House of Mouse and Beyond: Assessing the SEC's Efforts to Regulate Executive Compensation


What can or should be done, if anything, to address complaints that corporate executives are overpaid? This article argues that the Securities and Exchange Commission is making progress in the area of disclosure of executive compensation. The SEC will not accomplish any substantial reform regarding compensation as a wider issue, however, 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. Analyzing the Proposed Regulations and the Delaware Supreme Court decision In re Walt Disney Co. Derivative Litigation, this article sheds light on how a gap has arisen in the area of executive compensation regulation. 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 focii of state and federal regulations creates a gap for behavior that might be adverse to shareholder interests, yet occur beyond the shareholders’ ability to effectuate changes. Moreover, compensation decisions have characteristics that distinguish them from routine board decisions since the attributes of arms-length contracting are compromised. Additionally, while disclosure of compensation data is important, it is not the equivalent of merit review and issues of information overload, boilerplate and complexity remain. 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 could work cooperatively to implement more meaningful corporate governance reform to ensure that shareholders both have the information necessary to make informed investment decisions and the ability to effect changes in company decision-making.


Business Organizations Law

Date of this Version

August 2006