Corporate Governance Changesas Settlement Currency?

An article by Stephen Taub in today’s Compliance Week ($) gives some examples of how companies seem to be using their executive compensation and other corporate-governance policies as “settlement currency” to help resolve shareholder lawsuits. The article’s list of companies includes Cendant, Citrix, Enterasys, MCI, Sprint., and Siebel Systems.

The article says:

While denying that the actions taken were improper, [Cendant chairman and CEO Henry] Silverman and the other defendants agreed to significantly alter his existing contract. He agreed to move up the expiration date by five years, to Dec. 31, 2007, and reduced severance to no more than 2.99 times the prior year’s compensation.

In addition, a significant majority of Silverman’s bonus will now be subject to the attainment of certain performance-based earnings per share goals. Also as part of the compromise, the cash compensation portion of a post-employment consulting contract was reduced from life to a period of five years.

(Even the new contract still seems pretty rich to me, but hey, I don’t move in those circles….)

We’re likely to see more of this phenomenon, according to the article:

“It is definitely a growing trend,” says Richard Koppes, of counsel to Jones Day Reavis & Pogue and former general counsel of Calpers. “It’s beginning to happen in a fair amount of cases.”

“It does seem like something that is gathering momentum,” adds Bruce Carton, executive director of Institutional Shareholder Services’ Securities Class Action Services.

A couple of years ago, I heard a speaker suggest that the street-smart company will deliberately hold back on some reforms of this kind. That way, if litigation should ever come to pass, the company will still have something to offer in settlement discussions. This was in a panel discussion on the law of sexual harassment, not corporate governance, but the principle would seem to be be the same.

I’m not sure where I come out on that idea: if a particular reform makes sense, I wonder whether you might be better off implementing the reform on your own initiative, before litigation, in the hope that it will help prevent litigation-causing events in the first place.