Free Download: Liability of Corporate Officers and Directors--Ch. 5.08-Executive Compensation

§ 5.08 Executive Compensation.

For years shareholders have complained of the highly lucrative executive compensation arrangements maintained by their companies, and some complaints have found their way into the courts. Examples of such lawsuits include: 

Viacom shareholders initiated a derivative action alleging that the directors breached their fiduciary duties in approving excessive and unwarranted executive compensation packages. At a time when Viacom allegedly recorded a net loss of $17.462 billion, the board approved CEO and COO compensation totaling nearly $160 million.¹
 
Walt Disney Company shareholders filed suits in California and Delaware attacking the estimated $130 million in cash and stock options paid to former President Michael Ovitz when he left the company after only one year on the job.²
 
Coca Cola Company shareholders filed a derivative action alleging that the directors had breached their fiduciary duty by approving a compensation package for CEO Robert Goizueta, which includes options to purchase 1 million shares of company stock.
 
Greentree Financial Corporation shareholders, in January 1997, filed a derivative action against the directors and officers alleging that $28.5 million and $65.1 million bonuses paid to CEO Lawrence Coss were excessive and unreasonable.
 
The New York Attorney General filed an action to recover alleged excessive compensation paid to Richard Grasso during his tenure as Chairman and CEO of the New York Stock Exchange. The suit alleged that Mr. Grasso was paid nearly $190 million over eight years, and that his compensation and benefits for 2000 through 2002 was equal to 99 percent of the NYSE's net income during those years. The suit also named the former chairman of the board's compensation committee as a defendant. After four years of litigation, all of the claims against Mr. Grasso had been dismissed on various grounds.³

Historically, courts have been inclined to defer to the business judgment of directors as to such matters, and have been reluctant to impose personal liability on directors for compensation-related decisions. In the above Coca Cola case, for example, the Delaware Court of Chancery dismissed the action on the ground that reasonable disinterested directors could have concluded that the CEO's services and the resulting benefits to the company justified the compensation awarded. However, as executive compensation packages continue to reach astronomical levels, courts may be expected to become increasingly uncomfortable with blind deference to the judgment of disinterested directors.

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