For public companies, the compensation that Board members pay themselves has become fraught with risks of shareholder derivative litigation. This is mainly because the Delaware courts (whose decisions generally establish national standards) have found that credible allegations of excessive pay trigger judicial review under an entire fairness standard (described below) rather than under the highly deferential business judgement rule (which supports board decisions unless they are "so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests").[Quoting from Feuer v. Redstone, Del. Ch., 4/19/2018, pages 27-28.]
2018.12.30 Director Compensation Storm Ahead - Brace for Litigation in 2019. It has become risky to be an outlier in executive compensation matters, but the risk is likely to become acute in 2019 with respect to non-employee director compensation in particular. This is because ISS will in 2019 be identifying companies that pay excessive levels of ISS's U.S. Compensation Policies (released 12/20/2018) include FAQs - noted below - aimed at identifying outliers wo pay excessive levels of non-employee director compensation. Doing so in two or more consecutive years "without a compelling rationale
for companies that fail to plan correctly in response to
2017.03.14 Director Compensation - Survey Data and Precautions
The two should be considered hand-in-hand these days: survey data about director compensation, and precautions against litigation alleging it is excessive. This is because the best litigation protection for directors comes from two steps drawn from a Nov. 2016 survey published by Frederic W. Cook, which begins with the following heads-up:
2016.07.08 Proxy Precaution: Comp Consultant and Survey Results. Liberty Interactive's proxy statement includes, on page 69, smart disclosures indicating the reasonableness of its process for determining director compensation (through involving an independent consultant, and its actual levels (near the 50% percentile). In so doing, the proxy statement signals compliance with the "entire fairness" standard that Delaware law applies when shareholders challenge director compensation that has not received shareholder approval.
2014.June.9 Director Compensation - FaceBook Struck with Shareholder Litigation.
A Facebook shareholder has launched derivative litigation in Delaware Chancery Court, seeking to recover "unfair excessive compensation" being paid to directors (quoting from this Bloomberg article). The lawsuit alleges corporate waste, breach of fiduciary duties, and unjust enrichment.
2016.May/June. "Scrutiny and Standardization of Director Pay" - This article from Corporate Board, by two Frederic W. Cook authors, provides recent survey data along with useful insights into changes to consider in response to business, accounting, litigation, and other considerations.
2013.Oct.23 Director Compensation Escaping Say-on-Pay Attention, but Worth Precaution. A recent Mercer survey reports a mere 3% increase in 2012 director compensation. TowersWatson reached the same conclusion in its Fortune 500 survey. Survey data of this kind led this article from Corporate Secretary magazine to begin by noting that "the fuss over executive compensation" has not generally carried over to director compensation. That article concluded by suggesting three questions for directors to consider about their compensation, generally:
(1) are directors being paid appropriately for their time and expertise?
(2) are those pay structures both administratively simple, and designed to balance stable value with aligning director pay with shareholder interests, and
(3) is the director pay program likely to attract negative attention or to create litigation risks?
The above questions are well-framed. Given the Delaware decision in Seinfeld v. Slager (discussed here), smart boards should consider seeking independent advice that includes consideration of peer survey data. That should help them demonstrate the reasonableness and fairness of their compensation if questions arise.
Determining Director Compensation
Corporate directors should be reviewing the structure and amount of their compensation, and their processes for making those decisions. They should also be obtaining peer data, and considering the receipt of shareholder approval for maximum compensation levels (in order to secure judicial review under the highly deferential business judgment rule).
2013.Feb.28 Director Compensation - From Surveys to Shareholder Approval
The Conference Board's posting on the Harvard Governance blog prefaces its list of major findings with the following: "The Conference Board, NASDAQ OMX and NYSE Euronext jointly released the 2013 edition of Director Compensation and Board Practices, a benchmarking study with more than 150 corporate governance data points searchable by company size (measurable by revenue and asset value) and 20 industrial sectors." The study identifies many points of divergence between the practices of large and small companies. While the Conference Board report does not focus on how directors compensate themselves, corporate directors should be reviewing their practices, obtaining peer data, and considering shareholder approval for maximum compensation levels.
Copyright © Joseph Poerio. All rights reserved.