The release of the NYSE report on former CEO Richard Grasso's pay package prompted this observation from the WSJ($):
Carl McCall, the former New York state comptroller who headed the NYSE board's compensation committee in 2003 when it approved Mr. Grasso's most-lucrative contract, signed the document without fully understanding or reading all of it. Like Mr. Spitzer, Mr. McCall is a prominent Democrat, and Mr. Grasso has questioned why Mr. Spitzer didn't sue Mr. McCall, too. Wall Street financier Kenneth Langone, a Republican donor who was Mr. McCall's predecessor as compensation chairman, is named in Mr. Spitzer's suit. ...
One legal expert who has followed the case said some of the report's most-damaging revelations involve Mr. McCall, now a private-equity investor. In addition to not fully reading the 2003 contract, the report said, Mr. McCall asked an NYSE staffer to give him a written description of the document to use in briefing the full NYSE board, but then didn't review it. When he made his presentation to the board, "by most accounts [he] struggled in explaining" the contract, the report said.
"I am scratching my head as to why ... Mr. Spitzer went after Mr. Langone but not Mr. McCall," said Henry Hu, a law professor at the University of Texas at Austin.
One possible explanaton, of course, is that Eliot Spitzer plans to run as a Democrat for Governor of New York in 2006. he's even got a campaign website up and running. And there's precedent in Spitzer's past to believe that prosecutorial decisions are made for political reasons.
So how does Spitzer explain the decision not to go after McCall?
Asked why Mr. McCall wasn't sued, a Spitzer spokesman said, "You have to draw a distinction between who misled the board and people who were misled."
At first blush, that sort of makes sense. And it would make sense if Spitzer was going after Grasso and Langone in a criminal prosecution in which the distinction between malfeasance and misfesance presumably would loom large. In a civil suit for excess compensation, however, that distinction is far less significant. Directors who are grossly negligent in failing to inform themselves before approving an excessive compensation package can be held liable for that failure. Based on the facts in the report, one could certainly make a plausible case for liability on that ground against McCall. Hence, in fact, it does seem reasonable to infer that Spitzer's political aspirations once again intruded on the decisionmaking process.
BTW, Houston attorney Tom Kirkendall makes a very nice point in his post on the NYSE report:
Of course, the MSM is self-righteously indignant with the corpulent details of Mr. Grasso's perks, including $193 million in annual pay, early pension payouts and estimated interest earned on those payouts from 1995 through 2003, as well as the $240,000-a-year secretary, two $130,000-a-year drivers, access to a private plane, and club memberships. ... Alas, what is completely lost in the MSM treatment of Mr. Grasso's pay and Mr. Spitzer's Robin Hood lawsuit is the real issue, which is the failed corporate governance model of the NYSE.
Exactly. What the MSM (and, I think, Spitzer) persistently ignore is that the central legal issue is not the amount of the compensation but the process by which it was set. Yes, the compensation must be excessive in order for there to be a recovery. But you never reach the question of whether the compensation was in fact excessive until you first determine that the business judgment rule does not protect the board's decision. And in order to rebut the business judgment rule so as to reach the merits of the claim you must show that the decisionmaking process was flawed by a grossly negligent failure on the part of the board to be informed about the decision. (See generally my law review article The Business Judgment Rule as Abstention Doctrine.)
