Today’s W$J has an article describing some of the option granting practices at Brocade (see here). Among them was the creation of a one member compensation committee consisting of Brocade’s CEO, Greg Reyes. The article gives the following as the reasoning:
The process of granting stock options was cumbersome because the compensation committee met only every three months. Mr. Reyes said he wanted to speed it up so he could recruit better in those hectic days in Silicon Valley. The board gave him authority to approve options by himself, including their exercise prices.
He said the idea was supported by Larry W. Sonsini, one of the most prominent attorneys in Silicon Valley, who was then a Brocade director. A spokeswoman for his law firm, Wilson, Sonsini,Goodrich & Rosati in Palo Alto, said that one-person stock-option committees are legal under the laws of Delaware. That’s where Brocade is incorporated. “One-person stock-option committees were adopted during a time of intense competition for hiring and retaining employees and the ability to act quickly was critical,” said the spokeswoman for the law firm.
Wilson, Sonsini is of course correct. DGCL Sec. 141(c)(1) provides: “The board of directors may, by resolution passed by a majority of the whole board, designate 1 or more committees, each committee to consist of 1 or more of the directors of the corporation.” (emphasis added). The MBCA has a similar provision. While it may not represent best corporate practice to have single member committees, given the statutory language it is certainly within the board’s business judgment as to whether it is appropriate in a particular case.
With respect to compensation committees, however, NYSE and Nasdaq listing standards adopted in 2003 make it clear that the CEO cannot be on the committee–it has to be composed entirely of independent directors. Note that the standards do not specify whether a compensation committee can consist of a single independent director, but they use the plural “directors” in a way that implies the answer is no.
Although listing standards may make the question moot for most public companies, if you were a director, would you sign-off on a single member compensation committee? My inclination is “no.” Even during “a time of intense competition for hiring and retaining employees,” it seems to me that at least three directors could make themselves readily available to approve option grants through written consent. Executive compensation is just too riddled with temptation for abuse to leave to one person.
My bad, here is the right set of links: (hopefully)
Mike: only on the appropriate forum, where it gets a royal treatment it richly deserves.
Mike: only on the appropriate forum, where it gets a href=”http://www.theconglomerate.org/2006/07/forecasting_exc.html#c20136843″>royal treatment it richly deserves.
Kate. My apologies. Do you mind if I ask another etiquette question? Do you think weâ€™ve reached the point where I can just post: WAE? DYHAI?
Real men don’t use smileys 🙂 ;-))))) LOL FWIW OTOH IMHO.
P.S. I concur that there is no evidence that board composition matters for much of anything. The key to win an argument in this area is to repeat with some frequency, â€œwhat about endogeneity? do you have an instrument?â€?
Bill. Well there are hundreds of studies I could send your way 😉
Better yet, if I ever get done with it, Iâ€™ll send you a copy of the paper Iâ€™m working on that cites plenty of them.
Mike: I do not know enough about Brocade to answer. My last paragraph was intended to be general in nature. Also, I am not familiar with the social psychology literature. That is why I phrased it as an “inclination,” i.e., my gut reaction. If I took the time to study the relevant literature, maybe I would change my mind.
Bill. Do you really think the size or constitution of the Boardâ€™s compensation committee would have mattered? Much of the fraudulent behavior in corporations is carried out by a small group working together, the evidence on the relationship between indpendent boards and fraud is mixed, and there is a fair amount of evidence from social psychology that small groups are more likely to act in deviant ways than individuals. Furthermore, I think the fundamental claim on the Brocade side was that they did nothing wrong, and it is unclear whether a group review process would have led to a different answer.
I’ve always been dubious of legal shortcuts justified by not wanting to bother the directors. It seems to me the more prudent route is to make grants to lower level employees in batches.
I would think that a single member stock option committee would be a useful tool for grants to non-executive officers, and that it wouldn’t be difficult to limit such a committee’s authority to those circumstances. The board’s compensation committee would retain authority for grants to executive officers, including the CEO. Why bother three or more busy individuals to approve a grant for the new receptionist?