Last week, this post noted Henry G. Manne’s op-ed regarding the myth of shareholder democracy being some sort of panacea to all sorts of corporate agency cost problems. As if on cue, Professor Manne’s op-ed was followed by Home Depot’s announcement that it was terminating the contract of CEO Robert Nardelli, which triggered Nardelli’s right to receive about $210 million in exit compensation under his contract.
Of course, Nardelli’s rich exit comp generated the typical wails of woe from various business media pundits who contend that an executive profiting from failure is concrete evidence of a defect in corporate governance that needs to be addressed through more regulation. A typical reaction is this one from Chronicle business writer Loren Steffy:

That cuts to the heart of recent hot-button executive pay issues. From options abuses such as backdating and repricing to lavish perks, all tend to be awarded with a sense of entitlement.
It’s as if executives deserve ever-increasing pay packages simply because they’re executives.
How many of us, failing to meet our bosses’ expectations, are given a bonus or a raise equal to last year’s?

But as Ted Frank points out, self-righteous egalitarians such as Steffy miss the point. Nearly all of Nardelli’s $210 million was part of Nardelli’s original employment contract that he negotiated when the Home Depot board lured him from General Electric, where Nardelli had been a star and one of the three executives competing to succeed Jack Welch as GE’s CEO. When the GE board passed him over in favor of Jeff Immelt, Nardelli was a hot property in a market in which such talent is at a premium, sort of like Nick Saban or Carlos Lee in their markets. And, by the way, all of the terms of the rich deal to attract Nardelli were included in the annual Home Depot proxy.
So, what exactly is Steffy’s point about his so-called “Nardelli Principle?” That Nardelli’s deal should be abrogated now simply because the board concluded it made a mistake in hiring him in the first place?
Look, top executive talent — just like good football coaches and star baseball players — is hard to find, a fact that even private equity is realizing. As a result, boards are willing to pay a premium to get it. Those decisions don’t always work out — just as Drayton McLane’s final contract with Jeff Bagwell didn’t turn out well — but that doesn’t mean that the boards or McLane were wrong to pay a lot to attempt to reduce the risk of loss.
Meanwhile, bringing the discussion back to center is Professer Manne, who responds through this Larry Ribstein post to criticism that his views on shareholder activism leads to “philosopher king” board members overpaying failed cronies such as Nardelli:

. . . don’t forget that we do not want changeovers of management teams to be quite as easy as changing which grocery store (or gardener) you use. That would introduce an element of uncertainty and confusion into the management picture that no intelligent shareholders would want. I do not know the optimal difficulty to put in the way of regime changers, but I am certain that it is more than zero. I do not think there is any good substitute for allowing the market to work that matter out through unregulated experience.[. . .]
[A critic] says that “I want the system where residual claimants are able to pick their own agents.” That is exactly what we do not want. We want shareholders to have full freedom to buy or sell shares with whatever provisions lie behind them. Corporate governance is none of the government’s business; it is best left to the tender mercies of private contract unless some serious externality can be demonstrated or a market failure in the market for corporate control is shown, neither of which I am aware of. Who is being the “philosopher king” here?