After 20 years of writing about egregious C.E.O. behavior, I sometimes think there is nothing left to say. Salary inflation of Weimar Republic-like proportions, stratospheric bonuses, falsified financial statements, backdated stock options, and now the subprime crisis—I’ve almost lost the capacity for outrage. So what if Citigroup elected to give the departing Chuck Prince a $10 million bonus after he presided over the bank’s disastrous expansion into
the subprime-mortgage market? So what if Angelo Mozilo, the co-founder and C.E.O. of Countrywide Financial, exercised more than $100 million worth of options shortly before his firm’s stock price collapsed? And so what if Stan O’Neal, Merrill Lynch’s former boss, left the company with $162 million a mere week after it reported the biggest loss in its history? Self-enrichment on the scale of a Roman emperor is precisely what I expect from big-time C.E.O.’s, especially Wall Street ones.

Still, you have to wonder: Given all the scandals they have endured and all the opprobrium directed at them, how do they continue to get away with it? Part of the answer is to be found in recent changes in their employment contracts that make it extremely difficult to fire them, however badly they perform. For all the talk of C.E.O.’s taking responsibility and earning pay based on their performance, the typical corporate leader now has more job security than an East German factory manager during the Soviet era. However poorly a company performs, firing its C.E.O. is virtually impossible, largely because of this new breed of contract. All too often, the only way a board of directors can bring in somebody new is to ask the current chief executive to depart on friendly terms and pay him a king’s ransom.

The proliferation of C.E.O. contracts was no accident. They originated in the 1980s and ’90s, as a reaction to earlier efforts to rein in pay. After Enron, the Sarbanes-Oxley Act tried to codify C.E.O. responsibilities by, for instance, forcing them to sign off on company accounts. Corporate bosses responded by quietly demanding individual contracts, which, in many cases, were drawn up by their own lawyers and accepted by their boards with no outside review. Often, the restrictive and self-serving terms of these contracts came to light only when it was too late for shareholders, or anybody else, to do anything about them.

A few months ago, I went to Washington to watch members of the House Committee on Oversight and Government Reform question Prince, Mozilo, and O’Neal about their roles in the subprime blowup. Sitting there facing the television cameras, the three looked like fish on a dock. John Finnegan, the chief executive of Chubb, who heads Merrill’s compensation committee, told the committee that of the $162 million O’Neal received on his departure, $130 million was in the form of stock awards that had been granted years earlier and hadn’t yet vested. To keep those options away from him, the board would have had to terminate O’Neal for cause. And the provisions for that, Finnegan explained, “are very specific and basically cover misconduct, not unsatisfactory future financial performance.”

Henry Waxman, the California Democrat who chairs the committee, wasn’t satisfied with this explanation. He reminded Finnegan that Merrill lost $2.4 billion in the third quarter of 2007 and $10.3 billion in the fourth quarter, and that its stock price fell by almost half. “What was the rationale for letting Mr. O’Neal retire with $131 million in unvested stock instead of terminating him and recouping this money for the shareholders?” Waxman demanded. Finnegan repeated that the provisions in O’Neal’s contract having to do with dismissing the C.E.O. cover only misconduct and have nothing to do with poor financial results.

After listening to this exchange, I went in search of the legal language at issue. I found it in a Merrill contract provided to Waxman’s staff. It said “cause” for being fired existed only for “(a) any violation of Merrill Lynch’s rules, regulations, policies, practices, and/or procedures; (b) any violation of the laws, rules, or regulations of any governmental entity or regulatory or self-regulatory organization, applicable to Merrill Lynch; or (c) criminal, illegal, dishonest, immoral, or unethical conduct reasonably related to your employment.”

Finnegan was right. There was nothing about poor decisionmaking in exposing the firm to unnecessary risks or anything else relating to job performance.

I dwell on this example not to single out O’Neal but to show that the terms of employment he enjoyed are increasingly common. “Cause, as you and I understand it, has been redefined to mean something completely different,” says Nell Minow, the editor and co-founder of the Corporate Library, a research group that campaigns for better corporate governance. “If an ordinary person does a bad job, he or she gets fired. For a C.E.O. to be dismissed for cause, it now requires the committing of a felony, and sometimes even a felony conviction isn’t enough.”

The privileges afforded to C.E.O.’s are increasingly enshrined in their employment contracts. A decade ago, Minow says, less than a third of C.E.O.’s signed such contracts; now it is the norm. A 2001 study that examined about a hundred of these agreements found that in more than 90 percent of them, the C.E.O. couldn’t be fired for doing a bad job unless he or she received a big payoff; nearly half the time, even a felony conviction couldn’t deprive the C.E.O. of a severance payment. “We are unable to understand how such provisions could be in the interests of the firm,” Michael Jensen, of Harvard Business School, and Kevin Murphy, of the University of Southern California, wrote in a 2005 working paper, which they are currently turning into a book. “Employment contracts for C.E.O.’s and top managers should be discouraged, and when they do exist they should not provide for compensation when a manager is terminated for incompetence or cause.”

Sound advice, but it rings a bit hollow coming from two scholars who helped create the culture of the imperial C.E.O. In 1976, Jensen co-authored, with William Meckling, a paper that interpreted exorbitant C.E.O. pay as a so-called principal-agent problem, in which a firm’s stockholders (the principals) struggle to police its senior executives (the agents). The best way to align the interests of C.E.O.’s and shareholders, Jensen and Meckling argued, was to give executives more stock and stock options. In 1990, Jensen and Murphy published an influential article in the Harvard Business Review bemoaning the fact that many C.E.O.’s still owned trivial amounts of stock, a finding that encouraged the now ubiquitous practice of granting them elephantine options packages.

Jensen’s emergence as a critic of C.E.O. remuneration packages shows how far things have gone awry, but it probably won’t make much difference. The enduring ability of C.E.O.’s to entrench and enrich themselves has at least as much to do with power and, ultimately, with politics as it does with economics. With the disappearance of egalitarian social norms as a disciplining device, the only restraints on C.E.O.’s are independent directors and public anger, neither of which has proved to be up to the task.

Despite Sarbanes-Oxley, which forced corporations to appoint a majority of independent directors, C.E.O.’s usually dominate their boards. They control the flow of information to directors, they pay the compensation consultants who help the board set executive pay, and they can blackball board nominees that they don’t like.

They also pay their boards astonishingly well. Most boards meet for a day or two eight times a year. Let’s be kind and assume that the independent directors spend an equal amount of time preparing for the meetings, which means they work about 30 days a year. Leafing through Merrill’s 2008 proxy statement, I discovered that Finnegan and his colleagues were each paid, on average, about $275,000. This figure, which translates to a daily rate of almost $10,000, doesn’t include being flown to board meetings, put up at fancy hotels, and provided with numerous other perks.

Here again, Merrill is the rule rather than the exception. At Time Warner, independent directors were each paid roughly $250,000 in 2007. Citigroup’s independent directors pocketed about the same amount; at News Corp. and Pfizer, the figure was only slightly less. Now, when the nice man (or, in rare cases, woman) at the head of the table is paying you like a movie star, it’s bad form to bring up the fact that his terms of employment practically preclude firing him even if he messes up in the most frightful way. How much easier it is, should a managerial cutting become necessary, to let the C.E.O. “retire” and walk out the door with his swag bag bulging.

In the words of Lenin, what is to be done? The history of stock-option grants demonstrates the pitfalls of pat solutions. C.E.O.’s are in such a powerful position that they can manipulate most attempted reforms to their own advantage. The only way to prevent them from gaming the system is either to jettison the public company—Jensen is now a big supporter of private equity—or build up some form of countervailing power. “What we need,” Nell Minow says, “is board members with spines, who are willing to stand up to the C.E.O.’s and say, ‘If you fail to meet these benchmarks, you will lose your job.’ ”

Nobody could argue with that, but I fear that independent director has become an oxymoron. The best hope is to chip away on several fronts at the authority of C.E.O.’s, beginning with making it less costly to fire them. Following Britain’s example, corporations should be required to appoint a nonexecutive chairman, whose job would be to run the board and represent the interests of stockholders. They should also be obliged to post the terms of employment of their C.E.O.’s on their websites and allow stockholders a vote on executive compensation. Some of these things could be done by, say, changing the listing requirements for the New York Stock Exchange and Nasdaq. Others would require legislation. But nothing, absolutely nothing, will change without a hefty outpouring of public outrage. So go ahead and get mad. Send an email to your favored presidential candidate. Call your representatives in Congress. Better still, go to the annual meeting of a struggling company in your portfolio and ask some awkward questions of the folks on the dais. Don’t rely on hedge fund bottom-fishers or jaded columnists to do the job for you. Give ’em hell.