A spirited debate over director pay.

• Author: Zaleznik, Abraham
• Position: Corporate directors - Includes related article - Response to Hoffer Kaback, Directors & Boards, Winter 1996

The proposition that directors should not be forced to be paid in stock has sparked a round of rejoinders on the pay/performance nexus.

In the Winter 1996 edition of DIRECTORS & BOARDS, we published an article entitled, "The Case for Cash for Directors." The author, Hoffer Kaback, a corporate director himself, strongly challenged the philosophical rationale and tactical assumptions driving the movement to require directors to be paid entirely or substantially in stock (see sidebar on page 31 for a recap of the article's main points). At the invitation of DIRECTORS & BOARDS, the following authors have responded to this article with strong reactions of their own. Whether they agree or disagree with the original article, it is clear from their responses that the focus on how directors should be compensated is but a stalking. for bigger game - i.e., a challenge to, or defense of, fundamental beliefs of how directors see themselves and their role, what motivates directors, and how boards really work. The debate is a lively one and a compelling measure of the intellectual ferment that exists within corporate governance today.

Being a Good Director Is A State of Mind

Alignment and financial 'motivation' surely cannot induce a weak director to become a good one. Nor will they have any positive effect upon the already-good director. By definition, the good director is already doing the best he can. Forcing him to invest in corporate common stock cannot add the smallest peppercorn of integrity, judgment, or character to the quantum of such traits he already possesses.

Thus Hoffer Kaback presents the heart of his argument in his contrarian piece on compensating corporate directors.

Once presented, Kaback's argument is so obvious as to cause wonder at the sudden popularity of stock instead of cash. If taken at face value, the proponents of stock are really arguing a theory of motivation: payment in stock will motivate directors to look after the interests of the shareholder since the directors will now be at risk and properly aligned with the interests of shareholders. By implication, the proponents are saying that up until now, directors have not been looking after the interests of shareholders, thus neglecting their fiduciary responsibility.

Let's assume that, historically, the proponents of stock have the weight of evidence on their side. As far as I can tell, the proponents are not suggesting that the neglect, a serious breach of fiduciary...