2007 • Volume 32 • Number 2

The House of Mouse and Beyond: Assessing the SEC’s Efforts to Regulate Executive Compensation (Part 1)(Part 2)

Jennifer S. Martin

What can or should be done, if anything, to address complaints that corporate executives are overpaid? This article argues that with its revised regulations on executive compensation, the Securities and Exchange Commission (SEC) is making progress in the area of disclosing executive compensation. The SEC, however, will not accomplish any substantial reform regarding compensation because shareholders do not have much of a role in establishing executive compensation packages and have little ability to challenge board decisions after receiving the mandated disclosure. This article explores how a gap has arisen in the area of executive compensation regulation by analyzing the revised regulations and the Delaware Supreme Court decision In re Walt Disney Company Derivative Litigation. It demonstrates how state law regulates gross negligence, waste and, perhaps, bad faith, while federal law focuses on disclosure of certain compensation packages. The different foci of state and federal regulations leave a gap permitting behavior that might be adverse to shareholder interests, yet occurs beyond the shareholders’ability to effectuate changes. Addressing this gap is important because, unlike routine board decisions, compensation decisions have characteristics that may compromise arm’s length contracting. Additionally, while disclosure of compensation data is important, it is by no means the equivalent of merit review. If the SEC is truly committed to reforming executive compensation, it must address the gap in regulation remaining after In re Walt Disney Company Derivative Litigation. The SEC and states should work cooperatively to implement more meaningful corporate governance reform to ensure that shareholders have both the information necessary to make informed investment decisions, and the ability to effect changes in company decision making concerning executive compensation.