A Lesson for Spitzer
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Delaware might seem like a mere blip to New Yorkers, but its courts have something to teach Attorney General Eliot Spitzer. On Tuesday, a judge in the Small Wonder state issued a ruling on executive compensation that merits a close read as New Yorkers batten down for a battle between Mr. Spitzer and the directors of the New York Stock Exchange who okayed the pay of the Big Board’s former chief executive, Richard Grasso.
The Delaware case stemmed from Michael Ovitz’s turbulent 14-month tenure as the no. 2 executive at Walt Disney Co. in 1994 and 1995. Mr. Ovitz came aboard under a contract that guaranteed him a $140 million no-fault severance payout. Shortly after he departed, a group of shareholders filed suit, claiming that Disney’s board and the company’s CEO, Michael Eisner, had violated their fiduciary duty when they agreed to what the shareholders viewed as an overly generous package. Now a judge in Delaware’s Chancery Court has ruled that Mr. Ovitz’s deal may have been excessive but wasn’t illegal. Chancellor William Chandler III wrote that “[i]t is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see.”
There are differences between the Disney and Grasso cases – starting with the fact that the stock exchange isn’t incorporated in Delaware — but the gist is on point: If directors made informed compensation decisions, they shouldn’t be faulted if those decisions turn out to be mistakes. Mr. Spitzer argues that Mr. Grasso’s pay deal resulted not from bad judgment but from a species of fraud because Mr. Grasso and his allies supposedly duped a negligent board. But the Wall Street Journal reported in June on evidence that suggests key members of the exchange’s board made a concerted effort to arrive at what they thought was a fair, good-faith compensation package.
The Delaware ruling on Disney won’t have any direct impact on the New York case. It doesn’t set any precedent in the Empire State: The Grasso case hinges on New York’s not-for-profit corporation statutes, and Mr. Spitzer charges more serious wrongdoing than the incompetence alleged in Delaware. But it does reflect the fact that in one important jurisdiction, it will be hard to successfully challenge boards’ compensation decisions after the fact. We’ll see whether New York will learn from Delaware.
