What is the corporate boards role in determining the compensation paid by a corporation?
Boards approve compensation paid to the CEO and corporate officers as a matter of legal responsibility. As mentioned earlier, under typical state corporation laws (for example Section 144 of Delaware General Corporation Law) boards must approve “interested director transactions.” This is one reason senior executive pay decisions should not be delegated to management. See also FAQs on Governance.) In approving compensation, a director must exercise an appropriate level of care (duty of care), must be free from conflicts of interest with respect to the compensation arrangement (duty of loyalty), and must not be operating in bad faith (duty of good faith). All of these duties were mentioned in the recent Disney case (In re Walt Disney Co. Derivative Litig., Consolidated C.A. No. 15452, slip op. at 105 (Del. Ch. Aug. 9, 2005)).
