US “Pay Czar” May Dramatically Alter Corporate Governance
Much is being made of the “US Pay Czar,” Kenneth Feinberg’s, effort to limit executive compensation at firms that have not re-paid TARP funds. Feinberg plans to force 175 corporate executives to cut their salaries by 90%.
A Wall Street Journal article suggests that Feinberg won’t stop at limiting salaries:
“Mr. Feinberg will also demand a series of corporate governance changes at the firms, including splitting the chairman and CEO positions, requiring boards of directors to create “risk” committees and eliminate staggered board elections, which critics charge inhibit change.”
Feinberg’s pay restrictions will be ineffective in achieving their desired goals. Many executives who face a 90% pay cut will simply leave their firms. But further federal intervention into corporate governance is troubling. Corporate law has been a long been the domain of States. So any federalization of permissible takeover defenses represents a huge shift in the power toward Washington and away from more local government.
More importantly, staggered board elections operate as a takeover defense to prevent hostile bidders from acquiring control of the company. The legality of the anti-takeover measures (such as the staggered board) evolved out of several high-profile Delaware Chancery Court cases in the 1980’s. Like them or not, anti-takeover defenses yield substantial benefits to shareholders. Indeed, having a staggered board allows managers to negotiate harder and extract a higher price for the shareholder.
Corporate governance is not likely to improve with the elimination of staggered boards. Activist shareholders will be better equipped to challenge management - but there is no guaranty that these activist shareholders will yield more stable financial institutions. Indeed, some acquirers may ratchet up leverage and use the company to take riskier bets in the marketplace than the old management. As the same time, shareholders (and a nation of 401k holders) will suffer as their shares have a lower total value to potential acquirers.
Last 5 posts by Greg Adamo
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