An introduction to the modern corporate governance project. Using the track record of our efforts to control executive compensation, we see that notwithstanding decades of failure, and considerable evidence that our interventions have been making things worse, modern corporate governance remains fixated on agency cost theory as a normative program of reform. This is a matter of growing concern as corporate governance is gradually adopted as a tool to obtain important environmental and social outcomes. The themes of the book and its methodological approach are summarized. Children’s cartoons are referenced more than you would expect.

The rise in executive pay over the last four decades correlates with the rise of corporate governance. This chapter shows that the explosion in executive compensation has mostly been due to the adoption of two “best practices” urged on boards by the modern corporate governance regime: (1) the use of equity incentives to align managers’ interests with those of the shareholders; and (2) the adoption of pay-for-performance schemes. A large body of empirical research suggests neither of these compensation practices produces better corporate performance; the research does show, however, that these pay practices lead to adverse outcomes, including fraud. The chapter concludes by discussing how modern corporate governance’s focus on controlling agency costs has blinded it to the many other roles executive pay must play in a well-run organization.

Does agency cost theory work in the real world? The various hypotheses drawn from agency cost theory are considered in light of the relevant empirical evidence. Agency cost theory appears to be able to explain almost anything, but it predicts nothing.

Proponents of stakeholder capitalism claim that it can be implemented simply by modifying the fiduciary duties of directors so that they can take into account the interests of stakeholders rather than being legally limited to considering shareholder value maximization. Such claims fundamentally misunderstand how deeply embedded shareholder value maximization is in corporate law. Only shareholders get to vote, which means directors get to keep their jobs only if they please shareholders. A web of director and officer fiduciary duties inclines them to shareholder value maximization, as does the law of executive compensation.

In re Walt Disney Company Derivative Litigation iconically revealed the latitude the Chancery Court gives boards when using the business judgment rule. The business judgment rule presumes that “directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.” The burden is on the plaintiff to show that duties were breached and that the directors acted in bad faith, but both the Chancery Court and the Delaware Supreme Court ruled it had not. Professor Hillary Sale, rewriting the Delaware Supreme Court’s opinion as Justice Sale, suggests an alternative “inclusive process” that sets a higher ideal for corporate governance Sale urges boards to ask follow-up questions, explain different assessments, and listen to and weigh multiple viewpoints. In her commentary on the rewritten Disney opinion, Professor Laura Rosenbury contextualizes Sale’s approach by comparing its relational reasoning to similar insights of feminist scholars in other legal fields at the time, and also by situating the facts giving rise to the Disney litigation in light of the company’s and broader economy’s then-prosperity. Professor Rosenbury also highlights the intersectional strengths of Sale’s rewritten judgment.

This chapter on executive compensation and stock options is effectively a continuation of Chapter 9 on performance pay. It provides an overview of executive compensation and an intuitive, non-technical treatment of stock options that focuses on the worker incentives that options create. There is a lot of discussion of risk (of income loss) that builds on Chapter 9, and the “pay for luck” discussion that ends the chapter concerns the possibility of firms’ reneging on CEOs’ bonus payments, which echoes the wage-theft themes from Chapter 2. Section 10.2 covers the executive bonuses known as “80/120” plans, representing them pictorially as nonlinear functions of a performance measure (that are upward-sloping in some parts, as in the performance-pay graphs of Chapter 9). The section on stock options is detailed and explains all of the key terminology and the most important concepts in this area. The distinction between the intrinsic value and the market value of an option is made carefully, with an intuitive, non-technical discussion of the Black–Scholes–Merton options valuation formula, and the role of risk is explained in detail.

This chapter on executive compensation and stock options is effectively a continuation of Chapter 9 on performance pay. It provides an overview of executive compensation and an intuitive, non-technical treatment of stock options that focuses on the worker incentives that options create. There is a lot of discussion of risk (of income loss) that builds on Chapter 9, and the “pay for luck” discussion that ends the chapter concerns the possibility of firms’ reneging on CEOs’ bonus payments, which echoes the wage-theft themes from Chapter 2. Section 10.2 covers the executive bonuses known as “80/120” plans, representing them pictorially as nonlinear functions of a performance measure (that are upward-sloping in some parts, as in the performance-pay graphs of Chapter 9). The section on stock options is detailed and explains all of the key terminology and the most important concepts in this area. The distinction between the intrinsic value and the market value of an option is made carefully, with an intuitive, non-technical discussion of the Black–Scholes–Merton options valuation formula, and the role of risk is explained in detail.

This chapter analyses the Pacific Alliance – an economic bloc formed by Chile, Colombia, Mexico, and Peru in 2011 – and its integrated stock exchange, the Mercado Integrado Latinoamericano. It contends that the Alliance has the potential to foster the transition toward a sustainable economy in Latin America, through a renewed system of corporate law and corporate governance. On the one hand, it asserts that Colombian Law 1901 of 2018, creating the Companies of Collective Benefit and Interest, initiated a healthy regulatory competition in corporate law among member states. On the other, it discusses alternatives to promote sustainable corporate practices through executive compensation, leveraging the legal convergence in corporate governance prompted by the integrated stock exchange. The Alliance’s economic strength and regional leadership further bolster its potential to bring about meaningful changes in the region.