Tag Archives | CEOs

Gordon Gekko and Governing Small-Caps: Greed Works

Greed Works

Greed Works

    Few who have seen it can forget the iconic scene from the movie Wall Street when Michael Douglas’s character Gordon Gekko stands up, microphone in hand, at Teldar Paper’s shareholder meeting and says: “The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works.” Cinematic legend. What if it’s also the key to better small-cap corporate governance? Continue Reading →

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    Small Gains by Women in California Companies

    Women in California Companies: 1 woman for every 7 men in top leadership at California's largest firmsWomen in California companies continue to make slight progress. More of California’s largest 400 public companies public companies than ever have women chief executive officers (CEOs), and fewer have no women in their C-suites and boardrooms. However, the annual University of California, Davis, study shows women still hold just one in eight of the senior executive and director positions in corporate California.

    Overall, women hold 12.3% of the highest-paid executive positions and board seats in the state’s 400 largest public companies — a scant 0.75% point increase over last year, according to the UC Davis Study of California Women Business Leaders.

    At that rate it will take fifty years for women in California companies to reach parity. I’ll be long dead. In the meantime, I’ll continue investing a disproportionate of my portfolio in companies with women at the top, betting such companies have better corporate governance and will outperform my other investments. Continue Reading →

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    The Power of Shame Applied to CEOs and Corporations

    FidoRobert A.G. Monks, concerned with shameful corporate behavior today blogged When a Child Rules the Parent: The Problem of Corporate Domicile in a Global World.

    Corporations are creatures of the state but the social contracts that made them attractive in serving human interests are breaking down…

    Either we need to reign corporate operations in within a state and country or laws must transcend those borders to oversee a corporations across the globe. Which will it be?

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    Wayback: Five, Ten and Fifteen Years Ago in Corporate Governance

    Mr. Peabodys WayBackMachine

    Mr. Peabody and Sherman prepare to go back in time to visit corpgov.net 5, 10 and 15 years ago.

    Five years ago in Corporate Governance

    In the year-end reflections two contributing factors deserve more attention. First, “prophetic warnings” from religious groups on the dangers of subprime loans via shareowner resolutions. Second, a call from Sanford Lewis for boards to revoke implicit policies of “don’t ask, don’t tell” with regard to liability issues. (Two Overlooked Lessons From the Financial Crisis)

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    California Women Business Leaders: Discrimination Continues

    stop discrimination nowUCD Study California Women Business LeadersThe rewards of corporate leadership accrue faster for men. Not only do women hold just one in nine of the executive and board positions in California’s top 400 public companies, an annual University of California, Davis, study shows that that the women in top executive roles are not being promoted to the highest levels, and earn less than their male counterparts.

    Overall, women hold 11.5 percent of the highest-paid executive positions and board seats in the state’s 400 largest public companies — a 0.6 percent increase over last year, according to the UC Davis Study of California Women Business Leaders. The UC Davis Graduate School of Management has found an essentially flat trend line during the decade it has tracked the representation of women in these key decision-making roles. Together, the 400 companies represent more than $4.5 trillion in stock market value, up more than 30 percent over last year. Continue Reading →

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    Should CEO Des Hague be Fired for Kicking Puppy?

    Des Hague and puppy about to be kicked

    Des Hague and puppy Sade about to be kicked

    Sports catering giant Centerplate fined and censured CEO Des Hague last week after an internal review of surveillance video showing him kicking and yanking his friend’s puppy by its leash in a Vancouver elevator.(ESPN) Should the board fire him? Maybe we need more videos of CEOs and board discussing global climate change, slave labor and disdain for their employees and customers. Or is it only kicking puppies that brings outrage? Continue Reading →

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    Directors&Boards: Digital Advisors & Knowledge Capture

    Directors&BoardsDirectors&Boards is one of our “stakeholders.” No, that doesn’t mean they own part of us or that we own part of them and it doesn’t mean we always agree with each other. But they are included in our primary reference groups, those who contribute regularly to our “vocabulary of meaning.” The current edition begins to address two topics that need more attention. Continue Reading →

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    Stanford Academics Focus on Wrong Problems at ISS

    StanfordRockIn a recent Stanford “Closer Look” publication (How ISS Dictates Equity Plan Design), Ian D. Gow (Harvard but graduated from Stanford), David F. Larcker, Allan l. Mccall, and Brian Tayan argue ISS dictates pay equity plans. ‘Nonsense,’ was my first reaction. ISS policies generally reflect the will of its customers. The authors have a point but they miss the main problem. Their arguments begin in familiar territory. Continue Reading →

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    SVNACD Event – Corporate Boards: Strategy, Not Just Operations Review

    Bob Frisch photoBob Frisch is the managing partner of Strategic Offsites Group. He has more than 29 years of experience working with executive teams and boards worldwide on their most critical strategic issues. He has published three articles on teams and decision making in the Harvard Business Review: “Who Really Makes the Big Decisions in Your Company” (12/11), “When Teams Can’t Decide” (11/08) and “Off-Sites That Work” (6/06). Bob’s work has been profiled in publications from Fortune to CFO to the Johannesburg Business Report. He is a regular contributor to Bloomberg Business Week and The Wall Street Journal and his blog appears at HBR.org. Continue Reading →

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    Boys' Club Still in Charge of California Businesses

    Photo of Amanda Kimball

    Amanda Kimball

    The 400 largest companies headquartered in California, representing almost $3 trillion in shareholder value, still resemble a “boys’ club” with women filling fewer than 10 percent of top executive jobs, a University of California, Davis, study has found. Incremental gains have been pitiful, in my opinion.

    The Graduate School of Management’s eighth annual UC Davis Study of California Women Business Leaders — a yearly benchmark for the Golden State’s lack of progress in promoting women business leaders — paints a dismal picture for women in leadership during fiscal year 2011-2012. Some of the best known among these top companies, or the California 400, have no women leaders. Continue Reading →

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    Corporate Governance Bites

    Continuing challenges to exclusive forum bylaw provisions – Lexology

    An increasingly popular trend in recent years has been the adoption by Delaware public companies of an exclusive forum provision in their bylaws. An exclusive forum provision generally provides for the Delaware Court of Chancery to be the exclusive forum for certain disputes (including derivative actions, breach of fiduciary duty claims, claims arising pursuant
    to the company’s charter or bylaws and other shareholder litigation) against the company — and prohibiting such suits in other jurisdictions. Expected benefits cited by companies of adopting exclusive forum bylaw provisions include decreased litigation costs, avoiding parallel litigation in multiple jurisdictions and the predictability of Delaware courts. Continue Reading →

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    New CEOs: The Diversification of the Corner Office

    Sociologists Richard Zweigenhaft and G. William Domhoff began studying ascendance to the top corporate office 20 years ago and, while the population of CEOs is far from diverse, they report that they have been surprised to see as many women and minorities as they have.  Today there are 80 white women, African Americans, Latinos, and Asian Americans at the head of Fortune 500companies. Continue Reading →

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    Emotional Intelligence

    We need to do a better job of evaluating the emotional competency or our leaders. “A fine balance has to be maintained between technical and emotional competency of the individual and organization objectives and culture, wrote Sonia Jaspal back in 11/16/2011. Here is an excerpt from her argument, which deserves wider circulation.  Continue Reading →

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    When the CEO Really Must Go

    It is often said that “the most important function of a board is to hire and fire the CEO.” Yet the experience of many is that boards do a pretty good job on the hiring front and a not-so-good job on the “exit.” An exciting SVNACD session in Palo Alto focused on the pitfalls of CEO changes and how to avoid them. The panel couldn’t have been more timely. (Bartz fired at Yahoo…may have violated disparagement clause: Kathleen Peratis, Outten & Golden)

    This program, like all SVNACD programs, was subject to the Chatham House Rule: “Participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.” In this case, the panelists had already been identified publicly.

    As with many SVNACD events, the audience was frequently as informative as panelists. My report will give you just a flavor of what went on. To get the whole meal, you’ll have to Continue Reading →

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    CEOs: Not the Best Directors

    The new 2011 Corporate Board of Directors Survey from Stanford University’s Rock Center for Corporate Governance and Heidrick & Struggles has uncovered surprises about who makes the best board directors: it’s not necessarily the current CEOs that most companies seek out.

    “The popular consensus is that active CEOs make the best board members because of their current strategic and leadership experience,” says David Larcker, professor at the Stanford Graduate School of Business. However, when asked about Continue Reading →

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    When the CEO Really Must Go

    It is often said that “the most important function of a board is to hire and fire the CEO.” Yet the experience of many is that boards do a pretty good job on the hiring front and a not-so-good job on the “exit.”

    The Silicon Valley Chapter of the National Association of Corporate Directors will hold a session on September 15, 2011 focusing on the pitfalls of CEO changes and how to avoid them. There will be a candid discussion between an experienced CEO and an experienced chairman of a board, facilitated and led by Rich Moran, a member of our board of directors.

    Location: Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304. This program, like all SVNACD programs, is subject to the Chatham House RuleRegister Now!

    7:30-8:00 a.m. Continental Breakfast; 8:00-9:30 a.m. Program

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    Power Struggles Over Pay

    Gary Larkin’s recent post, 2011 CEO Succession Report: Dismissals Up, Outside Hires on the Rise, informs Conference Board readers that Institutional Shareholder Services has launched an executive compensation database service for its client subscribers. Say on Pay rules were the driving force behind the new service.

    The database includes historical CEO and NEO (named executive officer) compensation data for more than 4,000 U.S. companies, together with Say on Pay data Continue Reading →

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    Video: Abe Friedman on CEO Pay

    CEOs at the biggest U.S. companies saw their pay jump sharply in 2010, as boards rewarded them for strong profit and share-price growth with bigger bonuses and stock grants.

    The median value of salaries, bonuses and long-term incentive awards for CEOs of the 350 biggest companies (that filed proxies between May 1, 2010, and April 30, 2011) surged 11% to $9.3 million, according to a study of proxy statements conducted for The Wall Street Journal by management consultancy Hay Group.

    CEO pay was measured as total direct compensation — salary, bonuses and the granted value Continue Reading →

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    CorpGov and Exec Pay

    GovernanceMetrics International recently sampled large corporations and found that CEO pay jumped 27% in 2010 to a median of $9 million.

    According to William Lazonick, professor at the University of Massachusetts, in 2010 the S&P 500 jumped 12.8%, capping a two-year gain of 39.3%. Companies in the S&P 500 boosted profits by 47% in 2010, not from boosting sales of goods and services, which rose only 7%, but by cost-cutting and layoffs, says Lazonick. (CEO pay soars while workers’ pay stalls, USA Today 4/1/2011) ) Continue Reading →

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    Excess-Pay: Beyond the 2% Solution

    Excess executive pay can impose substantial costs on companies and shareowners even if manipulation or misconduct isn’t involved. Executive pay is the biggest lightening rod in corporate governance, prompting Dodd-Frank to include clawback requirements, mandatory say on pay, and say when on pay votes, as well as the coming ratio between executive pay and the pay of a company’s median employee.

    Jesse Fried and Nitzan Shilon’ s important paper, Excess-Pay Clawbacks, highlights the problem of “excess pay” to executives arising from errors in earnings and compensation-related metrics. Although addressed in part by Dodd-Frank, significant additional measures are still needed.

    The paper examines excess-pay clawback policies in S&P 500 firms prior to Dodd-Frank.

    We find that nearly 50% of S&P 500 firms had no excess clawback policy whatsoever. Of those firms with clear policies, 81% did not require directors to recoup excess pay but rather gave directors discretion to let executives keep excess pay. Of the remaining Continue Reading →

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    CEOs Should Get Out Vote Among Employees Says Daly

    In remarks before the National Press Club, the CEO of Broadridge, the nation’s largest shareholder communications company, called on all CEOs to encourage individual shareholders, including employee shareholders, to vote their proxies.

    In 2010, just one in 20 individual retail investors voiced their opinions about the  companies they invested in by exercising their fundamental shareholder right. That compares to recent historical levels four to five times as high. Public companies need to understand the seriousness of this issue and act to reverse this troubling decline to get each of their individual investors — and all individual investors generally — engaged with their companies.

    Richard J. Daly went on to explain that as an initial step in an overall strategy to increase individual shareholder voting, he is calling on CEOs of American businesses to

    join with us in launching a nationwide effort to encourage their employees  — numbering in the tens of millions  — to exercise a fundamental shareholder right  — and need  — to vote their proxy ballots, whether  it be proxies relating to their employer or proxies relating to other companies in which they invest

    As part of the effort, he is contacting the chief executives of America’s top 1,000 public companies to encourage them to motivate their employee shareholders to vote their shares.  Broadridge will inform shareholders —- within the constraints of regulatory boundaries —- that they have the ability to take action online, eliminate the paper, have all information stored in any format they want, have access to it anywhere they want and vote at any time they want, even on such new devices as Android™ phones and the iPad®.

    A relatively small increase in voting participation by employees could meaningfully increase individual investor voting participation from 5% per year to 20% or more per year. Companies that can distinguish their investors’ opinions from others’ will more easily have the strength and confidence to stay on course and create value. There is no greater show of support than the ballot, or in this case, the proxy.

    While I certainly agree with Daly that steps need to be taken to ensure more retail shareowners vote, I didn’t like the thrust of his remarks, which appeared to assume that more retail votes would mean more votes for management… or am I reading too much in when he says:

    Better to hear from actual owners — whose interests are likely aligned with the company — than from outsiders whose agendas may be in conflict with shareholders’ long-term interests.

    Additionally, it would have been nice if he would have emphasized the usefulness of sites that help inform shareowners on the issues.

    If it is a public relations move that Daly is after, he might recommend that companies take a page from Prudential Financial. They’re rewarding their voting shareowners with totebags or by planting a tree. Last year, the company got an additional 68,000 shareowners to vote, mailed 120,000 bags and planted more than 112,000 trees.

    This year, Prudential added information in its proxy materials on sustainability, corporate citizenship and shareowner engagement. Shareowners who cast their proxies online can view the directors’ bios and the supporting statements for shareowner proposals. More importantly, Prudential’s board supported a shareowner proposal from John Chevedden to eliminate the company’s supermajority voting provision.

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    Video Friday: Financial Crisis & CEO Input Into Board Selection

    In response to growing concerns on the spread of the financial crisis, the Yale School of Management, in partnership with the Wall Street Journal and CNBC, organized a roundtable discussion in New York on September 23, 2010 that brought together business leaders and scholars from Yale, Wharton, NYU, and the Columbia and Harvard business schools to discuss the unfolding situation in the markets and the economy more broadly, as well as the proposed federal bailout plan. Click Here. Hat tip to Simoleon Sense; I didn’t realize it had been posted.

    For a completely different take on the financial crisis, Arthur Benjamin asks, what if we put probability and statistics at the top of the pyramid instead of calculus?

    On This Week in the Boardroom (TWIB), co-hosts TK Kerstetter, President, Corporate Board Member, and Scott Cutler, Executive Vice President, NYSE Euronext review what nominating/governance committees should know about including the CEO in the board recruitment process. Additionally, hear why Hewlett Packard’s new CEO and nominating committee are under fire by proxy advisory firms. For our take on these issues, see The Appearance of Legitimacy: Board Elections and HP Nomination Committee Under Fire.

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    Effective Chair-CEO Relations

    The number of U.S. companies that separate the chairman and CEO roles is at a historic high: 40% of the S&P 500 now separate the roles, up from 23% a decade ago, according to Spencer Stuart. Of the 40%, 19% may be classified as independent Chairs, up from 9% five years ago. A new report published by the Millstein Center for Corporate Governance and Performance at the Yale School of Management is among the first to outline how chairs and CEOs work effectively together in these interdependent roles, providing useful guidance as the chair-CEO leadership structure becomes more prevalent.

    The Effective Chair-CEO Relationship: Insight from the Boardroom, authored by management expert Elise Walton, is based on interviews with 35 chairs, CEOs, and stakeholders. Participants identified key factors that contribute to a successful working relationship between the chair and CEO: good chemistry, a clear framework for the relationship, and having effective people and practices in place.

    “Separate board leadership is still emerging in North America,” said Walton. “There is no Continue Reading →

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    HP Nomination Committee Under Fire

    I recently got this from an anonymous member (here are related thoughts from Cydney Posner and Marty Lipton):

    You may have seen the stories regarding ISS’ recommendation that shareholders withhold against the entire Hewlett-Packard nominating committee for the way new directors were selected. I haven’t seen the ISS report, but the news stories (eg. WSJ article) probably describe it pretty well.

    At issue seems to be the fact that five new directors of H-P were identified by an ad hoc committee, which according to H-P’s proxy statement “consisted of the CEO and three non-employee directors, which was formed in November 2010 to assist in identification of new director candidates and to facilitate the process of evaluating those candidates as potential directors.”

    ISS and Glass Lewis criticize the addition of the CEO to this committee, since only the independent directors of the Nominating and Governance Committee are supposed to responsible for director nominations. While CEOs play a role in nominations, it does seem unusual to formally include the CEO on the search committee. It likely also didn’t help that, as according to this Bloomberg article, many of the new directors had connections to the CEO. None of those relationships are disclosed in the proxy, as much of it relates to the CEO’s former company.

    In additional soliciting materials filed on Friday, H-P responds to ISS’s recommendation. (How You Find New Directors: “True Independence” Under the Microscope – TheCorporateCounsel.net Blog, 3/14/2011)

    Go to theCorporateCounsel.net/Blog article to read the links. I highly recommend the one by Cydney Posner. Personally, I come down on the side of ISS on this one, although their action might have been better with some warning. At least now other companies have it. Don’t involve your CEO in a search committee pre-screening candidates. And some people wonder why shareowners favor split chair/CEO positions and proxy access.

    Taking a quick glance at CII corporate governance policies, the action at H-P appears to be at least an attempt to circumvent:

    2.5   All-independent Board Committees:  Companies should have audit, nominating and compensation committees, and all members of these committees should be independent.  The board (not the CEO) should appoint the committee chairs and members…

    7.2   Basic Definition of an Independent Director: An independent director is someone whose only nontrivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship.  Stated most simply, an independent director is a person whose directorship constitutes his or her only connection to the corporation.

    Much more from J. Robert Brown Jr. on this subject at theRacetotheBottom.org under “The Myth of an Independent System for Nominating Directors” in several posts.

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    It Takes a Daughter

    Male CEOs in Denmark who have a daughter are more apt to close the gender pay gap at their companies, reports the Wall Street Journal. Overall in Denmark, there is a gender wage gap of 21.5 percent. But the birth of a daughter to a male CEO caused that gap to close by 0.5 percentage points. Moreover, the birth of a first daughter caused the gap to close by 0.8 percentage points, and if that daughter was also the first child, the gap closed by 2.8 percentage points. Women with college degrees benefited from the births more than women with high-school or primary educations.

    via Male CEOs with daughters treat women better | Directorship | Boardroom Intelligence, 3/4/2011.

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    Addressing CEO Pay

    Regarding CEO pay, Nell Minow recently wrote, “there is a little flicker of light at the end of the long, dark tunnel of outrageous pay.” Her signs of hope:

    • Required advisory “say on pay” (SOP) vote. Last year after a “no” vote,  Occidental Petroleum’s board reduced the pay package for CEO Ray Irani and announced his retirement. Shareowners have voted down pay plans at several companies already. Additionally, “Some companies are adjusting their pay plans in anticipation of a new level of scrutiny by shareholders, tightening pay-performance links and getting rid of especially unpopular compensation components like “gross-ups” (paying the executive’s taxes).”
    • Shareowners at four of seven companies proposing a triennial say when on pay (SWOP) vote instead voted for an annual vote.
    • The UK may soon require new additional disclosures.
    • “Groups like Public Citizen are working to remove further legislative and regulatory obstacles to shareholder oversight on pay and disseminating information on the bonuses of bailout-company executives.”
    • The FDIC is moving forward with rules to requiring pay-performance links in bank executive compensation as part of insurance risk assessment.

    “These are all welcome signs that compensation is finally being seen as an essential element of securities analysis and risk management, and that’s what markets are all about.” (The Days of Outrageous CEO Pay May Be Ending | BNET, 2/14/2011).

    High CEO pay is symptomatic of a host of issues. An important one for me is income inequality. It seems to me that a disappearing middle class is not good for America. This seems to be a concern of many, but we still seem to be heading in the wrong direction. For some interesting research on American opinion in this area, see The Return of Dan Ariely: The Survey Results Are In (ChrisMartenson.com, 2/7/2011). His conclusion:

    Taken as a whole, the results suggest to us that there is much more agreement than disagreement about wealth inequality. Across differences in wealth, income, education, political affiliation and fiscal conservatism, the vast majority of people (89%) preferred distributions of wealth significantly more equal than the current wealth spread in the United States. In fact, only 12 people out of 849 favored the US distribution. The media portrays huge policy divisions about redistribution and inequality – no doubt differences in ideology exist, but we think there may be more of a consensus on what’s fair than people realize.

    From Eagle Rock Proxy Advisors, most companies are generally recommending that shareholders vote for say-on-pay votes once every three years. Here is a snapshot of overall board recommendations/ intentions for recommendation at the beginning of the season:

    Annual Biennial Triennial None
    All Companies 32% 8% 52.7% 7.3%
    S&P 500 21.7% 8.7% 65.2% 4.3%

    As we previously reported, shareowners are pushing for the annual option, so I expect many more rejections of triennial proposals. See “Say on Pay” to be Annual.  Timothy Smith, Senior Vice President, Director of ESG Shareower Engagement at Walden Asset Management recently sent out an e-mail noting he is among many strongly opposed to the triennial proposals by management and is “frustrated that we even had to have a frequency vote (thanks to Idaho Senator Crapo’s midnight amendment).” But the surge of votes for annual say when on pay SWOP is “helping investors pay more attention to the value and use of SOP votes. In the end this frequency vote may help solidify the importance of SOP to investors vindicating the initiative AFSCME, Walden and others started 6 years ago.”

    Yes, with SOP and SWOP votes this year and companies reporting the ratio of executive pay to the average of all employees for the first time, the topic of CEO pay may come into focus more this year than in the past and shareowners will now at least have the power to voice their opinion.

    However, I see little evidence that any of the current measures address the “Lake Woebegone” effect documented by Rachel M. Hayes and Scott Schaefer. According to those researchers, “no firm wants to admit to having a CEO who is below average, and so no firm allows its CEO’s pay package to lag market expectations.” (CEO Pay and the Lake Wobegon Effect, December 11, 2008, Journal of Financial Economics (JFE) Their analysis suggests SOP votes might be counterproductive. Before SOP was required by Dodd-Frank, many voices warned it would simply provide boards and managements with cover for a continued upward spiral.  Hayes and Schaefer offer up a “potential solution to the problem of shareholder myopia.”  Delegate pay decisions to directors and motivate them through contracts “to take a longer-term view.” But isn’t that what we’ve been trying all along? Clearly, something more is needed.

    India’s Sonia Jaspal does a good job of citing some of the more more relevant papers and issues that have received too little attention to date. (The Negative Impact of CEO Pay & Power on Corporate Culture and Governance, 2/15/2011) Jaspal’s concern was apparently set off by a recent study conducted by Economic Times of India, which showed that in 2009-2010 CEOs of top companies earned 68 times the average pay of employees, up from 59 times their prior year. To Americans facing a pay disparity of 264 (with a high point of 558 in the year 2000), the differences in India may seem paltry. (Mind the Compensation Gap, Portfolio.com, 1/26/2011)

    Many of us “feel” an injustice when CEOs earn so much more than average workers, but Jaspal points to academic studies that show the potential impacts are more harmful to society than simply hurt feelings.

    When Executives Rake in Millions: Meanness in Organizations.  “Higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers.” Some powerful executives perceive those with lesser power as sub-human. They demonstrate reduced empathy, being inclined to objectify and dehumanize others through behaviors such as sexual harassment and an increase likelihood of  unethical and corrupt behavior.

    Jaspal also points to another real impact of this dehumanization, “the fact that CEOs who fired the maximum number of employees during recession in US, received the biggest pay packets.”  They apparently felt little remorse in benefitting from the tragedy they impose on others. “The social and psychological consequences of income disparity are borne by the society” and the consequences may be greater in the United States than it is in India because of the much larger average disparities.

    An article published by The Economist titled The psychology of power: Absolutely looks at experiments that appear to confirm Lord Acton’s dictum that “Power tends to corrupt, and absolute power corrupts absolutely.” According to the studies, “The powerful do indeed behave hypocritically, condemning the transgressions of others more than they condemn their own… It is not just that they abuse the system; they also seem to feel entitled to abuse it.” Researchers conclude that “people with power that they think is justified break rules not only because they can get away with it, but also because they feel at some intuitive level that they are entitled to take what they want.”

    Of course The Economist comes to a different conclusion than many of us would: “Perhaps the lesson, then, is that corruption and hypocrisy are the price that societies pay for being led by alpha males (and, in some cases, alpha females). The alternative, though cleaner, is leadership by wimps.” I’d say the lesson, instead, highlights the need to ensure leaders remain accountable, knowing corruption and hypocrisy will not be tolerated.

    We keep Searching for a Corporate Savior in our CEOs but ending up with charismatic narcissists, with too many focused on short-term profits when we know we should be promoting CEOs from within to move from Good to Great.

    Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies by  the Committee of Sponsoring Organizations of the Treadway Commission found that CEOs were involved in 72% of the 347 alleged cases of fraudulent financial reporting listed with SEC during 1998-2007 period. The average period of fraud was 31.4 months. Why Do CFOs Become Involved in Material Accounting Manipulations? shows that 46.15% of CEOs involved in fraudulent activity benefitted financially from accounting manipulations. “CFOs are involved in material accounting manipulations because they succumb to pressure from CEOs, rather than because they seek immediate personal financial benefit from their equity incentives.” Since CEO performance and benefits are measured by financial numbers submitted to the stock market, CEOs rationalize the need to report fraudulent financial numbers to protect their own positions.

    Based on this analysis, Jaspal makes the following recommendations (I’ve taken liberty to reword some slightly.):

    • The law should place a limit on the number of times CEO pay can excede the pay of average workers. This will ensure some balance is maintained.
    • Because studies show that some powerful people tend to dehumanize their underlings and studies on emotional intelligence indicate that emotionally intelligent people are aware of their own and others emotions and drivers, we should explore methods to keep CEOs emotionally connected.
    • Since research found that women are less likely to feel a sense of entitlement or power we should appoint more women  CEOs to maintain a balance and keep senior management grounded.
    • Independent board members should be included on compensation committees. “This will ensure that a realistic view is taken of CEO and other top executives’ salary. Basing salary structures on performance rather than favorable circumstances is required.” (This is already the norm in the United States; unfortunately, it doesn’t appear to “ensure a realistic view.”
    • Employees may be empowered by forming trade unions and using whistle blowing lines inside and outside the organization. (Again, we have this in the United States and the whistle blowing tools are improved under Dodd-Frank.)
    • Last but not the least, the public should play an active role in curtailing income disparities. The issues should be brought to government and media attention. (Name and shame seems to have little impact but perhaps heightened awareness of the issues will lead to real sanctions.)

    It is a nice list. I certainly agree with the idea of keeping CEOs emotionally connected, appointing more women CEOs, and getting the government involved in reducing income gaps. However, for the most part Jaspal’s recommendations don’t provide much guidance for shareowners entering the proxy voting booth. The one exception is placing a limit on the number of times CEO pay can exceed the pay of average workers.

    Institutional investors have developed a plethora of guidelines and scorecards for voting down CEO pay. For example, section 3 of the CalPERS Global Principles of Accountable Corporate Governance, which contains too much to cover in this brief post but here are a few examples:

    • To ensure the alignment of interest with long-term shareowners, executive compensation programs are to be designed, implemented, and disclosed to shareowners by the board, through an independent compensation committee.
    • Executive contracts be fully disclosed, with adequate information to judge the “drivers” of incentive components of compensation packages.
    • A significant portion of executive compensation should be comprised of “at risk” pay linked to optimizing the company’s operating performance and profitability that results in sustainable long-term shareowner value creation.
    • Companies should recapture incentive payments that were made to executives on the basis of having met or exceeded performance targets during a period of fraudulent activity or a material negative restatement of financial results for which executives are found personally responsible.
    • Executive equity ownership should be required through the attainment and continuous ownership of a significant equity investment in the company.
    • Equity grant repricing without shareowner approval should be prohibited.
    • “Evergreen” or “Reload” provisions for grants of stocks and options should be prohibited.

    We can find many more lists, but again they don’t seen to be too helpful for the average investor who isn’t going to hire a proxy advisor or put a lot of time into analyzing the proxy. Last year, the Council of Institutional Investors issued a brief paper, Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Pay aimed at addressing this issue. “Many investors, however, lack the time and resources to do deep dives on compensation at each of the hundreds of companies in their portfolios. They need rules of thumb to identify executive pay programs that are ticking time bombs.” That statement might even ring truer for retail investors holding a dozen or fewer companies. Again, even CII’s “top 10” are too extensive to list here because many items are broken into multiple items. Here are the top 10 with much of that elaboration stripped away:

    1. Do top executives have paltry holdings in the company’s common stock and can they sell most of their company stock before they leave?
    2. Does the company lack provisions for recapturing unearned bonus and incentive payments to senior executives?
    3. Is only a small portion of the CEO’s pay performance-based or is the basis a single metric?
    4. Are executive perks excessive or unrelated to legitimate business purposes?
    5. Is there a wide pay chasm between the CEO and those just below?
    6. Stock options should be indexed to a peer group or should have an exercise price higher than the market price of common stock on the grant date.
    7. Did the CEO get a bonus even though the company’s performance was below that of peers?
    8. Does the company guarantee severance or change-in-control payments not in the best interest of shareowners?
    9. Does the disclosure fail to explain how the overall pay program ties compensation to strategic goals and the creation of long term shareowner value?
    10. Does the firm advising the compensation committee earn much more from services provided to the company’s management than from work done for the committee?

    Key to the the usefulness of CII’s advice is how easily answers can be obtained by individual retail shareowners. A second major concern is even if all this advice is followed, how will we ratchet down the Lake Woebegone effect and decrease the growing disparity between the rich and the rest of us? That seems important if we are to move from a culture of narcism, where many of the rich feel entitled to break the law and treat underlings with disrespect.

    Members of the United States Proxy Exchange will soon begin working on a paper to address the issue of CEO pay. I think it is likely to revolve around the issue of what pay packages to vote down. Most retail shareowners don’t subscribe to ISS, Glass Lewis or other services that can rapidly assess pay packages. We need simple metrics so that we can gather all the information we need to vote in just a few minutes. Three possible examples:

    • Pay that is over 100 times average pay.
    • Pay that takes more than 5% of a company’s net profit.
    • Majority of those disclosing votes in advance on ProxyDemocracy.org recommend against.

    For less than $4 a month, your voice can be heard by joining in this important effort.

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