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Home > Articles & Research > Compensation > Poor CEO Comp Practices a Possible Indicator of Litigation, Study Finds

Poor CEO Comp Practices a Possible Indicator of Litigation, Study Finds

CEO compensation practices that are poorly aligned with shareholder interests remain a powerful indicator of potential securities litigation, according to a study of securities class-action litigation conducted by the Corporate Library as part of a year-end report.

by Joseph McCafferty | January 28, 2008

CEO compensation practices that are poorly aligned withshareholder interests remain a powerful indicator of potential securitieslitigation, according to a study of securities class-action litigationconducted by The Corporate Library as part of a year-end report.

Thereport, like others conducted recently by NERA and Stanford Law School’s Securities ClassAction Clearinghouse, points to another year of increasedlitigation in 2008 and the growing involvement of institutional investors.

Thestudy examines the second-year effectiveness of The Corporate Library’s SCARisk Ratings to identify and predict the probability of companies being hitwith securities class- action suits.

TheCorporate Library’s findings include:

  • The most poorly rated companies in mid-2006 were five times morelikely to experience an SCA in 2007, matching the results from The CorporateLibrary’s previous SCA studies.
  • CEO base pay and annual bonus levels were more predictive thanlong-term incentives.
  • More than 35% of companies in The Corporate Library’s coverageuniverse that were unable to achieve compliance with Section 404 ofSarbanes-Oxley experienced at least one SCA in the past three years.
  • Institutional investors hold more than 60% of the traded stock atnearly all companies subject to SCAs.
  • Growing numbers of small- and mid-cap companies are being hit withsuits.

“Effective prediction is the only real defense againstsecurities litigation, and that is the primary focus of the presentreport,” said Ric Marshall, chief analyst and author of the study.

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