In the years since the financial reporting scandals and the Sarbanes-Oxley Act of 2002, and in particular following the financial crisis and the Dodd-Frank Act of 2010, boards of directors have faced greater burdens and more intense scrutiny of their activities and performance. One manifestation of this has been pressure to change the role of directors from one of partnership with and oversight of management to one of an almost quasi-governmental watchdog directly responsible for monitoring management’s performance, including its compliance with increasingly complex and burdensome regulation. In addition, activist investors continue to publicly push some boards to pursue strategies focused on short-term returns, even in instances where those strategies are inconsistent with the directors’ preferred, sustainable long-term strategies for the corporation.

In recent years, we have advised that directors regularly work with their advisors to monitor and adapt to the continually changing landscape. Among other things, we have suggested more frequent, well-structured engagement with shareholders, a focus on the ability to communicate the corporation’s and board’s policies in a way that is understandable and convincing to the corporation’s constituencies, and that directors prepare to respond to increasing external pressures in a manner that both thoughtfully takes those pressures into account and fully reflects the director’s carefully considered view of the long-term interests of the corporation.

In addition to these general points, we also have seen developing during 2012 a series of additional specific issues, discussed below, on which we believe boards of directors and corporations should focus in 2013.

…continue reading: Selected Issues for Boards of Directors in 2013

On August 1, 2012, the Internal Revenue Service (the “IRS”) published final regulations concerning the tax deductibility of corporate expenses associated with the personal use by employees of corporate aircraft. [1] As noted below, these rules may have implications for those involved with public-company executive compensation disclosure, as well as of course for tax practitioners who must apply the rules to prepare federal income tax returns. [2] Generally, the principal takeaways are as follows:

…continue reading: New Personal Use of Corporate Aircraft Tax Rules

A recent opinion of the Delaware Chancery Court, Seinfeld v. Slager, [1] addresses the legal standard applicable to directors’ decisions about their own pay under Delaware law, an important topic as to which there is little prior law. In an opinion by Vice Chancellor Glasscock, the Court held that a derivative claim alleging that directors breached their fiduciary duties by granting themselves excessive compensation survived a motion to dismiss. [2] In so concluding, the Court also found that the directors’ action did not have the protection of the business judgment rule and was instead subject to “entire fairness” review.

The Court’s decision to require “entire fairness” review means that the claim of excessive compensation could proceed to a full evidentiary trial on the merits. Under Delaware law, a court will not second-guess business judgments of directors if the directors acted in good faith, exercised due care and were not conflicted in the matter. When the business judgment rule does not apply, the judgments may be subject to heightened scrutiny under the entire fairness standard. To meet this standard, the directors must demonstrate that both the process undertaken by directors and the amount of their compensation are fair to the company.

…continue reading: Delaware Case Raises Question About Structuring Director Compensation

Great outrage and indignation have been expressed, from multiple perspectives, in connection with AIG’s retention bonuses and the Congressional response thereto. Now that most of the public, albeit probably not the actual participants, seem to be past the initial burst of emotion, we believe that it is well worth noting that all employers, whether or not they are recipients of Government funds, should pay close attention to the several recently proposed (and competing) bills in Congress spawned by the episode.

These bills show that the politics of populist furor over executive compensation can easily pave the way for hasty and thoughtless regulation, which would (if enacted as written) be counterproductive to the US financial system and economic recovery. The bills also foreshadow possible future and potentially broad legislation that may eventually have negative effects for many companies beyond the financial industry.

Political focus on, and accompanying rhetoric regarding, perceived excesses in executive compensation have been building in intensity for some time. The current legislative impulses, however, raise systemic risks that pose a far greater danger than the issues sought to be addressed by them. In our recent memorandum, entitled “Implications of the AIG Bonus Imbroglio,” we discuss particularly troublesome aspect of the four recently proposed bills, including the lack of an exception for existing binding compensation contracts. The memorandum also outlines possibly unintended and negative consequences to employers, employees and the public alike of the bills and briefly summarizes relevant provisions of each of the bills.

Whatever the immediate prospects for passage may be, we believe that it is important for employers and employees generally to be aware of the substance of the recent proposals even if they are not the targets at the moment.

The memorandum is available here.