There is an interesting parallel set of prosecutions going on in the US and Germany. In the latter, the WSJ (sub. req'd) is reporting that Deutsche Bank CEO Josef Ackermann (and some other supervisory board members of Mannesmann AG) have been charged with approving bonuses for Mannesmann executives following approval of Mannesmann's acquisition by Vodafone. In the US, as CNNfn is reporting, the trial of former Tyco CEO Kozlowski began today.
The two cases illustrate a striking difference between US and German law. In US law, executive compensation typically is an issue for private litigation, typically involving shareholder derivative litigation charging waste of corporate assets. Kozlowski's case is a very rare exception to that rule, in which prosecutors are charging that Kozlowski stole from the corporation. The key charge in the indictment is that Kozlowski borrowed money from Tyco and then stole it by causing the "loans to be forgiven without the board's knowledge." If Kozlowski can prove that the board knew and approved the loan forgiveness, I don't see how the charges can stick. Indeed, I'm not convinced the charges will stick even if all Kozlowski can prove is that the loans were properly processed by corporate subordinates (specifically the firm's accounting department).
In contrast, under German law, criminal prosecutions over allegedly excessive executive compensation are a lot easier. The Economist explains that "Paragraph 87 of Germany's securities law says that [bonuses] to board members should bear a 'reasonable relationship to their duties'." I gather that such prosecutions are pretty rare in Germany and that this prosecution is especially controversial.
Personally, I think criminalizing the issue of excessive executive compensation is just nuts. But prosecuting not just the executives who got paid too much but also the board members who approve the payments is really crazy. Public corporations are finding it increasingly difficult to recruit and retain qualified independent directors. Relatively low pay, compensation in stock rather than cash, and increased time demands and liability exposure have all combined to render board service far less attractive than it once was. Criminalizing their executive compensation decisions, which are among the most controversial decisions a board makes, however, would make an bad situation almost impossible. What sane person would be willing to sit on a corporate board?