University of Delaware

During the early '90s, sharehold‐ers and other observers were call‐ing for a stronger link between CEO pay and performance–more spe‐cifically, a link between CEO pay and shareholder value. One result was a dramatic increase in the use of stock options for incentive pur‐poses. But, in the face of a booming stock market during the '90s, the “excesses” in CEO pay became a controversial issue in the business press. And when a number of CEOs cashed out their option holdings just prior to the collapse of their own companies' stock prices, the topic generated even more controversy. This roundtable brings together a small group of people from academia, business, institutional investing, and the courts to discuss problems with executive pay and corporate governance. There was general agreement among the pan‐elists that the board of directors and the compensation committee have a fiduciary responsibility to share‐holders to ensure that executive compensation is appropriate, and that an active, informed, and inde‐pendent board is critical to achiev‐ing that end. Nevertheless, in many cases, shareholders have voted on stock option plans and have almost always approved them–and in this sense they too bear some responsi‐bility for incentive plans that fail to serve their own interest. As one remedy for the problem, both the New York Stock Exchange and the Conference Board have called for boards to hire the compensation consultants who design the compen‐sation plans. But this is not likely to be a complete solution since, as several panelists pointed out, the consultants do not negotiate executive pay con‐tracts. There have also been new regulations on board independence to prevent “friendly” boards from overpaying their CEOs–although, here again, some panelists expressed reservations about the loss of “institu‐tional memory” if these regulations mean giving up board members from a company's major suppliers or lead banks. The loss of such outside ex‐pertise and knowledge of the com‐pany may be even more critical now that board members with any pos‐sible relationship to the firm are pro‐hibited from sitting on various board committees. In general, there was a clear pref‐erence among the panelists for market‐based solutions–with greater reliance on investors' ef‐forts to protect their own inter‐ests–as a meaningful alternative to new regulations designed to ensure the sort of responsible be‐havior that monitoring by inves‐tors is intended to accomplish. Survey data indicate that institu‐tional investors have finally real‐ized that pay packages matter, espe‐cially when they are outrageously high and completely disconnected from financial performance. In such cases, investors are likely to “weigh in” on compensation prac‐tices, and through repeated use, the shareholder voting process could become an effective force for disciplining management. The primary role of the judiciary in all this is twofold: first, to hold corpo‐rate board members accountable for their actions; and second, to protect the integrity of the share‐holder voting process.