Corporate directors must rein in soaring U.S. executive pay or face the prospect of government regulation, said the judge who presided over a landmark shareholder suit involving Disney Co.

WASHINGTON, D.C. (Reuters) -- Corporate directors must rein in soaring U.S. executive pay or face the prospect of government regulation, said the judge who presided over a landmark shareholder suit involving Disney Co.

Delaware Chancery Court Judge William Chandler -- who let Disney directors off the hook in August for Michael Ovitz's huge $140 million 1996 payoff after a brief failed term as Disney president -- on Oct. 25 warned in a speech to a directors' group that regulation would be a "blunt instrument."

"If neither the courts nor the markets are able to restrain executive compensation, and if you the decision-makers fail ... the result will be imposition of regulatory controls," said Chandler, whose court handles many important business cases.

Top U.S. company managers continue to receive huge pay packages -- $9.8 million for the average chief executive of a major company in 2004 -- despite years of complaints by investor advocates and warnings by a variety of watchdogs.

Former U.S. Securities and Exchange Commission chairman William Donaldson often called for restraint in executive pay before he stepped down this summer. Public Company Accounting Oversight Board chairman William McDonough does so, as well.

Chandler earlier this year presided over a shareholders lawsuit that sought to force the return to Disney of the fortune Ovitz got in 1996 after his 14 months as president.

Ovitz was a Hollywood talent agent brought into Disney by his friend and former Disney chief Michael Eisner. Ovitz was touted at first as a possible successor to the controversial Eisner. But the two quickly fell to bickering and Ovitz left.

Shareholders later demanded that the $140 million he received when he departed the Magic Kingdom be returned to the company with tens of millions of dollars more in damages.

After a high-profile trial, Chandler rejected the shareholders' plea. He said Disney's board acted legally in the Ovitz matter, which was closely watched by investor activists. The Disney shareholders have filed an appeal.

Delaware courts often set corporate legal precedents because so many U.S. corporations are incorporated in the small, East Coast state.

In his 175-page ruling on the Ovitz case, Chandler criticized the Disney board. At the conference, he urged corporate directors, especially those on board compensation committees, to be more assertive in setting executive pay.

"The entire matter of executive compensation, which seems in some cases to have come spectacularly unhinged from the market for corporate talent, will either be regulated by you the fiduciaries, or by the politicians," Chandler said.

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