'Clean Hands' and the CEO: Equity as an Antidote for Excessive Compensation
University of Pennsylvania Journal of Business Law, Vol. 12, Pages 101-165, 2010
65 Pages Posted: 26 Aug 2010 Last revised: 10 Jun 2015
Date Written: August 25, 2010
Abstract
The financial crisis has placed executive pay at center stage in the corporate governance reform debate in the United States and around the world. We consider whether a judge-made solution to the problem will support the regulatory reform effort to reduce or eliminate excessive compensation. In particular, we assess whether courts should supplement existing contract law with the equitable defense of “clean hands” (unclean hands). Doing so would strengthen the legal position of the company in relation to the CEO by providing the Board a right to refuse excessive bonuses or other payments in order to protect shareholders and other stakeholders. Because courts have not considered the defense in cases involving excessive executive pay, we ascertain whether it is an appropriate addition to the current law and construct a model of unclean hands to establish under what circumstances it should apply.
Keywords: executive compensation, executive pay, equity, unclean hands, clean hands, equitable defenses, remedies, financial reform, corporate governance, business ethics, contract, executive employment contracts
JEL Classification: G38, G39, K12, K20, K22, K30, K40, K41, K49
Suggested Citation: Suggested Citation