November 05, 2009
Jones v. Harris and the Role of Government in Business
Posted by Renee Jones

One interesting aspect of the Jones v. Harris is how this case and the controversy surrounding it reflect an apparent shift in how judges and government officials are thinking about the role of government in business, and in particular the appropriateness of government input on questions of compensation. 

As Usha has observed, for years courts have clung blithely to notions of director independence and arms-length bargaining to eschew difficult judgment calls about when compensation is excessive.  Although fairness is the standard for assessing conflict transactions, by invoking director “independence” these questions magically become issues of “business judgment” and judges typically allow a board’s decision to stand.

Just as judges are reluctant to weigh in on the question of how much is too much when it comes to compensation, Congress and the SEC have relied to a large extent on “incentive compensation” requirements and disclosure obligations in vain attempts to constrain executive pay.

 

With the financial bailout and other unfortunate economic events that seem to belie the “pay for performance” construct, government officials begun to take a more hands-on approach in dealing with compensation issues.  The TARP limits, the role of the pay “czar” and new proposals for overseeing bank compensation practices are just a few examples of this kind of intervention.

The Supreme Court’s decision to review Jones v. Harris, and the debate between Judges Easterbrook and Posner on the ability of markets to ensure fair pay practices is also a sign that the “independence” and “market efficiency” rationales for deference on pay decisions are beginning to lose force.  I make no predictions on the outcome of the case, but only note that judges and regulators seem to be asking questions and taking actions in compensation matters that they had assiduously avoided in the past.

 

 

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