Sunday, October 14, 2007

Fighting the Good Fight

Lucian Bebchuck is one of the seemingly few economists who can see what appears obvious to those of us who trade stocks: executive compensation is out of control, and its robbing shareholders. I'm reading his Executive Compensation As An Agency Problem [PDF] and in the second page he notes that "shareholders could try to challenge pay arrangements in court [but] ... corporate law rules effectively prevent courts from reviewing compensation decisions."

He has quite a vitae. Obviously one major step towards fixing this problem is changing corporate law. The next step is to require cumulative voting rather than slate voting -- or at least some alternative to slate voting. While the Wikipedia [WP] article notes that cumulative voting is required for corporations in many states, it neglects to point out that 50% of public companies are incorporated in Delaware (60% of Fortune 500 companies). Most of the remainder are incorporated in Nevada!

As with most major problems, there are simple and easy ways to at least partially remedy the problem. The inherent barrier is simply ignorance and perhaps deceit. I don't have time to research this issue thoroughly, but I will post if I find more simple solutions. Here is Bebchuck's solution.

UPDATE: Why Incorporate in Nevada?

2. Your Officers and Directors Can Be Indemnified.

In 1987, the Nevada Legislature passed a revolutionary law that permits corporations to place provisions in their articles of incorporation that eliminate the personal liability of officers and directors to the stockholders of Nevada Corporations.

This is one of the main reasons large companies like Citibank are domiciled in Nevada. Delaware and a few other states soon adopted lesser versions of this law, but Nevada's law remains among the most thorough and comprehensive in the country.

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