Andrea Olofson Chen
Volume 76, Issue 3, 947-974
Excessive director compensation erodes the independence that directors are supposed to bring to boardrooms. In theory, directors are meant to serve as objective parties, overseeing corporations using their care, skill, and loyalty to promote sound decisionmaking. However, excessive compensation can create the unintended ill-effect of rendering a director beholden to upper management and unable to make clear-eyed, impartial decisions. To mitigate this problem, this Note advocates for the implementation of tenure limits, compensation caps, and enhanced proxy disclosures to ensure that board members uphold their fiduciary duties and make decisions in the best interests of the corporations they serve rather than in their own self-interests.
This Note explores the tension between offering competitive compensation to retain qualified directors while still expecting directors to remain free enough to challenge upper management’s decisions. Part I provides an overview of the historical background and recent trends in director compensation. Part II analyzes the recent case Tornetta v. Musk to understand how courts define materiality in director compensation, and to display the effect excessive compensation has on approving corporate transactions. Part III advocates for potential solutions to the problem of excessive compensation eroding independence by outlining measures aimed at increasing transparency for shareholders.