This blog celebrated its two-year anniversary earlier this week. It’s been fun and I hope you’ve enjoyed the ride. I’ve gotten into the habit of making most of the contributions lately – I’m more than happy to post your thoughts. A blog contribution only need be a paragraph or two – and it doesn’t have to cover a breaking development. It can share a story – or just your ten cents.
To celebrate, I thought I’d share a groovy video of a classic song circa 1970:
Below is an excerpt from this recent NACD press release:
Corporate board pay levels are flat or down compared to last year, according to the NACD’s annual Director Compensation Survey: 2009-2010. Created in partnership with consulting firm Pearl Meyer & Partners, the report examines director pay trends among public boards in four size categories, along with a fifth category of the Top 200 companies – ranging in revenues from $50 million to over $10 billion – across multiple industry verticals. Data is used as an important benchmarking tool for boards to review or establish effective and competitive compensation plans.
The report also shows a link between the composition of director compensation and the current economic environment. Cash compensation, consisting of annual retainers and fees for board and committee service, represented a greater proportion of total compensation. The percentage of director pay in the form of equity declined significantly, largely as a result of lower share prices. While stock compensation was generally below the 50% benchmark, there was also a significant shift away from the use of stock options in favor of full-value share grants.
Key Highlights:
Median total direct compensation:
– Companies with revenues of $50 million to $500 million — decreased 3% to $75,490
– Companies with revenues of $500 million to $1 billion — decreased 6% to $108,836
– Companies with revenues of $1 billion to $2.5 billion — decreased 2% to $131,054
– Companies with revenues of $2.5 billion to $10 billion — decreased 1% to $164,455
– Companies with revenues over $10 billion plus — increased 1% to $216,186
Compensation by industry:
– Highest compensated included: Pharmaceutical & Medical Products, Diversified Financial & Brokerage, Petroleum/Crude Oil Production & Pipelines and Computer Products & Services
– Lowest compensated included: Transportation & Distribution, Motor Vehicles & Parts and Banks/Savings & Loans
From an organizational perspective, the NACD report found that the work of corporate boards is being conducted increasingly at the committee level as directors seek to most effectively address the volume of issues they face. Virtually all companies in the survey maintained audit and compensation committees with the vast majority also having a governance/nominating committee. A sizeable majority of companies differentiate pay among committees in some way, reflecting the difference in relative workloads.
Continuing a practice begun in the wake of Sarbanes-Oxley, audit committee member compensation is highest, reflecting a significant rise in responsibilities and time commitment required as a result of regulation. Compensation committees follow, due largely to increased workloads and a more intense scrutiny of their decisions by all stakeholders.
In yesterday’s WSJ, Roger Ferguson, President and CEO of TIAA-CREF, contributed an op-ed, repeated below:
In his speech last Thursday at New York City’s Cooper Union, just a few blocks from Wall Street, President Obama called for reforms to provide shareholders a stronger say in the governance of companies in which they invest.
Institutional investors should support the president’s call enthusiastically. As stewards for the savings of millions of individual investors who have little ability to influence corporate practices on their own, these institutions have every incentive to throw their weight around, especially since they bear the ultimate cost when companies perform poorly or fail.
An example: Based on discussion with TIAA-CREF and other investors, Amgen, the international biotechnology company, provided shareholders with the ability to comment on its compensation program directly to the compensation committee of Amgen’s board. When investors and companies collaborate cooperatively, we can achieve outcomes that further the long-term interests of all shareholders.
Unfortunately, many institutional investors shirk their roles. There are many reasons. Some institutional investors are reluctant to spend resources on improving corporate governance. Others face conflicts of interest, particularly some mutual fund companies–for example, firms that manage 401(k) plans for large corporations could be called upon to vote against company management, the very client responsible for lucrative 401(k) plan fees.
Finally, some investors believe that the only way to hold companies accountable is “the Wall Street walk”–if you don’t like the company, sell the stock. It’s an elegant solution but one that doesn’t always work. Portfolios that aim to replicate the performance of a benchmark index can’t sell the shares of all underperforming companies. Besides, as disclosures about Lehman Brothers’ accounting show, it may be too late to advantageously sell once problems related to poor governance become apparent. Better to engage management on governance and strategy issues before problems arise and shareholder value plummets.
Institutional investors have a lot of clout if they choose to act. Pension funds, investment and insurance companies are the largest group of investors in U.S. companies, holding more than 40% of the outstanding equity of publicly traded firms. These institutions can and should do more to protect investors’ long-term interests. Specifically, they can:
• Talk with boards and management about the company’s strategy and risk management. When dialogue fails, investors need to have available the appropriate tools to bring companies to the table, including the right to nominate and remove board members.
– Exercise voting rights on matters such as director elections, executive compensation and other governance matters.
– Ensure that compensation policies fit the unique situation of each company, integrate with business strategy, and align managers’ incentives with shareholders’ long-term interests.
– Actively defend the integrity of accounting standards, because the quality of reported information is critical to investors’ ability to judge risk and allocate capital appropriately.
Institutional investors also need to examine their own practices and hold themselves to high standards of governance. For example, mutual fund companies should have more independent boards of directors, who can put shareholder interests ahead of those of the investment adviser.
Greater shareholder engagement may not have averted the financial crisis. But it can help to ensure efficient allocation of capital, connect company owners and managers in an ongoing dialogue about their common purpose, and reduce the risk of future failures.
Last week, the Council of Institutional Investors published this checklist of the “Top 10 Red Flags Investors Should Consider When Casting Say-on-Pay Votes.”
Here is something I recently blogged on Harvard’s “Corporate Governance Blog”: Peter Drucker, the revered management guru, deplored excessive CEO pay. He argued that CEOs should not be paid more than 20 to 25 times the average salary of company employees. While his approach is schematic, Drucker’s reasons for opposing high executive compensation resonate today even more than during his lifetime. Essentially, Drucker believed that the leadership, motivation and teamwork needed for a successful business are undermined when the CEO is overpaid. He maintained that business leaders should set an example of responsibility, not privilege. He defined the CEO’s role in terms of stewardship, not self-interest.
The financial crisis certainly validated Drucker’s concerns. A Who’s-Who of respected global business leaders have recently gone on record advocating changes in executive compensation. The list includes Paul Volcker, Bill Gates, George Soros, Warren Buffett, Jeff Immelt, Mervyn King — even Alan Greenspan.
Conspicuously absent from the list have been the leaders of Wall Street, and herein lies an important clue to what went wrong, what should be done and why the task is so difficult.
A case can be made for tracing the roots of both CEO pay abuses and the broader financial crisis all the way back to 1976 and the decision to end fixed commissions on Wall Street. That change triggered a chain of events that altered relations between Wall Street and corporate America, ultimately damaging both.
In a nutshell: During the 1970s, ’80s and ’90s investment banking devolved from a relationship business into one driven by transaction fees. Mutual trust between companies and bankers gave way to arm’s-length dealings. Hostile takeovers proliferated. Shareholder demographics changed. Relations between companies and activist institutions became increasingly adversarial. Independent sell-side analysts were displaced by captive research often in service of deals and underwriting. A further cascade of negative developments followed repeal of the Glass-Steagall Act in 1999: deregulation, construction of financial oligarchies, IPOs of Wall Street firms and stock exchanges, conflicted credit rating agencies, opaque derivatives trading, distorted accounting – all contributed to the now-familiar story of over-the-top executive pay, market volatility, speculative bubbles, fraud, Ponzi schemes, the debt crisis and financial system collapse.
One of the least-noted effects of these systemic changes was to unleash Wall Street’s specialized money culture and pay practices, which ultimately migrated to corporate America, infecting businesses via their boardrooms and ratcheting up CEO pay. The Enron Corp scandal showed us where the infusion of Wall Street practices into corporate America can ultimately lead. With its board asleep to the dangers, Enron decided to become a trading company and make money the same way Wall Street does. In so doing, it earned fortunes for its top executives while defrauding its employees, customers and investors.
The lesson: What makes sense for Wall Street can be problematic for corporate America. The converse is also true: Governance and pay standards appropriate for public companies don’t suit Wall Street’s high-risk, competitive environment. Recent post-TARP concessions limiting top investment bankers’ salaries and bonuses may represent a step toward best practice from a corporate governance perspective, but surely they are only temporary. Before long, competitive forces will compel investment banks to return to incentives and pay levels that match private equity firms, hedge funds and other private entities.
How can we bring rationality back to executive compensation at America’s public companies (and, for that matter, to Wall Street)? The answer ultimately depends on our ability to tackle the bigger problem: How can we restructure the U.S. financial system to disentangle Wall Street, corporate America and the federal government?
As Congress continues to grapple with these questions, here are five steps that should be considered:
1. Wall Street firms should voluntarily segregate speculation and proprietary trading and convert these activities back into private ownership structures, thereby reducing the risk exposure of long-term investors and keeping investment bankers’ compensation out of the public record.
2. Too-big-to-fail financial institutions should be restructured or broken up to reduce both systemic risk and moral hazard.
3. Congress should enact new legislation, building on the principles of Glass-Steagall, to segregate commercial and investment banking and to clarify fiduciary standards governing investment of long-term assets.
4. Regulatory and accounting reforms should compel both corporations and financial intermediaries to increase transparency.
5. Corporate boards should strengthen oversight of risk management and executive compensation and be fully accountable to shareholders.
These reforms would help reign in corporate pay, take some of the pressure off Wall Street and stabilize our financial system.
Even if these steps are taken, the U.S. must also face up to its underlying cultural and governance issues – the entitlement and celebrity status of CEOs, a tradition of boardroom acquiescence, flawed governance of institutional investors, truculence between companies and shareholders, pervasive short-term focus in investment and business management.
The solution to these long-term problems is not just a matter of legislation or public policy. Corporate CEOs and boards of directors will have to take a leadership role. As Peter Drucker might say, corporate America needs fewer overpaid managers and more responsible stewards.
Recently, the AFL-CIO launched “PayWatch 2010” and announced it is focusing on the six largest banks this year – Bank of America, Citigroup, Wells Fargo, Morgan Stanley, JPMorgan Chase and Goldman Sachs – when the companies hold advisory votes on executive compensation later this month and in May. They also are focusing on the bank’s lobbying on financial reform.
As part of this focus, the AFL-CIO plans to stage protests at the banks’ annual meetings and may oppose compensation committee members. The AFL-CIO also is planning a rally next Thursday (4/29) on Wall Street, with hope for more than 10,000 demonstrators.
Here’s a silly AARP video on big banks and financial reform that might tickle you entitled “A Financial Protection Sing-A-Long.”
Given the publicity in the area of executive compensation these days, it’s not surprising there are more academic studies than ever before analyzing cause and effect, etc. Here are two interesting ones from Professors Core and Guay that have come out recently:
As noted in the excerpt below of this article from Manifest (a European proxy advisor service), Australia may take the concept of say-on-pay further than proposed here in the US (here is the Australian’s full response on this topic):
Australian Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen has delighted Australian shareholders with plans to introduce extensive executive remuneration reforms designed to force boards to be more accountable and give shareholders more power.
In a ringing endorsement of the Productivity Commission’s review of executive pay which was published in January this year, the Rudd administration has announced that it will introduce legislation to implement many of the PC’s 17 recommendations, including the “two strikes” proposal, which will strengthen the non-binding vote on remuneration and set out consequences where companies do not adequately respond to shareholder concerns on remuneration issues.
As currently proposed, the two strikes and re-election resolution would work as follows:
– 25 per cent ‘no’ vote on remuneration report triggers reporting obligation on how concerns addressed; and
– Subsequent ‘no’ vote of 25 per cent activates a resolution for elected directors to submit for re-election within 90 days.
It is not clear whether it would be the entire board to be submitted for re-election, just the remuneration committee or the chairman, however there will be a further opportunity for input as there during the consultation process ahead of the final drafting of amendments to the Corporations Act 2001.
An unexpected but welcome addition to the proposals is a “claw-back” provision which would require a director or executive to repay to the company any bonuses calculated on the basis of financial information that subsequently turned out to be materially misstated. Bowen asserted that the introduction of a claw-back provision “warrants further analysis, as it would help strengthen the ability of shareholders to recover overpaid bonuses that have occurred as a result of materially misstated financial statements.”
Issuers have expressed their concerns in the Australian media calling the proposals “heavy handed”. Speaking to ABC News, John Colvin from the Institute of Company Directors said: “We’re a bit perplexed and quite frankly bemused at why we would have such a heavy-handed, red-taped, legislative approach to this area,”
“Whilst there are examples of, and we acknowledge those, of pay outcomes which haven’t been in line with either company expectations… on the whole Australian remuneration of corporate governance has been very good.”
The Australian Shareholders Association (ASA) said that the response was “much stronger than they had anticipated.”
“We think that it’s a very well-measured, very well-considered report,” said an ASA representative “from the ASA’s point of view it certainly went a little bit further than we had asked, but we’re very positive about the recommendations and we’re very hopeful that they’ll have the effect of making boards much more accountable on this issue which is very important to shareholders.”
Notwithstanding predictions of an exodus of executives from companies under U.S. government oversight, 84 percent of the executives whose compensation was cut last year by the federal “pay czar” in October were still at their firms early this year, according to Kenneth Feinberg, the Treasury Department’s special master for executive compensation.
This finding was among those in a March 23 report on Feinberg’s 2010 pay rulings for 119 senior executives at five companies–American International Group, General Motors, GMAC, Chrysler, and Chrysler Financial–that received “exceptional” assistance from the federal government’s Troubled Asset Relief Program (TARP). News reports suggest that a weak economy and loyalty to companies were factors that may have reduced executive turnover.
Feinberg originally had oversight over the 25 highest-paid executives at seven firms, which then included Bank of America and Citigroup. In late October, he reduced their total compensation by about 50 percent on average from 2008 levels. Bank of America and Citigroup since have repaid their TARP assistance and no longer are subject to Feinberg’s authority.
Under Feinberg’s latest round of pay rulings, the cash pay for the covered executives declined by 33 percent on average from 2009 levels, 82 percent of them received cash salaries of $500,000 or less. Feinberg said he also reduced total compensation at AIG, GMAC, and Chrysler Financial by about 15 percent compared with the pay these executives received in 2009; GM and Chrysler were excluded from this total due to their bankruptcy restructurings in 2009. At AIG, Feinberg said he succeeded in making sure that the executives at the company’s Financial Products unit repaid the full $45 million they pledged to give back from previous bonuses.
Feinberg said his rulings also reaffirm the principles announced last year to bring executive pay into line with “long-term value creation and financial stability,” including: a majority of compensation must be paid in stock that is held for the long term; and incentives may be paid only if objective performance results are achieved, and must be subject to a clawback if results prove illusory. Feinberg also has extended his $25,000 cap on executive perks and continued to freeze supplemental retirement plans.
In addition, Feinberg issued a letter to all 419 companies that received TARP assistance prior to Feb. 17, 2009, requesting that they respond within 30 days and provide information on compensation paid to their “top 25” highest-paid executives prior to that date. As authorized by the American Reinvestment and Recovery Act of 2009, Feinberg said he will review those payments to determine “whether any payment was contrary to the public interest” and whether “to negotiate reimbursements to the federal government.”
Meanwhile, as I blogged recently, the AFL-CIO is leading a charge to push shareholders to vote against pay packages at financial institutions this proxy season, leveraging the say-on-pay items on their annual meeting agendas.
Even though executive compensation has been very much in the news, it seems like the focus on perks has subsided – or at least, it is not among the top issues in the pay area compared to past years. But recently, there has been a spate of perks news, including this SEC action charging three former senior executives and a former director of infoUSA and infoGROUP for their roles in an alleged scheme in which the CEO funneled illegal compensation to himself in the form of perks worth millions of dollars.
To me, the most noteworthy aspect of the SEC’s action is that it is going after the audit committee chair and appears to have applied a pretty low standard in terms of the audit chair’s responsibility for what went wrong (here are some thoughts by Keith Higgins on the topic; and Kevin LaCroix has commentary too). Note that the last time the SEC went after an audit committee chair was the Chancellor Corp. case back in 2003.
And Paul Hodgson recently wrote this – in TheCorporateLibrary Blog – in a piece entitled “Country Club Membership Perk Still Going Strong”:
But, although still provided to only a small minority of CEOs, the payment of membership fees for country clubs, city clubs, sports clubs et al still appears to be holding up with just under 400 CEOs receiving the perk in both of the most recent 12-month periods.
There’s been some shift, with some companies terminating the benefit, but on the other hand many companies have introduced it. Some of this is due to the disclosure threshold. Initiation fees of up to $100,000 in one year followed by annual membership of less than $10,000 (the SEC disclosure threshold) the next might cause some data just to disappear.