Optimal Executive Compensation vs. Managerial Power: A Review of Lucian Bebchuk and Jesse Fried's "Pay without Performance: The Unfulfilled Promise of Executive Compensation"

This essay reviews Bebchuk and Fried's "Pay without Performance: The Unfulfilled Promise of Executive Compensation". Bebchuk and Fried criticize the standard view of executive compensation, in which executives negotiate contracts with shareholders that provide incentives that motivate them to maximize the shareholders' welfare. In contrast, Bebchuk and Fried argue that executive compensation is more consistent with executives who control their own boards, and who maximize their own compensation subject to an "outrage constraint". They provide a host of evidence consistent with this alternative viewpoint. The book can be evaluated from both a positive and a normative perspective. From a positive perspective, much of the evidence they present, especially about the camouflage and risk-taking aspects of executive compensation systems, is fairly persuasive. However, from a normative perspective, the book conveys the idea that policy changes can dramatically improve executive compensation systems and consequently overall corporate performance. It is unclear to me how effective in practice are potential reforms designed to achieve such changes likely to be.

[Review of \u3ci\u3ePay without Performance: The Unfulfilled Promise of Executive Compensation\u3c/i\u3e]

[Excerpt] Every once in a while someone comes out with an important book concerning corporate governance or executive compensation. Like Aldolf A. Berle and Gardiner C. Means\u27s The Modern Corporation and Private Property (New York: Harcourt, Brace, and World, 1932) and Graef S. Crystal\u27s In Search of Excess: The Overcompensation of American Executives (New York: W.W. Norton, 1991), Bebchuk and Fried\u27s new book is thought-provoking and interesting. It is a very important book and should be read not just by those interested in executive pay or corporate governance but by anyone interested in how corporations work

Path dependence, corporate governance and complementarity

In a series of recent papers, Mark Roe and Lucian Bebchuk have developed further the concept of path dependence, combined it with concepts of evolution and used it to challenge the wide-spread view that the corporate governance systems of the major advanced economies are likely to converge towards the economically best system at a rapid pace. The present paper shares this skepticism, but adds several aspects which strengthen the point made by Roe and Bebchuk. The present paper argues that it is important for the topic under discussion to distinguish clearly between two arguments which can explain path dependence. One of them is based on the role of adjustment costs, and the other one uses concepts borrowed from evolutionary biology. Making this distinction is important because the two concepts of path dependence have different implications for the issue of rapid convergence to the best system. In addition, we introduce a formal concept of complementarity and demonstrate that national corporate governance systems are usefully regarded as – possibly consistent – systems of complementary elements. Complementarity is a reason for path dependence which supports the socio-biological argument. The dynamic properties of systems composed of complementary elements are such that a rapid convergence towards a universally best corporate governance systems is not likely to happen. We then proceed by showing for the case of corporate governance systems shaped by complementarity, that there even is the possibility of a convergence towards a common system which is economically inferior. And in the specific case of European integration, "inefficient convergence" of corporate governance systems is a possible future course of events. First version December 1998, this version March 2000

Reorganizations and Stochastic Collateral Value

Bebchuk and Fried propose using a series of auctions to implement a market-based methodology for valuing secured claims in a reorganization. This Article demonstrates their procedure can result in a secured creditor receiving more than its ex ante bargain, and that the probability distribution of possible collateral values can be relevant to fulfilling the ex ante bargain. This Article further develops and examines a refinement of the Bebchuk and Fried procedure that provides an approximate solution to the overcompensation of secured creditors. This refinement reconceptualizes collateral as comprising two components: (i) a call option on that property, exercisable at the time the secured claim would become due, with an exercise price of the amount that would be due on the secured claim at the corresponding time, and (ii) the property subject to that call option. This Article details how revising the Bebchuk and Fried proposal in light of this insight can yield a market-based methodology that produces an approximation of the ex ante bargain

Curb Your Enthusiasm: The Rise of Hedge Fund Activist Shareholders and the Duty Of Loyalty

Shareholder activism has been a growing problem in the corporate world, creating numerous dilemmas for the board of directors of companies. Activist shareholders can unsettle a company, pressuring the directors to make decisions according to the course of business the activists would prefer, and thus interfering with the traditional role of directors as the decision-makers of a company. With this new development in the business world, legal scholars have been debating if this activism needs to be controlled and, if so, what measures can be taken to reach a balance. This Note examines the traditional corporate principles such as the shareholder primacy theory and the principle of “one share, one vote,” evaluating the benefits and the costs of adhering to these theories amidst the changing landscape in the business and legal world. This Note then proposes that the traditional concept of the duty of loyalty can be applied to activist shareholders, much like it has been applied to the directors and majority shareholders in the past, based on a fact-by-fact analysis

Compensation Consultants and Executive Pay (CRI 2009-010)

This chapter provides a review of the recent literature on compensation consultants and executive pay. Six major pay consulting firms dominate the market. These firms advise client firms about executive pay and frequently supply other services such as actuarial work. There is some evidence that CEO pay is higher in firms that use compensation consultants. However, the hypothesis that CEO pay is higher in firms whose consultants face potential conflicts of interest, such as cross-selling of other services, is not as empirically robust

The Business Judgment Rule, Disclosure, and Executive Compensation

Despite its ubiquity in corporate law, the business judgment rule remains a doctrinal puzzle. Both courts and scholars offer different understandings of the Rule\u27s role in litigation brought against corporate directors and different justifications for its deployment to insulate such directors from liability for breaches of fiduciary duties. This Article rejects all existing justifications for the Rule and argues that the Rule is no longer needed to protect directors from liability either because the justifications offered never made any sense or because directors are now protected by other, statutory means. Rather, the Rule is needed today not to protect directors, but the corporations they serve from the irreparable harm corporations would suffer if forced to disclose prospective business plans in order to defend decisions taken by their boards. This Article follows some recent scholarship in arguing that the Rule is best understood as an abstention doctrine and argues that courts should invoke the Rule and abstain from the review of the business judgment of corporate directors when the litigation that gives rise to such review would compel the corporation to disclose information relating to its prospective business plans. The Article then Illustrates why the Rule should not apply in cases involving challenges to board decisions relating to executive compensation through a detailed discussion of the ongoing litigation relating to the hiring and dismissal of the Walt Disney Company\u27s former President Michael Ovitz

Corporate governance and regulation : can there be too much of a good thing ?

For a large number of companies from different countries, the authors analyze how company corporate governance practices and country regulatory regimes interact in terms of company valuation. They confirm that corporate governance plays a crucial role in efficient company monitoring and shareholder protection, and consequently positively impacts valuation. They find substitution in valuation impact between corporate governance measures at the company and country level, with a possibility of over-regulation. Corporate governance appears more valuable for companies that rely heavily on external financing, consistent with the hypothesis that the main role of corporate governance is to protect external financiers.National Governance,Governance Indicators,Corporate Law,Microfinance,Small Scale Enterprise

Regulatory Competition and the Market for Corporate Law

This article develops an empirical model of firms’ choice of corporate laws under inertia. Delaware dominates the incorporation market, though recently Nevada, a state whose laws are highly protective of managers, has acquired a sizable market share. Using a novel database of incorporation decisions from 1995- 2013, we show that most firms dislike protectionist laws, such as anti-takeover statutes and liability protections for officers, and that Nevada’s rise is due to the preferences of small firms.Our estimates indicate that despite inertia, Delaware would lose significant market share and revenues if it adopted protectionist laws. Our findings support the hypothesis that Delaware faces competitive pressure to maintain its current laws, and that managers are willing to commit to such laws in order to attract capital