Volume 95 - No. 3 Minnesota Law Review

Executive Compensation in the Courts: Board Capture, Optimal Contracting, and Officers’ Fiduciary Duties

Americans seem convinced that corporate executives are paid too much. So far, however, attempts to rein in executive compensation have met with little success. In the Article we propose a new approach to monitoring executive compensation, one that turns to an unlikely institution to oversee pay: the courts.

Enemies of high executive compensation have generally dismissed courts’ ability to curb executive compensation, reasoning that courts have never wished to become involved in pay decisions. We show, however, that at several points over the last century, courts have proven surprisingly willing to second-guess decisions on executive compensation. These courts ultimately retreated from activist approaches to executive compensation not because of complacency, but because they believed themselves incapable of determining whether pay was “fair” or merited.

New developments in corporate law point to a way out of this impasse and carve out a new way for courts to oversee executive compensation. In recent years, courts have begun focusing on the distinctive fiduciary duties of corporate officers, culminating last year when the Delaware Supreme Court held in Gantler v. Stephens that a corporation’s officers owe the same fiduciary duty to the corporation and its shareholders as do its directors. Gantler and similar cases open the door for courts to monitor executive compensation by inquiring whether officers fulfilled their fiduciary duties when negotiating their own compensation agreements. The Delaware Chancery Court has already held that corporate officers are bound by their fiduciary duty of loyalty to negotiate their employment contracts in an arm’s-length, adversarial manner. If they instead try to manip­ulate the negotiation process, the officers open themselves up to shareholder lawsuits which invite judicial scrutiny of compensation negotiations and the result of those negotiations, the compensation agreements.

:: View PDF

De Novo

  • Dan’s Flaw

    DAN’S [F]LAW: STATUTORY FAILURE TO ENFORCE ETHICAL BEHAVIOR IN CLINICAL DRUG TRIALS Noah Lewellen* I. INTRODUCTION Paul, a sophomore at the University of Minnesota, bursts into a lecture hall, loudly claims to see monsters sitting in the seats, and offers his services in slaying them. The police are called, and Paul is restrained and delivered […]

  • Case Comment: Bhogaita v. Altamonte

    EVERY DOG CAN HAVE HIS DAY IN COURT: THE USE OF ANIMALS AS DEMONSTRATIVE EXHIBITS Kyle R. Kroll, Volume 100, Online Managing Editor In Bhogaita v. Altamonte, the Eleventh Circuit recently decided whether to allow a dog in the courtroom as a demonstrative exhibit.[1] Although the case presented many serious issues regarding the Fair Housing […]

  • Revisiting Water Bankruptcy

    REVISITING WATER BANKRUPTCY IN CALIFORNIA’S FOURTH YEAR OF DROUGHT Olivia Moe, Volume 100, Managing Editor This spring, as “extreme” to “exceptional” drought stretched across most of California—indicating that a four-year streak of drought was not about to resolve itself[1]—Governor Jerry Brown issued an unprecedented order to reduce potable urban water usage by twenty-five percent.[2] In […]