Do Comp Reform Proposals Threaten Increased Board Exposures?

Do Comp Reform Proposals Threaten Increased Board Exposures? - 9/21/2009

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Do Comp Reform Proposals Threaten Increased Board Exposures?
Kevin LaCroix

The D & O Diary. September 21, 2009
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EXCERPT: One of the propositions on which most commentators seem to agree is that perverse compensation incentives helped fuel the global economic crisis. For example, last Wednesday, formed Fed Chairman Paul Volcker said in a speech that one of the causes of the financial crisis "was the ultimately explosive combination of compensation practices that provided enormous incentives to take risk." Other commentators have made similar assertions. Given these sentiments, it comes as no surprise that among the first reform initiatives to emerge in the wake of the economic crisis are proposals to regulate compensation practices. The most attention-grabbing example of this compensation-related reform agenda is last week’s news that the Federal Reserve is planning to issue bank compensation rules that would, according to the Wall Street Journal, "inject government regulators deep into compensation decisions traditionally reserved for the banks’ corporate boards and executives." Under this plan, the Fed would review – and could reject or amend – any compensation policies to make sure they "don’t create harmful incentives." If these reforms are enacted, they could represent a significant potential expansion of bank board liability exposures. As reflected in a September 19, 2009 Wall Street Journal article entitled "Boards Face Expanded Responsibilities", the proposed Fed rules "could increase time demands, recruitment challenges and legal exposures for boards." Because the proposed Fed plan could lead to the Fed’s review of compensation for "many lower-level employees, such as big traders and groups of loan officers," the plan could "force directors to scrutinize pay practices for more employees," as "board members might have to keep tabs on pay arrangement for thousands of employees." The Fed plan is not the only reform initiative that could impose increased compensation-related burdens on corporate boards.

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