Excessive executive compensation legal action dropped
01/09/2008
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In July, New York Attorney General Andrew M. Cuomo dropped his case challenging the nearly $190 million compensation package of former New York Stock Exchange chairman Dick Grasso, hours after a state appeals court dismissed the two remaining claims.

The case was interesting and relevant to Australian directors because the basis of the legal challenge was a New York state law specifying that not-for-profit remuneration should be “reasonable”.  Australian directors are aware that section 211 of the Corporations Act also requires executive and director remuneration to be “reasonable”.

We first reported on the Grasso case in November 2006 (see HERE).

The ruling came less than a week after the state’s top court rejected four other claims stemming from a 2004 lawsuit brought by former state attorney general Eliot Spitzer.

Cuomo could have continued the prosecution after the court decision yesterday but would have had to seek permission for a review – and obtain a reversal – from the Court of Appeals, the state’s highest court.

Grasso’s compensation, which included an immediate lump-sum payment of $139.5 million in 2003 and an additional $48 million payable over four years was challenged by state prosecutors as excessive and in violation of state law.

Spitzer brought the case under a New York law governing nonprofit groups (i.e. that executive compensation be “reasonable”). But the appeals court ruled that prosecutors could no longer pursue the case once the NYSE, a not-for-profit organisation at the time of Grasso’s payment, became a for-profit business. The court said it was wrong for public funds to be spent on a prosecution that was no longer in the public’s interest, adding that the NYSE could take action to recoup the money.

Grasso resigned as NYSE chairman in 2003 following criticism regarding his compensation from board members, who voted to ask him to leave. An internal investigation was also launched.

Its findings found that Grasso received “excessive levels of compensation and benefits, far beyond reasonable levels.”

The report charged that Grasso’s excessive pay was the result of a highly flawed executive-compensation process, a high turnover rate among NYSE board members and an overall lack of training among new members. Grasso also handpicked those who decided his package, some of whom were his friends, the report said.
The two legal claims dismissed by the court yesterday dealt with unlawful payments and breach of Grasso’s fiduciary duty.

Legal experts said the failed prosecution highlighted the difficulty prosecutors may have in contesting other executive pay packages deemed to be excessive.

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