50 S.M.U. L. Rev. 127 (1996-1997)
Director Compensation and the Management-Captured Board - The History of a Symptom and a Cure

handle is hein.journals/smulr50 and id is 141 raw text is: DIRECTOR COMPENSATION AND THE
MANAGEMENT-CAPTURED BOARD-
THE HISTORY OF A SYMPTOM
AND A CURE*
Charles M. Elson**
TABLE OF CONTENTS
I. THE HISTORY OF DIRECTOR COMPENSATION .... 135
II. THE CONSEQUENCES OF THE PRESENT
COMPENSATION SYSTEM             .............................    156
III. COMPENSATION AS THE CURE TO BOARD
PA SSIV  ITY  ...............................................    164
IV. CONCLUSION ...........................................             173
he most significant problem facing corporate America today is the
management-dominated, passive board of directors. A common
occurrence in many of our largest corporations is that passive
boards are responsible for excessive executive compensation and, more
importantly, poor corporate performance.' The board, created to moni-
*Copyright 1996 by Charles M. Elson. All rights reserved.
** Professor, Stetson University College of Law; Visiting Professor, Cornell Law
School, Spring 1996; B.A., 1981, Harvard University; J.D., 1985, University of Virginia;
Salvatori Fellow, The Heritage Foundation, Washington, D.C.; Member, National Associa-
tion of Corporate Directors' Commission on Director Compensation. The author wishes
to thank Chris Dalrymple, Scott Davies, and Ellsworth Summers for their excellent re-
search assistance.
1. The following Article draws from and expands upon two earlier works that both
examined the negative impact on corporate performance resulting from passive boards of
directors and offered an equity-based solution to create more active board oversight and
greater corporate performance. See Charles M. Elson, The Duty of Care, Compensation,
and Stock Ownership, 63 U. CIN. L. REv. 649 (1995) [hereinafter Elson, Duty of Care].
This article examined the relation between a passive board of directors and the director's
legal duty of care. It suggested that the duty in its present form enhances board passivity
and why substantial director stock ownership will counter that passivity. Id. at 691. To
achieve high levels of director equity ownership, it suggested compensating directors with
stock and presented an empirical study to support its conclusions. Id. at 700-06. See
Charles M. Elson, Executive Overcompensation-A Board-Based Solution, 34 B.C. L. REv.
937 (1993) [hereinafter Elson, Board-Based Solution]. This article examined the history of
the executive overcompensation problem and critiqued as either ineffective or harmful to
corporate well-being, the solutions offered by other commentators, including heightened
disclosure, tax-based remedies, judicial involvement, institutional shareholder activism,
strengthened board compensation committees, and a market-based approach. Based on an
empirical study of the executive compensation voting behavior of boards composed of
outside directors with substantial stockholdings, Board-Based Solution suggested that a
link exists between heightened equity ownership and more effective compensation over-

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