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What is Expected
"[T]he principal responsibility of a corporate director is to …. [bring] experience and judgment into the boardroom…. which means to become informed, to participate, to ask questions and to apply considered business judgment to matters considered by the board."
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American Bar Association Section of Business Law, Committee on Corporate Laws, Corporate Director’s Guidebook (Third Edition, 2001), 4
Simply put, to avoid liability, Compensation Committee members must have a reasonable basis for exercising an honest business judgment that their actions are in the corporation’s and shareholders’ best interests.
Before they approve a proposal, Compensation Committee members must understand it fully and, most importantly, the proposal must pass their moral or ethical review. This means that Compensation Committee members are expected to be knowledgeable about compensation risks and issues and extremely thorough in reviewing questionable areas.
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