{"id":31,"date":"2008-05-14T06:44:53","date_gmt":"2008-05-14T11:44:53","guid":{"rendered":"https:\/\/www.ontimesupplies.com\/blog\/?p=31"},"modified":"2022-08-17T16:04:16","modified_gmt":"2022-08-17T21:04:16","slug":"reining-in-the-overpaid-underperforming-ceo","status":"publish","type":"post","link":"https:\/\/www.ontimesupplies.com\/blog\/reining-in-the-overpaid-underperforming-ceo\/","title":{"rendered":"Reining In the Overpaid & Underperforming CEO"},"content":{"rendered":"

Corporate governance expert Nell Minow explains the relationship between outlandish severance packages and the risky financial instruments linked to subprime mortgages.<\/span>
\n<\/span><\/span><\/strong><\/p>\n

The boards of directors of Citigroup, Merrill Lynch, and other financial institutions may have contributed to their massive subprime mortgage\u2013related write-offs by creating compensation packages for their chief executive officers that didn\u2019t punish them for failure, says Nell Minow, editor-in-chief of The Corporate Library, an independent research firm that rates governance practices. In fact, this approach to their compensation encouraged them to take undue risks, she says.<\/p>\n

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These CEOs were guaranteed outsized exit and separation packages, regardless of how they or their firms performed. And now that many of them have been shown the door, there is little hope that shareholders or directors could \u201cclaw back\u201d any of that pay, Minow says. One important solution, she argues, is for more companies to adopt rules specifying that to be elected, directors must receive a majority of shareholder votes cast, rather than a plurality as is typically the case now (indeed, currently even if a large number of shareholders abstain, a director can be elected with just a few affirming votes). This would raise the prospect that directors could more easily be ousted by dissatisfied shareholders if they grant overly generous compensation packages. William J. Holstein, a contributor to strategy+business<\/em>, talked to Minow in late January 2008 about her attempts to refashion the relationship between boards, shareholders, and top executives.<\/p>\n

Interview Transcript\u00a0 (S+B Journal and Mr. Nell Minow)
\n………………………………………………………………………………………………………………………<\/strong><\/p>\n

S+B:<\/strong> In what ways were the boards responsible for the current debacle in the financial-services sector?<\/p>\n

MINOW:<\/strong> There were a couple of precipitating factors. One is that the boards weren\u2019t paying enough attention. They weren\u2019t asking the right questions. And the other is that they were creating executive compensation plans that had the effect of pouring gas on the fire.<\/p>\n

You can see how it worked by looking at it in hindsight. All of the CEOs who failed got paid very well. Therefore, the pay plans had very perverse incentives. Yes, the CEOs did receive incentive compensation, but incentive to do what? If the incentive was to essentially offload risks \u2014 which is what happened, because the CEOs were pushing much of the risk off to shareholders \u2014 then this is what you get.<\/p>\n

S+B:<\/strong> It seems that the vast majority of U.S. companies have more independent boards and more effective governance than they used to. So what went wrong in the financial sector?<\/p>\n

MINOW:<\/strong> Generally speaking, yes, there have been tremendous improvements. Boards are doing a much better job than they did a few years ago. They\u2019re providing much more diligent oversight. But in the financial-services sector, I don\u2019t think there has been much improvement. In the very first set of corporate governance grades that we at The Corporate Library issued in 2003, Citigroup was dead last, even though Institutional Shareholder Services (another governance ranking agency) was giving them top marks. On paper, Citigroup looked like it had wonderful corporate governance policies. But on the two issues we thought were most important, the board failed abysmally. One was pay for performance \u2014 their approach was awful \u2014 and the other was how the board responded to the analyst scandal (in which Wall Street firms were found to have falsified positive research about companies in an effort to win investment banking business). Citigroup was the only company in which the CEO was personally involved in one of the most outrageous conflicts of interest and one of the most outrageous breaches of ethics of that period: the incident involving analyst Jack Grubman. [According to investigators, in 2000, Citigroup CEO Sanford Weill asked Grubman, the company\u2019s top telecommunications analyst, to raise his rating of AT&T; after Grubman complied, Citigroup won a US$45 million assignment to help underwrite a share sale in AT&T\u2019s wireless unit.] As a result of his personal involvement, Weill was restricted in his ability to meet with his analysts without an attorney present. And yet the board did not impose any sanctions on him. That is the definition of a bad board. They didn\u2019t know how to respond when the CEO failed.<\/p>\n

S+B:<\/strong> What could the boards of financial-services firms have done to help avoid situations like the subprime meltdown?<\/p>\n

MINOW:<\/strong> You can\u2019t do better than what Warren Buffett said to the people at Salomon Brothers many years ago: \u201cIf you lose money for us, we will be forgiving. If you lose reputation for us, we will be ruthless.\u201d You make the situation clear by stating your intentions and you back them up in the design of your compensation program. If there\u2019s any suggestion of bad behavior, the money goes back to the company. That\u2019s the only fair and credible way. Any CEO who won\u2019t come in on that basis is somebody you don\u2019t want to bet on because he is not willing to bet on himself. The moral of the story is that you get what you pay for. If you tell the CEO he\u2019s going to get paid tremendously for short-term gains even if he has an \u201capr\u00e8s moi, le deluge\u201d philosophy, then he\u2019s going to go for it.<\/p>\n

S+B:<\/strong> Are you now going to push more intensively for reforms in CEO compensation?<\/p>\n

MINOW:<\/strong> I don\u2019t know how much more intense I can get. I\u2019ve been pushing for a long time. But I\u2019ll continue. I\u2019m enthusiastic because now it\u2019s like a perfect storm; three different forces for positive change are coming together at the same time. One is majority voting. I think that\u2019s going to be very powerful as it gets widespread adoption. Right now, under the law, a director who is unopposed can get elected with one vote because voters have only two options: to affirm a candidate or not to vote at all. Thus, it\u2019s not very meaningful to withhold a vote. But as companies adopt the rule that a director must receive a majority of the votes cast in order to win, directors will know they can be voted out if there are a lot of abstentions. Second, the broker vote change will eventually go through so that actual shareholders, or beneficial holders, will vote for directors. (Currently, in many cases, large brokerages hold shares for individual investors and vote on their behalf without consulting with their clients; frequently, they join management in supporting their board slate and opposing shareholder resolutions.) Third, mutual funds and money managers now must disclose which way they voted on board appointments and resolutions under a ruling by the Securities and Exchange Commission.<\/p>\n

We do a \u201cnaughty and nice\u201d list every year of who votes for shareholder value and who does not. So that will put pressure on mutual funds to vote more thoughtfully. One way or another, votes are going to become much more meaningful. If compensation committees start getting voted out for signing off on outrageous pay packages, then I think boards will start to do a better job.<\/p>\n

Editor’s Note: This interview was conducted by Strategy and Business Magazine (S+B Publications), courtesy of Booz, Allen, and Hamilton.<\/em> Special thanks to Edward C. Landry and\u00a0 William J. Holstein.\u00a0 Reproduction of this article in any form is\u00a0prohibited.<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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