ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Monday, January 20, 2014

Is Disney to Yahoo! as Tragedy Is to Farce?

Mad StacksIn the mid-1990s, the Walt Disney Company hired Michael Ovitz to be its #2 executive.  After slightly over a year in the position, Disney's Board of Directors fired Ovitz, having determined that he was an ineffective executive for the company.  He received over $100 million in severance pay.  After years of litigation, the Delaware courts found that Disney's Board of Directors did not breach its duty of care in approving an excecutive compensation scheme that made Ovitz better off for having been terminated than he would have been had he stayed on the job.  The Delaware Supreme Court noted that Disney's corporate governanace was far from optimal and should not pass muster in a post-Enron/WorldCom etc., world.  I have written about the case here.

According to this article in The New York Times, Yahoo! was not paying attention.  In 2012, Yahoo! hired Henrique de Castro to be its #2 executive.  He lasted a little over a year and is now walking away with at least $88 million.  The Times quotes Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, who says that such hiring decisions are usually made by the corporation's CEO and that the Board can't tell the CEO whom to hire.  However, Professor Elson also notes that Boards have an obligation to "ask hard questions," especially when executive compensation seems "out of whack."  Mr. de Castro was the eighth highest paid executive in the region, earning more than Yahoo!'s CEO.  

I suppose it is usually true that a Board cannot tell a CEO whom to hire, but the Board and its Compensation Committee do set executive pay.  And nobody at that level can be hired without Board approval.  In order to lure an executive of de Castro's experience, a corporation must offer "downside protection."  That is, a business person of de Castro's experience is not going to leave a secure, well-compensated position without a guarantee that he will be well-compensated at the new position, even if the relationship sours.  However, as the Times points out, de Castro's record at Google was mixed.  He had been demoted and then promoted again, which suggests his position was not that secure.  In any case, his compensation seems to have been well in excess of what was necessary to protect his potential downside.  

Board capture apparently is still a major problem in U.S. public companies, and the Times suggests that the problem is especially bad in Silicon Valley.  The real problem is that executive pay remains absurdly, stratospherically high in this country.   No pay package should be structured to guarantee millions in dollars of severance even in cases of abject failure.

https://lawprofessors.typepad.com/contractsprof_blog/2014/01/is-disney-to-yahoo-as-tragedy-is-to-farce.html

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