I had the good fortune to be asked to review Professor Telman’s Business Judgment Rule, Disclosure and Executive Compensation article, over on the ‘glom. I enjoyed the paper, both because I think Professor Telman proposes an interesting way to attack recent executive compensation scandals and because I am currently working with my sister (the nicer, funnier, smarter Professor Nowicki) on an empirical paper on executive compensation, such that the topic weighs heavily on my mind. In addition, however, it was interesting to read Professor Telman’s article on the heels of the Delaware Supreme Court’s Disney opinion and its weak review of the Disney board’s analysis of Ovitz’s vulgar pay package. Indeed, Gordon Smith poses a query to Professor Telman (and perhaps me) on the ‘glom that is partially related to something I had intended to address earlier here, on concurringopinions.com. For what it is worth, then:
Executive Compensation and the “Ovitz Fiasco”
In my view, the Disney board failed in an amazing assortment of ways with respect to the hiring and compensation of Michael Ovitz, not the least of which include
(a) the failure to sufficiently consider/review/debate (become informed about) the decision to hire Ovitz (or the “decision to elect Ovitz as Disney’s President”) and
(b) the failure to review as a board at least to some minimal degree the OEA.
The Delaware Supreme Court, in its recent Disney opinion, did not do a strong job with addressing these failures, both in the collective and as the bevy of very distinct issues that they were. In its opinion, the court inappropriately collapses and poorly addresses four inquiries:
(1) Did Eisner have the authority to hire Ovitz into a senior-level position – e.g. delegate board authority to an officer ala normal agency principles and DGCL § 141 – without first securing official board approval?
(2) Did the board *as a group* have to debate/consider/review/become-informed-about the decision to elect Ovitz as Disney’s President?
(3) Was a full board vote needed when approving a very costly senior executive compensation package or could that sort of matter be finalized without full board ratification?
(4) If a full board vote was needed on the compensation package, was it permissible for the board to delegate the discussion and deliberation on the entirety of the Ovitz compensation issue to the compensation committee, such that all the full board needed to do is hear the comp. committee say “yep, fine with us” and the rest of the board could sign-off on the package? (Francis v. Smith?)