October 26, 2014
Okay, there are a few hundred people who believe that the tens and hundreds of millions of dollars pocketed by CEOs reflect their worth in the market. (And most of those people write for newspapers or teach in business schools.) The rest understand that CEOs get incredibly rich by being able to rip off the companies that they supposedly work for. This is because the rules are rigged to give them effective control over the company.
Gretchen Morgenson has a good piece explaining one way in which CEOs and other top management rig the deck. Her column today talks about a Delaware court ruling that allows companies to write by-laws that make shareholders pay the company’s legal cost if they lose a case filed against the company. For example, this could mean that if shareholders sued a company because it rewrote the strike price on options given to an incompetent CEO, and then lost the case, then the shareholders would have to pay the company’s legal expenses.(Most U.S. companies are chartered in Delaware, so this ruling makes a big difference.)
Since companies that overpay incompetent CEOs tend to have hugely overpaid lawyers, this is likely to be a very serious expense. This would be a major disincentive to shareholder suits, making it easier for CEOs to rip off the companies for which they work.
It is worth noting that courts always had the authority to require losers to pay the winners’ legal fees in frivolous cases. The Delaware ruling means that losers would always be required to pay the company’s legal fees, even if the loss was due to a technical issue, such as a missed filing deadline.
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