Shareholders rights may depend upon executive compensation in California.   At face value, shareholders’ rights may appear to be in jeopardy whenever CEOs and other managers are paid amounts that do not seem to correspond to their value.  This may, in fact, be true if an executive’s compensation package pays them in stock and cash, without regard to changes in the marketplace.

In such a case, the company and ultimately the shareholders will be placed in jeopardy if the managers of the company have no incentive to avoid risky decisions, or to consider the long-term health and prosperity of the company.

In order to protect shareholder rights then, it is a good practice, and may even be considered necessary, to ensure that a company’s managers have the correct motivation to increase the value of the company to its shareholders.

while Shareholders rights may depend upon executive compensation in California there are several ways that shareholders can be protected in this manner.  For one, if an executive is to be paid partly in stock, then limitations should be placed on when the executive may sell the stock.  Ideally, vesting the stock only after the executive has left the company can place the manager in the shoes of a shareholder, thereby encouraging the executive to focus on long-term growth.

Another way to protect shareholders’ rights is to keep the pay package flexible.  This means allowing for changes in the market and within the company to be reflected in an executive’s pay.  For example, if the company’s stock price were to fall dramatically, it would be a good idea for the managers to receive more stock and less cash.  This would then motivate managers to make decisions to increase the share price.

Finally, executives should have some form of debt compensation.  Research shows that CEOs with large debt compensation features manage their companies more conservatively, ending up with fewer loan covenants and a lower cost of debt.

Careful and creative executive compensation packages can go a long way toward avoiding shareholder disputes against California businesses for complaints such as breach of fiduciary duty and breach of the covenant of good faith and fair dealing.