April 5, 2005

Delaware Supreme Court Rules in Disney Books & Records Case

On Thursday, the Delaware Supreme Court issued an order in a case that had been appealed by Roy Disney last year. Roy seeks to have the confidentiality restrictions lifted on the sensitive executive pay information he had successfully obtained in his books & records request to the Walt Disney Company. Roy has said that he wants to publicize the pay information in his quest to improve governance practices at the company. The order is posted in “Books & Records” section of the “Compensation Litigation Portal” in

In remanding the case back to Chancery Court, the Supreme Court requested that Vice Chancellor Lamb make specific factual findings about the confidential nature of the documents in question and to balance the harm and benefits of lifting the confidentiality designation. This kind of balancing approach may suggest the test for getting confidential documents is not quite as stringent as Vice Chancellor Lamb had articulated in his initial decision, in which he set a high bar for plaintiffs trying to overcome a confidentiality designation by the company.

Crocodile Tears over Executive Compensation

I cringe when the media does a special report on executive compensation (like the NY Times on Sunday and USA Today last Thursday) because my dad will call me and ask why Corporate America continues to perpetuate excessive pay practices. To answer him, I resort to my top four explanations of this dilemma:

1. “Who’s in Charge” Fingerpointing – Talk to most compensation consultants or lawyers about responsible practices and they are quick to point out that they have no control over what is paid and many feel they have no obligation to speak up to directors to advise them on responsible practices.

My hunch is that directors – most of whom serve in that role on a part-time basis – value the wisdom of their advisors and would welcome such input. And surprisingly, quite a few lawyers subtly talk in terms of representing the CEO, rather than the corporate entity for which they truly should serve. Need some backbone here.

2. The Catch-22 of Benchmarking – Unfortunately, nearly all compensation committees – based on the advice of their consultants – resort to relying on traditional benchmarking surveys to determine pay levels. This is true despite the fact that most agree that the compounded “ratcheting-up” effect of two decades of wanting to be in the top 25% has rendered survey data useless. Other benchmarking methods, such as internal pay equity, have yet to widely take hold.

The “Catch-22” here is that everyone is looking to the consultants for guidance in this area, but they are loathe to say their past data is bad – because that would be some form of admission of past failures. This cycle has to be stopped for normalcy to return.

3. Strong Dose of Alice in Wonderland– I don’t know how else to explain it other than a lack of common sense, as I just don’t see how a CEO would be motivated to perform better if she was paid only $5 million rather than $50 million per year. At some point, more compensation will not get you more performance – and if anything, might reduce performance as immense wealth sometimes can change one’s ego and personality. And providing huge pay packages to retirees or severed officers – or “golden hellos” as mentioned in this recent Washington Post article – doesn’t seem to provide shareholder value as its not tied to performance.

4. Soft Legal Standards – Arguably, there is no real law that prevents directors from establishing excessive pay practices. The state legal standards are the law of corporate waste (which has no teeth whatsoever) and the array of fiduciary obligations that directors have, which essentially requires that the proper process be followed. In fact, as noted in the Integrated Health decision in Delaware, to avoid personal liability under a lack of good faith charge, only the barest minimum of process need be present (unless Vice Chancellor Chandler really surprises in his Disney decision come this summer).

Honest to Betsy, we didn’t think that we would have more than one Executive Compensation conference nor did we think that would be more than course materials for last year’s conference. And I truly hope that we won’t have to keep these up long, but it sure doesn’t look good.

For a refresher of the many issues still present in the compensation area, I strongly urge everyone to go back and read our “12 Steps to Responsible Executive Compensation Practices” from the May-June 2004 and Sept-Oct 2004 issues of The Corporate Counsel, which are still freely available to everyone on