Who Killed Katie Couric?" and Other Tales from the World of Executive Compensation Reform
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Fordham Law Review Volume 76 Issue 6 Article 11 2008 "Who Killed Katie Couric?" and Other Tales from the World of Executive Compensation Reform Kenneth M. Rosen Follow this and additional works at: https://ir.lawnet.fordham.edu/flr Part of the Law Commons Recommended Citation Kenneth M. Rosen, "Who Killed Katie Couric?" and Other Tales from the World of Executive Compensation Reform, 76 Fordham L. Rev. 2907 (2008). Available at: https://ir.lawnet.fordham.edu/flr/vol76/iss6/11 This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Law Review by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. "Who Killed Katie Couric?" and Other Tales from the World of Executive Compensation Reform Cover Page Footnote Associate Professor, The University of Alabama School of Law. I would like to thank Dean Ken Randall and my colleagues on the faculty and the Alabama Law School Foundation for their generous support of my research. I greatly appreciate input from Alfred L. Brophy, Montré Carodine, and Norman Stein. I also thank Catherine Crosby Long, Eric Rumanek, and Thomas Simpson for excellent research assistance. This article is available in Fordham Law Review: https://ir.lawnet.fordham.edu/flr/vol76/iss6/11 ARTICLE "WHO KILLED KATIE COURIC?" AND OTHER TALES FROM THE WORLD OF EXECUTIVE COMPENSATION REFORM Kenneth M. Rosen* With average Americans perturbed about executive pay, government officials are taking action. Officials appear to be racing against each other to battle corporate excess. The U.S. Securities and Exchange Commission (SEC) engaged in major rulemaking related to the disclosure of executive compensation, and Congress quickly considered executive compensation legislation. More reform, however, is not always better. Concurrent reform by multiple regulatorspresents perils. This Article adds to the dialogue about scandal-driven reform. While much discussion exists about the advisability of particular reforms, the focus here is on the process of reform. The Article conducts a comparative analysis of the SEC and House of Representatives' reform processes, which reveals that different policy-making processes may be more or less likely to yield positive reforms. The Article argues that promoting distinct, more delineated roles for certain public actors could improve synergies between regulatory reform efforts. TABLE OF CONTENTS INTRODUCTION ........................................................................................ 2908 I. EXECUTIVE COMPENSATION REFORM AT THE SECURITIES AND EXCHANGE COMMISSION ............................................................. 2910 A. Initiation of DisclosureReform, the Katie Couric Clause, and Critiquesof the Clause................................................... 2912 B. Adoption of Initial Rules and Continuing Reform .................. 2918 1. Adopting Release and Request for Additional C om m ents ....................................................................... 29 18 * Associate Professor, The University of Alabama School of Law. I would like to thank Dean Ken Randall and my colleagues on the faculty and the Alabama Law School Foundation for their generous support of my research. I greatly appreciate input from Alfred L. Brophy, Montr6 Carodine, and Norman Stein. I also thank Catherine Crosby Long, Eric Rumanek, and Thomas Simpson for excellent research assistance. 2907 2908 FORDHAM LAW RE VIE W [Vol. 76 2. Assessment of the Handling of the Katie Couric Clause and Continuing SEC Executive Compensation Reform. 2920 II. COMPETING CONGRESSIONAL REFORM ............................................. 2923 A. The New Congress and the Shareholders Vote on Executive Compensation A ct ................................................................ 2923 B. Issues Raised by House Action ............................................... 2925 1. Imposed, Untailored Solutions ......................................... 2927 2. Failure to Recognize Fully the Role of Reform Synergies ......................................................................... 2930 3. Hidden Costs and Reform Priorities ................................ 2932 III. TRANSFORMATION OF COMPETING REFORMERS INTO COMPLEMENTARY REFORMERS ................................................... 2933 A . Addressing Authority .............................................................. 2933 1. Retention of A uthority ..................................................... 2933 2. Supplementation of Authority .......................................... 2934 3. Coordination of Authority ................................................ 2936 B . Providing Oversight ............................................................... 2938 C. Defeating Recalcitrance ......................................................... 2939 C ON CLU SION ........................................................................................... 2940 INTRODUCTION Compensation received by executives increasingly draws the attention not only of corporate governance specialists, but of the media, shareholders, and government officials. Following expansive news coverage of various corporate scandals, the inner workings of major corporations today seem to be scrutinized more closely. The average American now can learn details about the bathroom accessories I favored by corporate executives as well as other purportedly generous pecuniary benefits of those executives' 2 positions. 1. When former Tyco International chief executive officer (CEO) Dennis Kozlowski stood trial for allegedly taking millions of dollars for "unauthorized personal expenses," prosecutors showed video of his apartment that featured a $6000 shower curtain and a $15,000 umbrella stand dog sculpture. See Kevin McCoy, Jury Sees Kozlowski 's Posh Digs via Video, USA Today, Nov. 25, 2003, http://www.usatoday.com/money/industries/manufacturing/2003-11-25-tyco-x.htm. 2. One newspaper proclaimed that median chief executive officer compensation amounted to $14 million in 2004. See H.R. Rep. No. 110-88, at 3 (2007) (citing Gary Strauss & Barbara Hansen, Special Report: CEO Pay 'Business as Usual,' USA Today, Mar. 30, 2005, at 1B); see also Dan Slater, The Activist Professor, Deal, June 4, 2007, at 40 (describing CEO compensation at Home Depot and an exit package for a CEO purportedly worth $210 million). In addition to basic forms of compensation, more exotic forms of compensation, such as stock options, garner additional attention. See Mark Hulbert, Why Backdated Options Might Be Contagious,N.Y. Times, Jan. 21, 2007, § 3, at 5 (discussing the problem of "retroactively granting options to executives and directors on dates when a company's stock price was lower"); see also M.P. Narayanan et al., The Economic Impact of Backdating of Executive Stock Options, 105 Mich. L. Rev. 1597, 1601-05 (2007) (providing an overview of backdating and forward-dating issue). 2008] EXECUTIVE COMPENSA TION REFORM 2909 Such scrutiny may affect the confidence of investors, whose dollars are critical to U.S. businesses and the American economy. With average Americans perturbed about executive pay, 3 government officials are acting to assuage that anxiety. Indeed, various officials at times appear to race against each other to battle corporate excess and to implement legal reforms. For instance, former New York Attorney General Eliot Spitzer pursued litigation to recover millions of dollars from former New York Stock Exchange Chairman Richard Grasso for alleged overcompensation. 4 In addition, the U.S. Securities and Exchange Commission (Commission or SEC) engaged in major rulemaking related to disclosure of executive compensation. 5 And, the U.S. Congress quickly moved to consider executive compensation legislation in its new term.6 More reform, however, is not always better. The phenomenon of concurrent reform by multiple regulators presents its own perils. In previous work, I cautioned generally against crafting corporate reform in the crucible of scandal. 7 I am not alone in raising questions about recent reform efforts such as those undertaken in the enactment and implementation of the Sarbanes-Oxley Act of 20028 by Congress and the SEC.9 An important dialogue is developing about scandal-driven reform, and I seek to add to that discussion with this Article. While much of this discussion is about the advisability of particular reforms, I aim to focus on the process of reform. I do so in the area of executive compensation by engaging in a comparative analysis of the reform processes of the SEC and House of Representatives. This analysis reveals that different policy- making processes may be more or less likely to yield positive reforms. I argue that promoting distinct, more delineated roles for certain public 3. See Andrea Coombes, Wage Gap: Workers Say Execs Paid Too Much; Report Being Happier with Performance Pay, MarketWatch, June 20, 2007, http:/Aww.mketwatch.com/news/story/workers-say-xecs-pay-to/story.aspx?guid=%/7b33B 1BB3D- F9CB-4838-81 B8-C01FB5F36IB7%7d&print-true&dist--printTop. 4. See Krysten Crawford, Spitzer Seeks $10OM from Grasso, CNNMoney.com, May 24, 2004, http://money.cnn.com/2004/05/24/markets/spitzer-.grasso. 5. See infra Part I. 6. See infra Part II. 7. See Kenneth M. Rosen, Mickey, Can You Spare a Dime? DisneyWar, Executive Compensation, Corporate Governance, and Business Law Pedagogy, 105 Mich. L. Rev.