The Grasso Case and Board Reverberations

Bill Sjostrom —  30 October 2006

The Law Blog asks “Will the Grasso Ruling Reverberate in Corporate Boardrooms?” The post includes the following quotes from some “executive pay gurus” via Business Week:

• H. Rodgin Cohen, Sullivan & Cromwell: “The precedent-setting issue here: a CEO’s duty to inform the board fully about his or her pay and the board’s duty to learn those details. Pay formulas are so complex today that even sophisticated directors can’t figure out the bottom line.”

• Nell Minnow, co-founder and editor, The Corporate Library: “The important part of the ruling is what it says to directors. It’s a wake-up call that they have to do the math [on CEO pay packages], and ask tough questions. And more important, give tough answers — like ‘No, that’s too much.’”

• Muriel Siebert, Muriel Siebert & Co., first female member on the NYSE: “I feel sorry for Dick. He did a good job. But that money was egregious. You don’t join a non-profit and expect to be paid like that. Did the compensation committee do their homework?”

The first two quotes are in reference to the most notorious holding of Judge Ramos’ opinion: “Mr. Grasso’s duty is to be fully informed [regarding the $100 million plus balance in his SERP account] and to see to it that the Board was fully informed. He failed in this duty. . . . That a fiduciary of any institution, profit or not for- profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care.”

Although the case’s precedential strength is questionable (a lower court decision applying New York non-profit corporation law), my guess is that it will impact boardroom behavior, in part given the media attention it has received. Directors and officers have little incentive not to take the holding seriously—they don’t pay the bills for having compensation consultants and lawyers better paper the file regarding executive compensation, their corporations do. Conversely, they are potentially personally liable if they are found to have breached their fiduciary duties. Whether the additional thrashing of the waters will lead to lower CEO compensation is another question, but it will certainly generate additional professional fees. Heck, investment banks could start selling executive compensation fairness opinions.

5 responses to The Grasso Case and Board Reverberations

    John L. Davidson 1 November 2006 at 6:52 pm

    Jay, it will only be tricky because it will require CEOs to tell the truth; there is a vast amount of academic literature arguing they have no prior experience at this skill.

    To quote the Rumsfeld, there are known knowns, known unknowns, and unknown unknowns. There are known knowns.

    The exact quote, “These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”

    Very clearly Grasso knew what his pay package was. However, if he wants to lie about that, then quite clearly all he did was hoist himself on his own petard—since he knew he would be paid something, he was dealing with a known, unknown and had a duty of care to tell the Board, “Hey ladies and gentlemen . . . ”

    What is disturbing to me are all the comments of people who want to rationalize what he did. What possible rationale justifies his conduct?

    Keep in mind, I am not of the limit executive pay school nor am I in favor of more public disclosure of compensation, as such is valuable business information. These issues are red herrings that have absolutely nothing to do with what Grasso did.


    So if I’m a CEO, I should tell the board of directors what I don’t know? That could get tricky.

    John L. Davidson 31 October 2006 at 9:29 pm


    it is that simple, as an agent also has a duty to exercise ordinary care in the matters entrusted to the agent

    alternatively, if he didn’t know, he also had a duty to tell his principal that he didn’t know.

    These are simple agency law propositions.


    It’s not that simple. Grasso claims he didn’t disclose the SERP balance to the Board b/c he didn’t know what it was, i.e., he couldn’t keep the “principal” fully informed. As the quote above indicates, the court said he had a duty to know.

    John L. Davidson 31 October 2006 at 7:05 am

    this case is about as simple a case as one can find on agency law—its fundamental that an agent must keep the principal fully informed, especially on matters where the agent’s interests so obviously conflict.

    I suspect that all this comes about because most law schools don’t teach agency/partnership with real vigor and even if they do they really don’t give students a fundamental understanding about how these propositions apply. Its no different in that regard than contracts law which teaches that one can breach a contract and pay the damages, which is not true in the real world. Doing such happens to be mail or wire fraud, as several ill advised souls have learned over the years.