Executive Compensation Counsel

Recently, board obligations have been highlighted in a breach of fiduciary duty lawsuit against the Disney company’s board of directors. Executives and board members at all public companies have fiduciary duty and must act with the shareholders’ and company’s best interests in mind. Fiduciary duty includes the duty to be informed (know the market, competition, company strategy, know enough to make intelligent decisions), duty of care (do everything you can to help the company), and duty of loyalty. Board members must disclose conflicts of interest.

The Disney shareholders’ suit against the company’s board of directors claimed that the board didn’t represent their best interests by allowing CEO Michael Eisner to grant Michael Ovitz $130 million in severance pay after just 14 months as company president. But a Delaware court found that the board acted in good faith, going through a reasonable decision-making and due diligence process in reaching its decision to pay Ovitz the severance.

Say On Pay

If enacted, the Shareholder Bill of Rights legislation would allow shareholders to vote against company directors who sit on the compensation committee. However, since it’s just an advisory vote, a board doesn’t have to act on it.

“Some companies would argue you don’t really need say on pay because you already have it,” Seidel says. “Shareholders can always vote against directors that sit on the comp committee. That’s one way to express dissatisfaction of compensation.”

While the say-on-pay legislation passed the House in July, Stout says he’s interested to know exactly what shareholders will be able to vote on if the legislation is enacted. “Are you asking them to approve pay structure and analysis? The proxy material? Are they specifically approving the compensation of the CEO?” he wonders.

Sheffert believes the proposed legislation is an overreaction. “At the end of the day, you can’t legislate [against] ignorance and greed,” he says. He’s also concerned the bill will make it difficult for companies to compete in a global environment.

Despite the harsh backdrop of compensation and bonus scandals, companies are still committed to making incentive compensation work, Seidel says. Taking steps as simple as awarding bonuses biannually instead of annually can incent executives to work to make their company’s long-term performance sustainable. And as companies diversify their compensation structures, they’ll benefit by not putting all the incentive eggs in one basket.

This article was published originally as “Good Compensation Counsel” in the November 2009 issue of Twin Cities Business, page 55.