Although executive compensation has been under significant scrutiny for many years, directors’ compensation has flown somewhat under the radar. That may be about to change: in Calma v. Templeton, a Delaware court recently held that the level of compensation granted to non-employee directors should be reviewed under the “entire fairness” standard rather than under the more lenient “business judgment” standard. The court concluded that the stricter standard was appropriate because:
- the directors had a conflict of interest when they were deciding whether to award themselves any equity compensation; and
- the company’s shareholders did not “ratify” the directors’ equity awards when they approved the plan under which the awards were granted, since the plan did not include “meaningful limits” on the potential awards.