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Funny Faces of Corporate America
http://www.sina.com.cn 2004/03/23 11:20  Shanghai Daily

  The outlandish payment to Richard Grasso has angered US investors and regulators alike, but US corporate law, which favors directors and officers, will not help discipline the former chairman of the New York Stock Exchange.

  The US Securities and Exchange Commission has issued subpoenas to every director who served during Grasso's eight years as the chairman and CEO of NYSE, asking them why they agreed to pay Grasso nearly US$140 million last year. Grasso was ousted after the compensation package was made public.

  John Thain, the new CEO of NYSE, has demanded Grasso return a "very substantial part" of the money, but he has refused, saying his package was legally approved by the board of directors.

  Grasso's pay was lavish compared with the annual salary of US$142,500 paid to SEC Chairman William Donaldson.

  Although the public outcry is understandable, it will not force Grasso to return his income, unless he is found to have defrauded investors or cooked NYSE books.

  Such is American corporate law, under which approval by a board of directors acting in good faith and with due care essentially shield people like Grasso from liability.

  The core legal issue, then, is whether shareholders can easily invalidate a board decision on executive compensation and other corporate affairs. The answer is no.

  The trick lies in the well-established business judgment rule, which immunizes directors and officers from liability for honest mistakes of judgment made with reasonable prudence that result in a financial loss.

  Shareholders cannot invalidate executive compensation, however exorbitant it looks, unless they prove that such compensation constitutes corporate waste, if not fraud.

  However, the Delaware Court of Chancery, where most corporate suits are decided, says a waste claim cannot succeed merely by alleging that a company has not received adequate consideration for compensation granted to an officer.

  The US Supreme Court also holds that a board decision on executive compensation should receive great deference and that a board acts properly so long as it does not unconsciously or irrationally squander corporate assets.

  In Grasso's case, there is no evidence that his stratospheric pay package has squandered NYSE assets. He simply cut a sweat deal for himself.

  He did not loot the company, as was in the case of Tyco.

  The courts' deference to board power provides a handy cover for directors and officers to extract rents, or excessive pay. And Grasso is not alone.

  A recent study by professors from Harvard and UC Berkeley law schools reveals that the median compensation of S&P 500 CEOs jumped about 150 percent from 1992 to 1998.

  In the breakdown, the median value of options rose 335 percent to US$1.6 million; the median salary rose 29 percent to US$811,000; and the median bonus surged 99 percent to US$750,000.

  By contrast, the seasonally adjusted civilian employment cost index rose only 20 percent and the consumer price index rose only 16 percent during the same period.

  Although they do help managers maximize shareholder interests in one way or another, options are far from optimal. Indeed, the American law professors argue that rent extraction does exist as a CEO often influences the board's decision-making process.

  US CEOs earn much more than their foreign counterparts. Yet there is no reason to believe that US executives are a rare species that justifies higher pay. The loophole is in US corporate law, which grants officers and directors too much power.

  Grasso may well remain at large until and unless someone airs his dirty linen, if any, as Monica Lewinsky did to former US President Bill Clinton.




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