When one thinks of the use of legislative power to curb the size and the type of compensation paid to executives, one normally thinks such power is reserved to the states. That is, one tends to think that regulating corporate governance falls within traditional state police powers. However, while state courts have been willing to review the processes boards of directors use in setting the size and type of executive compensation, they have been less willing to review the actual results of such decisions. Hence, it is no shock that Congress continues to dabble in the area of corporate governance in order to have an impact on the size and type of executive compensation, especially with the recent meltdown of the financial institutions.
This Article begins with a discussion of Congress's use of the Internal Revenue Code (“I.R.C.” or the “Code”) over the past century to impinge upon and change corporate behavior, particularly in the area of executive compensation. Such a tactic is not startling due to the potential power of taxation over executives and corporations, and the recent congressional requirement that legislative initiatives be deficit-neutral in the totality. However, Congress's use of the Code has failed in this regard, resulting in further complexity of the Code and unintended consequences.
As a result, we have seen a shift in the last decade on the part of Congress to use federal securities law to enact corporate governance rules, which focus the public spotlight on executive compensation. Congress hopes to cause public outrage over the size and type of executive compensation, resulting in a shift in the corporate culture. It is not unforeseen that Congress has used the federal tax code and the federal securities law to regulate in this area--the Code gets to the pocketbook of the executive and the corporation whereas the securities law uses disclosure and transparency to focus on the corporation's actions. Whether the use of securities law will be successful or not is too early to tell.
Kathryn J. Kennedy, The Use of Federal Law To Curb Excessive Executive Compensation: Lessons in Past Failures and Lessons for the Future, 57 Vill. L. Rev. 551 (2012).