In dismissing a wide-ranging stockholder challenge to compensation practices at Goldman Sachs, the Delaware Court of Chancery has issued a strong reaffirmation of traditional principles of the common law of executive compensation.  The decision emphasizes that boards are free to encourage and reward risk-taking by employees and that Delaware law protects directors who adopt compensation programs in good faith.  In re The Goldman Sachs Group, Inc. Shareholder Litigation (Oct. 12, 2011).

Shareholders of Goldman Sachs brought suit on a variety of theories, claiming that Goldman’s compensation policies, which emphasized net revenues, rewarded employees with bonuses for taking risks but failed to penalize them for losing money; that the directors allocated too much of the firm’s resources to individual compensation versus investment in the business; that while the firm adopted a “pay for performance” philosophy, actual pay practices failed to align stockholder and employee interests; and that the board should have known that the effect of the compensation practices was to encourage employees to engage in risky and/or unlawful conduct using corporate assets.  In dismissing the claims, the Court relied on basic principles of Delaware law.

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