On July 29, the Harvard Law School Forum on Corporate Governance and Financial Regulation posted my memorandum entitled “U.S. Corporate Governance Today: A Reshaping of Capitalism.” The message of that memorandum was, in brief, as follows:

“Corporate governance” has become an expansive concept today, involving many parties collectively pursuing multiple agendas. The combined purposes and effects of this movement are reshaping the U.S. private enterprise economic system.
However, the nature and consequences of this reshaping are not being adequately explored — leading to the prospect that more harm than good may result from corporate governance reform as defined and pursued today. The memorandum (1) provides an understanding of what changes are afoot; (2) identifies some of the important challenges and risks they present to key underpinnings of U.S. capitalism; (3) highlights that over time, and notwithstanding significant stumbles, our free enterprise system has been the most vibrant and competitive economic system in the world; (4) offers a reminder that the very essence of capitalism is that it fosters risk-taking — and that “mistakes” will be made; and (5) in the context of pursuing corporate governance reform, urges applying the long-term view of our private enterprise system’s performance and the principle of restraint which that view dictates.

One of the key areas of governance initiatives today that raises these issues is executive compensation. As noted in my prior memorandum, executive compensation matters currently on the corporate governance agenda include:

(1) requiring annual advisory “say on pay” shareholder votes; (2) requiring independent compensation consultants in certain circumstances; (3) requiring companies to develop and disclose “claw-back” policies; (4) barring severance agreements for executives terminated for poor performance; (5) requiring proxy disclosure of specific performance targets for incentive compensation; (6) requiring shareholder approval of pay above a prescribed multiple (e.g., 100x, as provided in one Senate bill) of what the average company employee is paid; (7) requiring expanded compensation-related proxy disclosure, including regarding compensation paid to lowest and highest paid employees, average to all employees, number of employees paid more than prescribed multiple (e.g., 100x) of average employee compensation and total compensation paid to employees paid more than prescribed multiple; (8) making “excessive compensation” non-deductible for federal income tax purposes (e.g., pay above 100x average compensation to company employees, as provided in one Senate bill); (9) requiring “excessive compensation” reports to be filed with the Treasury Department; (10) providing additional requirements with respect to compensation committees regarding (a) enhanced independence standards, (b) direct responsibility for hiring, paying and overseeing compensation consultants, (c) authority to hire and pay outside counsel and advisors, and (d) independence standards to be applied to compensation consultants and outside counsel; (11) requiring discussion and analysis of risk related overall compensation policies and practices for employees generally, if the risks arising from those policies and practices “may have” a material effect on the company; (12) limiting payouts to families of executives who die in office; and (13) requiring that executive equity awards be held until retirement.

The purpose of this follow-up memorandum is to examine more closely the justification, efficacy, risks and motivations associated with this broad-based effort to increase significantly the regulation of executive and other compensation arrangements of U.S. publicly traded business corporations. This effort would be effected through a combination of substantive requirements, expanded disclosure and non-binding shareholder advisory votes imposed at the federal level through legislation and regulation, and also on a company-specific basis through proposals sponsored by shareholders.

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