Corporate Governance

In re Lear Corporation: Tough on Shareholders, Not So Tough on Management (Part 6)

By J. Robert Brown

Last night, in the debate, Barak Obama made a point of emphasizing the $400,000 spent by AIG executives in lavish entertaining in the aftermath of Treasury's decision to provide an $85 billion loan.  According to published reports: 

• As it happens, congressional investigators released AIG documents earlier in the day showing that the company paid more than $440,000 for the event, including nearly $200,000 for rooms, $150,000 for meals, $23,000 in spa charges and almost $7,000 for golf outings.
  

The documents are here.  He stated that the executives should be fired and the money recovered. 

The expenditures were not related to CEO compensation but apparently to the entertaining of salespeople.  Nonetheless, the event shows an out of control attitude about these types of expenditures and the lack of corporate oversight, both explained by the lax standards applied by the Delaware courts.  The expenditures may garner bad publicity (a rare consequence since in general they won't become public) but what they won't garner is legal liability.  Any challenge would be dismissed after a cursory examination of the board's independence and reliance on a waiver of liability provision.

Indeed, the amounts at issue in Lear were far greater and plaintiff was treated with derision, the claim described as containing "inflammatory and conclusory charges of wrongdoing," the complaint called an "unwieldy document" lacking in "any attempt at editing."  Both the tone and the analysis in Lear demonstrate just how difficult shareholders have it when trying to challenge perceived wrongdoing within a company. 

With all of the outrage over excessive compensation, the only real fix is to take the issue away from a jurisdiction that benefits financially from attracting companies into the state by giving management exactly what it wants.  What management wants more than anything else is the lack of limits on executive compensation and that is effectively what they have under Delaware law.  There is no mystery to the Delaware approach.  It is one of pure economic self interest.  The mystery is how large components of the country's system of corporate governance can be left to a jurisdiction with these obvious economic incentives. 

Federal preemption is what is required.  As for the race to the bottom and the Delaware approach to executive compensation, try this paper: Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty

Full post as published by The Race to the Bottom on October 08, 2008 (boomark / email).