The New “Best Practices” Standard? Independent Legal Counsel for Compensation Committees

July/August 2011Articles The Corporate Governance Advisor

Today, shareholders are more willing than ever to hold corporate directors, especially those serving on compensation committees, to account for what many perceive as excess executive compensation. Although a few years old, the high-profile shareholder suit against the board of directors of the Walt Disney Company and Michael Ovitz remains as one of the seminal cases providing guidance with respect to the extent to which corporate directors can be held accountable for excessive compensation paid to corporate executives. In this context, Disney/Ovitz is still an important direction-setter.

While the Delaware courts ultimately ruled in favor of Ovitz and Disney’s board, they certainly gave no ringing endorsement of the board’s oversight practices, and corporate directors should not take much comfort in the outcome. In fact, had it not been for certain procedural matters, the ultimate decision may very well have been against Ovitz and Disney’s board. Accordingly, many compensation committees took this decision as a wake-up call to revisit their policies for limiting potential legal exposure.

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