Independent Yet Captured: Compensation Committee Independence After Dodd-Frank

Bernice Grant

Volume 65, Issue 3, 761-810

In response to the financial crisis of 2008 to 2009, the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 includes several far-reaching executive
compensation reforms. Because most scholars have focused on the so-called “say-onpay”
provision, they have not sufficiently analyzed another Dodd-Frank reform that
requires public companies to have compensation committees composed entirely of
independent directors. This Article fills that void. Although it is sensible to make
compensation committee members independent of management, the reform does not go
far enough to achieve its goal. The independence requirement is not sufficient to prevent
directors from being captured by management because it does not take into account
organizational behavior literature regarding group dynamics. Ostensibly independent
directors might still be subject to organizational behavior factors—such as norms of
reciprocity, groupthink, polarization, social cascades, and herding—that could lead them
to approve excessive compensation packages.

This Article thus proposes two additional reforms to augment the independence of
compensation committee members: (1) mandatory continuing professional education
regarding compensation issues and (2) a rotation system for compensation committee
membership. Directors will be less susceptible to the organizational behavior factors
noted above if they are equipped with knowledge about complex compensation issues
and tasked with approving compensation for only a limited period of time. These
recommendations draw on similar requirements under the Sarbanes-Oxley Act of 2002,
which mandate that (1) all members of the audit committee be financially literate, (2) at
least one audit committee member have financial expertise, and (3) the lead and
concurring partners of a company’s auditing firm rotate off the client engagement after
five years.

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