Today's  NYT, following the announcement by Obama's executive pay "tsar" that 125 of the country's top execs would have to choke down a big paycut, warned that any stunt pulled by Feinberg would prove illusory in the long run.  Instead, the times insists that it's up to "shareholders" to reign in executive pay.  See http://www.nytimes.com/2009/10/23/business/23nocera.html?_r=1&hp

What's not entirely clear from the article (perhaps because such clarity would come only with embracing a bit of legal wonkishness) is the drastic change in our corporate laws required to allow shareholders to actually govern CEO salaries.

Ever since the seminal CEO pay case - the one dealing with, if you remember, Michael Ovitz at Disney and his golden parachute (Brehm v. Eisner) - it's been clear to us lawyers that no one can touch a salary set by an executive compensation committee unless there's outright, plan-faced fraud or a conflict of interest.  This, incidentally, is almost impossible to prove.  Folks familiar with corporate law know the roadblock as the "business judgment rule."  It's a presumption that anything an "independent" board does passes the legal straight face test.  Only when a board member is on both sides of a transaction will a court begin to look at the merits of the deal and whether it's in shareholders' best interests.  And for you normal non-lawyers, "conflict of interest" is a term of art.  It doesn't mean "smells like fraud," "looks shady," and "indirectly, of course there's a conflict."  It means that the board member is voting himself his own pay raise, or voting for one for his best friend - not "if I give him a pay raise now, it will help inflate salaries everywhere and generally be good for rich people like me." 

Moreover, as the article does make clear, it's nearly impossible for shareholders to control corporate governance through their suffrage rights.  Boards are stacked - so your shares only entitle  you to vote for certain board positions - and unless you have a candidate to endorse, it's financially infeasible to launch a proxy contest against the incumbents.  You can't just complain about their behavior, you have to find a willing replacement.  On top of it all: since when do beneficial share owners pay enough attention to have a voice?  The folks with enough weight to make a difference are your institutional investors.  That's Fidelity, along with your state pension fund.  Inspiring confidence??

My point is this: there's a mountain to move if you want to control executive pay through empowering shareholders.  On the other hand, passing a law linking executive pay to, for example, 10-year average profits is easy.  Okay, so you discourage risk taking and maybe the most talented of the talented will find a career that will bring in bigger bucks.  But last I checked, there are some pretty brilliant hard-working people in, for example, the ivory towers of academia who are motivated by such other than dollars.