Sue on Pay: Say on Pay’s Impact on Directors’ Fiduciary Duties

This Article advances a normative case for using say on pay litigation to enhance the state courts’ role in policing directors’ compensation decisions. Outrage over what many perceive to be excessive executive compensation has escalated dramatically in recent years. In 2010, such outrage prompted Congress to mandate say on pay—a nonbinding shareholder vote on executive compensation. In the wake of say on pay votes, some shareholders have brought suit against directors alleging that a negative vote indicates a breach of directors’ fiduciary duties. To date, the vast majority of courts have rejected these suits. This Article insists that such rejection represents a wasted opportunity, and argues that Delaware courts should use say on pay litigation to alter how they assess board duties related to pay practices for at least three reasons. First, empirical evidence suggests that we cannot rely exclusively on say on pay to alter board behavior. Second, if Delaware and other state courts fail to respond to calls for better regulation of compensation practices, those courts risk further federal intrusion in this area, which could undermine private-ordering along with value-enhancing experimentation and innovation that can only occur at the state level. Third, say on pay votes are an ideal vehicle for increasing state courts’ role not only because courts should encourage boards to consider shareholder concerns but also because negative say on pay votes may be a critical signal that there is a defect in pay policies that needs to be addressed. Instead of being used as a tool to bypass fiduciary duty law, say on pay should serve as a springboard for reinvigorating such law as it pertains to executive compensation.