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Lee Harris

Abstract

Again and again, economists, corporate law scholars, and Congress have turned to reforms, such as executive compensation reforms, as a solution to executive misbehavior. The root of the evil, they muse, is skyhigh pay with only a flimsy connection to managerial performance. If CEO pay can only be rejiggered on the front end and tied to performance, the argument goes, executives can be expected to pursue shareholder interests and put aside egos, and firms will prosper. This Article argues that such reforms are, despite the best of intention, fool’s gold. The fallacy is not in thinking that CEOs and other executives who have abused their position and have failed to live up to expectations should be paid less—they should. However, this Article argues that when CEOs and other executives fail, they should be out of a job altogether. This Article goes on to describe how to create a right of retention by drawing the analogy to the public sphere. Specifically, one way to check CEO conduct is through periodic up-or down votes, the same kind of retention-style elections a plurality of states use to give voters a say in whether judges should be ousted. Importantly, in states that use them, retention elections have treaded lightly—they have created a monitoring device to hold in check the worse abuses without undermining the authority of public officials (governor and judicial nominating committees) from making their selections about whom should be appointed. Thus, I suggest that retention elections provide a useful path, after bad conduct occurs, to checking corporate executive abuses. Incidentally, as I have suggested in the past, this approach demonstrates that, once again, a solution from the public sphere might mitigate another long-standing problem in the private sphere—this time, CEO accountability. Finally, this Article proposes a new classification scheme for efforts to rein in CEO misbehavior and promote accountability. The expected success of efforts to rein corporate leadership abuses depends, crucially, on timing. Reforms have a higher chance of achieving their goals if the focus is on actual (or past) performance, not anticipated performance. Thus, this Article makes some initial claims about when to create prospective incentives for good behavior versus retrospective punishments for bad behavior.

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