inflation-related risk to the purchasing power of trust assets. In that sense, "the capital is at hazard."