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How I Voted: Johnson & Johnson (JNJ) – Proxy Score – 76%

, April 23, 2013 ,

Johnson & Johnson ($JNJ) is one of the stocks in my portfolio. Their annual meeting is coming up on 4/25/2013. ProxyDemocracy.org had collected the votes of three funds when I checked on 4/22/2013.  I voted with management 76% of the time.  View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime)

I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003. Continue Reading →

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Corporate Directors Forum – Day 2

, February 14, 2013 ,

This is the last in my series on the Corporate Directors Forum 2013. See materials, slideshow, Corporate Directors Forum 2013: Bonus Session, and Corporate Directors Forum 2013 – Day 1, Part 1, and Corporate Directors Forum: Day 1, Part 2. The program was subject to the Chatham House Rule, so there will be little in the way of attribution below but I hope to provide some sense of the discussion. I throw in a lot of opinions. Some are those of panelists, some are mine, and some came from the audience. Continue Reading →

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Call for Papers – Journal of Corporate Finance

, January 9, 2013 ,

Since the Cadbury Report was published in 1992 in the UK, there has been increasing emphasis not just by UK regulators but also by regulators from other countries, including the USA and Continental Europe, of the role of boards of directors in corporate governance. However, 20 years down the line it is still uncertain whether boards of directors are able to fulfill the important role they have been assigned by regulators. Continue Reading →

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Cisco: How I Voted – Proxy Score 83%

, November 9, 2012 ,

Cisco ($CSCO) is one of the stocks in my portfolio. Their annual meeting is coming up on 11/15/2012. ProxyDemocracy.org had collected the votes of five funds when I voted on 11/8/2012.  I voted with management 83% of the time.  View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank will be voted in favor of management’s recommendations. (See Don’t Let Companies Change Shareholders’ Blank Votes) Continue Reading →

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Call for Papers: Inside the Board Room

, November 3, 2012 ,

Since the Cadbury Report was published in 1992 in the UK, there has been increasing emphasis not just by UK regulators but also by regulators from other countries, including the USA and Continental Europe, of the role of boards of directors in corporate governance. However, 20 years down the line it is still uncertain whether boards of directors are able to fulfill the important role they have been assigned by regulators. For example, the academic literature on the impact of board composition, in particular the proportion of outside, non-executive directors, is as yet inconclusive as very few studies have Continue Reading →

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Independent Board Oversight: Lessons from HP

, May 10, 2011 ,

Note: Republished with permission of the author. Originally published on the Bloxham Voice as Independent Board Oversight, 4/10/2011. Copyright The Value Alliance.

Nominating and governance processes and independent board oversight: Do they really matter? If so, to whom?

In a Digest publication late last year, I wrote about an ISS policy survey that found investors, in all markets, ranked board independence as the most important governance topic.

Of course, there are a number of ways independence is important. One is the independence of board members (including independent mindedness). Another is effective independent board oversight. Paralleling these are independent processes to nominate directors.

In a January 28 article for Fortune.com, I wrote:

HP’s 2010 proxy explains that the nominating and governance committee, Continue Reading →

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Moody's Shareowners Vote to Split Chair/CEO

, April 27, 2011 ,

At the annual meeting of rating agency Moody’s Investors Service, a resolution calling for an independent Chairman of the Board was supported by 56% of shareowners. The resolution was co-filed by Hermes Equity Ownership Services (EOS) and the Laborers International Union of North America (LIUNA).”

Citing both the Corporate Core Principles and Guidelines of the California Public Employees’ Retirement System (CalPERS) and the Millstein Center for Corporate Governance and Performance, the resolution stated,

We believe that the recent economic crisis demonstrates that no matter how many independent directors there are on the Board, the Board is less able to provide independent oversight of the officers if the Chairman of that Board is also the CEO of the Company.

via Institutional Shareowner.

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Search Continues at footnoted.com for Another Frugal CEO

, April 5, 2011 ,

Frugal gourmets? Yes. Frugal CEOs? Not so much. I really enjoy Michelle Leder’s posts at footnoted* and was stopped in my tracks with her recent headline that appeared to announce that she had found another frugal CEO, aside from Warren Buffett. 

The proxy filed by Dresser-Rand (DRC) indicated they had “agreed to purchase Mr. Volpe’s home in Olean, New York and all personal effects included therein for $267,500, which was their appraised value.”

Cheap digs for a CEO, even for upstate New York. Unfortunately, with a little digging, Leder found additional payments for new digs in or near Paris, a monthly housing stipend, and more money to cover the tax bill. She concludes:

We guess we’ll just have to keep looking. We’re in the midst of proxy season right now and perhaps one will turn up in the pile one day soon.

via Could there be another frugal CEO out there? | footnoted.com, 3/31/2011.

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Aspirational Pay for CEOs

, March 31, 2011 ,

Goodyear CEO, Richard Kramer, saw a 69% rise in his annual compensation to $8.5 million in 2010, according to an Associated Press calculation from a regulatory filing. The company reversed a 2009 decision to freeze executive officers’ salaries, Bloomberg reports. Meanwhile, the largest US tire maker reported a loss of $216 million for 2010, which included a $160 million charge to close a 1,900-employee plant in Union City, Tennessee.

Goodyear is a prime example of the many US companies that are granting bonuses to its executives despite suffering a loss in revenues. US likely to tweak its executive compensation schemes, Corporate Secretary, 3/30/2011.

Apparently Kramer is being paid base on aspirations, rather than actual performance. That’s one of my aspirations too, get paid for my dreams, rather than reality. Nice work if you can get it. Corporate Secretary also reports, UK firms may begin to lengthen executive remuneration schemes from three years to five, a change that would put pressure on other major companies to change the way they reward senior managers.

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Fix CEO Compensation by Broadening Incentive Pay

, March 30, 2011 ,

The defenders of executive compensation argue that senior executives make the most significant contribution to a company’s success; ergo, outsize compensation is justified. But the NBER Shared Capitalism Research Project has shown the opposite: Distributing rewards across the corporation—sharing them with workers—is the most efficient way of making businesses more successful. Motivated employees are more productive and spur innovation in products and processes…

Freeman, Blasi, and Kruse propose a simple way to encourage companies to follow the Googles and Wegmans of the world: Allow them to deduct incentive pay as a cost of business only if they offer the same incentive program to all workers. In other words, don’t give tax breaks to companies that provide stock options and bonuses to only a few executives. This would correct a major loophole in the tax system with which corporate executives have been enriching themselves at the expense of their stockholders and taxpayers. (The U.S. Tax Code does not allow the deduction of salaries beyond $1 million as a business expense, but it does allow companies to deduct as a cost of business any amounts paid as incentive compensation.)

This proposal is not as radical as it may seem. It is, rather, American capitalism at its best, the extension of a system that has engendered the success of such major companies as Google (GOOG), Apple (AAPL), and Procter & Gamble. The same principles already apply to pension and health-care plans—these are deductible as a cost of business only when they cover every employee. Compensation should be subject to the same rules, which will encourage more companies to extend incentive pay to all workers. And most importantly this change would make U.S. businesses more productive while benefiting workers.

via How to Fix Oversize Executive Compensation – BusinessWeek, 3/25/2011.

According to Corey Rosen, National Center for Employee Ownership:

The ideas here make sense. We have become infatuated with the idea that companies rise and fall based on a few key people. Yet study after study (and the rhetoric of CEOs insistent that “people are our most important asset”) show that the level of employee engagement at work is the single most important determinant of corporate performance. Engaged employees come up with the ideas, large and small, that move companies forward. Companies that share ownership widely grow 2-3% per year faster than would have been expected to otherwise, for instance, their employees have three times the retirement assets, and they are much less likely to go bankrupt.

As I recall, much of the research into employee ownership and worker participation showed tremendous gains when these factors were linked. There was a raft of experiments in the 1970s and 1980s. I, myself, was somewhat involved with Rath Meatpacking when it became the largest worker-owned firm in the United States. In many of these situations productivity shot up but management shut them down because employee participation took power away from them… especially middle management. I like the ideas advocated by Freeman, Blasi, and Kruse. Unfortunately, the Business Roundtable and the US Chamber of Commerce are likely to express strong opposition.

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Are High Paid CEO$ Looking for Acceptance?

, March 23, 2011 ,

People who feel more secure in receiving love and acceptance from others place less monetary value on their possessions, according to new research from Edward Lemay, assistant professor of psychology at UNH, and colleagues at Yale University.

Lemay and his colleagues found that people who had heightened feelings of interpersonal security — a sense of being loved and accepted by others — placed a lower monetary value on their possession than people who did not.

In their experiments, the researchers measured how much people valued specific items, such as a blanket and a pen. In some instances, people who did not feel secure placed a value on an item that was five times greater than the value placed on the same item by more secure people.

“People value possessions, in part, because they afford a sense of protection, insurance, and comfort,” Lemay says. “But what we found was that if people already have a feeling of being loved and accepted by others, which also can provide a sense of protection, insurance, and comfort, those possessions decrease in value.”

“These findings seem particularly relevant to understanding why people may hang onto goods that are no longer useful,” Lemay says. (The more secure you feel, the less you value your stuff, ScienceDaily, Mar. 3, 2011) Could they also be relevant to understanding why many CEOs seek pay way beyond what they can meaningfully use for their own needs?

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Just How Clever Are Directors on Pay Issue?

, March 1, 2011 ,

Interesting post from Dominic Jones, brilliant author of the IR Web Report, who wonders if directors fumbled, given that so many three year Say When on Pay proposals are being voted down. Or did directors intentionally channel investor anger “towards the less important of the two say-on-pay proposals.”

Such a diversionary tactic gives “a window-dressing opportunity to their institutional investors,” writes Jones. When funds disclose their votes, they can seem to take a hard line, while taking attention away from the fact that they are also voting in favor the more concrete executive pay proposals. “In fact, 87% of pay votes so far have received more than 80% support from investors.” (Say-on-pay frequency battles a clever diversion | IR Web Report, 2/25/2011)

Interesting theory, but I don’t really see directors taking that much interest in providing cover to funds so that fund managers can say they “stood up for the little guy.” The driver here is more likely to be proxy advisory firms that have drawn a line in the sand that is easily understood, publicized, and followed.

Investors can easily understand, “give me power every three years or give me power every year.” What we can’t understand, unless we devote a lot of resources to filling out scorecards on executive pay proposals using the typical metrics used by large and conscientious institutional investors,  is whether or not we should vote in favor of a board’s pay proposal.

We often know in our gut that the bottom line pay that a proposal yields will be outrageous. But aren’t basketball players paid outrageous amounts too? Unless we’re willing to crunch all the numbers, we generally vote with the board’s recommendation.

While I’m all in favor of incentives to increase the holding period on option and/or stock grants, clawbacks for unearned bonus and incentive payments, cutting back on absurd perks, tying bonuses to performance that take into account market movements and peers, limits on severance or change-in-control payments, and the myriad of other details these good governance funds are concerned with, I also think we also need a few simple overarching guidelines.

  • Will the CEO earn more than 100 times the average worker?
  • Will they take more than 5% of the company’s net profit?
  • How are funds voting that actually put themselves out there by announcing their votes in advance on ProxyDemocracy.org?

I’m sure there are more simple guidelines and these examples may not be the best. As I said in a recent post, which I’m delighted Jones cites (Addressing CEO Pay), members of the United States Proxy Exchange will soon begin working on a paper to address the issue of CEO pay. I’ll be advocating a few simple metrics to ratchet down the “Lake Wobegone effect” and to help wean America away from what has increasingly become a “winner take all” mentality.

As long as directors keep thinking their company’s CEO is above average, the average will keep going higher and higher every year as the baseline comparison rises. Between 1980 and 2004, real wages in manufacturing fell 1%, while real income of the richest one percent rose 135%. The top 1% average $3.2 million a year, while the bottom 90% average $31,000 based on 2008 data. The top 1% control 35% of America’s net worth, while the bottom 90% control 27% based on 2007 data. (It’s the Inequality, Stupid, Mother Jones, 3-4/2011) Looking at the world as a whole, the richest 1% control 43% of total assets according to The Economist (More Millionaires Than Australians, 1/22/2011), whereas the bottom 50% control 2% of assets.

I don’t think we should wait for these gaps to widen further before taking action. If average CEO pay for S&P 500 firms moved from the current $9.25 million per year to $4.6 million a year, would average CEO performance be cut in half? I doubt it. Conscientious institutional investors will go after the outliers, the most outrageous examples. Somebody needs to go after the herd. Let’s make use of the pay ratios that have to reported in the CD&A because of Dodd-Frank while we still can.  That requirement could be gone before we know it the way things are headed in Congress.

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Founders Directors: Better Board Monitoring

, February 3, 2011 ,

Feng Li and Suraj Srinivasan examine CEO compensation, CEO retention policies, and M&A decisions in firms where founders serve as a director with a non-founder CEO (founder-director firms). They find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay for performance sensitivity for non-founder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared to non-founder firms. Bottom-Line: Boards with founder-directors provide more high powered incentives in the form of pay and retention policies than the average U.S. board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared to non-founder firms.  (SSRN-Corporate Governance When Founders are Directors by Feng Li, Suraj Srinivasan, 1/8/2011)

CEOs in founder-director companies have higher pay-for-performance sensitivity (PPS) than CEOs in non-founder firms. For non-founder firms, the average CEO’s annual total compensation including the change in value of stock and option holdings increases by about $5.20 for a $1,000 increase in the market value of the firm. For firms with a founder-director the additional PPS is $2.24. In addition, after controlling for other economic determinants of pay level, CEOs of founder-director firms receive lower pay than CEOs in non-founder firms. We interpret this as lower excess pay due to better governance in these firms (Core et al., 1999). In terms of economic magnitude, CEOs of founder-director firms, on average, receive $329,000 less than CEOs of non-founder firms in annual compensation after controlling for other economic determinants of pay.

Second, CEOs in founder-director firms are more likely than those in non-founder firms to be replaced for poor performance. A decline in performance from the top to bottom decile in performance increases the likelihood of a forced CEO turnover by almost 8.3% more in founder-director firms compared to non-founder firms. Lastly, we find that the three-day M&A announcement return is 1.29 % higher for founder-director firms than other firms…

Results suggest that the founder’s role extends to more effective board level monitoring and not just to superior executive performance as documented in prior research. The higher PPS, lower excess compensation, and higher turnover-performance sensitivity are uniquely associated with founder-directors.

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CEO Pay in an Age of WikiLeaks: Reporting, Rationale and Ratios

, January 18, 2011 ,

As has been widely reported, WikiLeaks will soon release thousands of documents revealing malfeasance, greed and incompetence at the highest levels of a major American bank, most likely Bank of America. According to WikiLeaks’ Julian Assange, this may be the biggest expose of unethical corporate behavior since the Enron scandal. (Facing Threat From WikiLeaks, Bank Plays Defense, NYTimes, 1/2/2011) For broader “leaks,” see Ex-Banker Gives Data on Taxes to WikiLeaks, NYTimes, 1/17/2011.

This will focus new attention on the subjects of greed, fraud and abuse at the highest levels of Corporate America. See Gary Larkin’s post, Wikileaks Episode Should be Wake-Up Call for Companies. (The Conference Board Governance Center Blog, 1/14/2011)

Last year’s Dodd-Frank bill includes Section 922, which provides that the SEC must pay rewards to whistleblowers who provide original information about violations of the federal securities laws that leads to successful enforcement actions resulting in more than $1 million in penalties. (Concerns Grow Over New Dodd-Frank Act Whistleblower Provisions). Additionally, a pay disclosure rule will require many U.S. companies to report the ratio of CEO pay to median employee pay in the annual proxy statements and also requires votes on corporate proxies concerning how often shareowners will have a “say on pay.”

A recent Towers Watson poll of 135 U.S. publicly traded companies found that 51% expect to hold annual say-on-pay votes, while 39% prefer the vote be held every three years, and 10% anticipate holding biennial votes. Meanwhile, nearly half 48% of companies surveyed are making some adjustments to their executive pay-setting process, while 65% are devoting more attention to explaining their programs in the Compensation Discussion & Analysis (CD&A). Some of the best advice for companies on these issues can be found regularly at CompensationStandards.com, including a program today, The Proxy Solicitors Speak on Say-on-Pay.

Clearly, the issue of executive pay is one that stay with us for years to come but 2011 could set the tone, not just in America but around the world. One of the more interesting discussions I’ve read is in the recent posts of an an Indian blogger, Sonia Jaspal, who cites a recent report of COSO “Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies,” which states that CEOs are involved in 72% of the 347 alleged cases of fraudulent financial reporting listed with SEC during 1998-2007 period. (see Fraud Symptom 1- Insatiable hunger of CEO, Fraud Symptom 2- A Weak CFO, and Fraud Symptom 3 – Board’s failure to exercise judgment. We need mechanisms to reduce the likelihood of collusion between CEOs and CFOs, such as making directors and/or audit committee responsible for recruiting and terminating CFOs and not linking CFO pay to stock market performance.

Shareowners are also grappling with how to address the issues. Manifest, a UK-based proxy advisory firm has something of an advantage, since UK shareowners have had a say on pay for many years. See an example of relatively recent discussion at “Excessive” bonuses lead to higher dissent. Other sources of advice include books such as Money for Nothing: How CEOs and Boards Enrich Themselves While Bankrupting America and the classic Pay without Performance: The Unfulfilled Promise of Executive Compensation.

Members of the United States Proxy Exchange have initiated a forum to discuss where individual shareowners and USPX should come down on pay issues. Get in on the conversation for $3.95 a month, if only to monitor what direction this increasingly influential group will take. There are thousands of sites providing investment advice but USPX is one of only a few on investors as owners.

While I have often advocated that any any principles regarding limits should be grounded on academic research, it is difficult to envision a mass movement based on the complex formulas and principles contained in most CD&As, even if they may be grounded in research. Should founding CEOs be given a pass? I don’t think so. CEOs like Steve Jobs of Apple and John Mackey of Whole Foods can easily afford to work for minimum wages because they own a substantial portion of their companies. Their real pay comes through ownership, not by working.

CEOs will try to convince their boards they should be paid in the top 25% of their peers and we have the Lake Wobegon Effect. Since companies will be reporting the ratio of annual CEO pay to median annual total compensation for all employees, that number may drive a popular movement. What will be considered fair? 1 to 25? 1 to 50? 1 to 100? 1 to 200?

In 2007, CEOs in the S&P 500, averaged $10.5 million annually, 344 times the pay of typical American workers, but that was a steep drop in the ratio from 2000 when CEOs earned 525 times average pay. With companies forced to report their ratios, expect more pressure than ever from shareowners in 2011.

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DTCC Splits Chair and CEO Positions

, January 6, 2011 ,

The company that holds legal title to about 80% of all American stocks announced this week that it will separate the role of chairman and chief executive officer following a two-year review of the organization’s governance.

Splitting the roles will increase its oversight of risk management and follows a growing trend by international companies that have adopted this reform.

The CEO will oversee the DTCC’s overall business strategy and operations that relate to the daily running of the company and will report to the chairman.

But it says that DTCC’s risk management and compliance departments will report directly to the chairman to heighten independence, leading to a system of “checks and balances” between the business and control functions. (Global Financial Strategy)

DTCC’s depository provides custody and asset servicing for 3.6 million securities issues from the United States and 121 other countries and territories, valued at almost $34 trillion. DTCC’s subsidiary, The Depository Trust Company (DTC), established in 1973, was created to reduce costs and provide clearing and settlement efficiencies by immobilizing securities and making “book-entry” changes to ownership of the securities. In 2009, DTC settled transactions worth more than $299 trillion, and processed 299.5 million book-entry deliveries.

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Swiss May Limit CEO Pay

, January 5, 2011 ,

Disgusted with the how much CEOs are paid in comparison to the average worker? In Switzerland they are using the referendum process to address the issue head on.

Thomas Minder, CEO of Trybol Cosmetics launched his campaign in October 2006 and collected nearly 118,600 to bring bring about a national referendum on remuneration. Minder, who needed a minimum of 100,000 signatures on his petition to force the referendum, is targeting a ban on transaction bonuses, salary in advance and golden handshakes (to departing executives). Minder’s proposal would provide for annual votes on the total remuneration of the board of directors, the executive board and the advisory board. There would also be annual votes on the election of the chairman of the board, the individual directors and the members of the remuneration committee. Pension funds would be required to disclose their voting behaviour. The articles of association of companies would be required to set out the maximum number of board members for executives, the duration of their employment contracts and ceilings on the value of pensions, credit and loans provided to corporate executives. (Law on ‘unfair remuneration’ one step closer in Switzerland « Manifest – The Proxy Voting Agency, 12/14/2010)

Will we see a similar more in the US? While many Americans are upset with CEO pay, they may be even more disgusted with Wall Street bonuses.

More than 70 percent of Americans say big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, a Bloomberg National Poll shows.

An additional one in six favors slapping a 50 percent tax on bonuses exceeding $400,000. Just 7 percent of U.S. adults say bonuses are an appropriate incentive reflecting Wall Street’s return to financial health. (Banning Big Wall Street Bonuses Favored by 70% of Americans – BusinessWeek)

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Moving Corporate Governance Out of the Fraternity House

, October 20, 2010 ,

Perhaps it takes the mass media to illustrate the skewed focus of corporate law. Here we have the [at least for now] CEO of Tribune Company, Randy Michaels, under fire for a lot of superficial things, such as an alleged frat house atmosphere in the company, while his role in the company going into and staying in bankruptcy during his three year tenure wasn’t enough to bring about such scrutiny or cause the board concern about its own exposure. It took a misstep by one of his subordinates in circulating an offensive video and public disclosure of a ‘frat house’ atmosphere to bring things to this point. (Tribune Co. CEO Randy Michaels: I have not resigned, Chicago Tribune, 10/19/2010)

But sources said board members were concerned that Michaels had publicly embarrassed an iconic Chicago institution, made many of its employees uncomfortable, and had aggravated an already-tortuous 22-month-old bankruptcy process at a highly delicate stage.

In light of those issues, board members also were becoming concerned that the behavior of Michaels and his management team might open them up to legal action over their fiduciary duty to protect the company, the sources said.

To be clear: the juvenile hijinks are wrong, probably illegal and ill-befitting of an executive of a major public company. However, they and the public embarrassment and employee discomfort are a peripheral matter in the grand scheme of things and have nothing to do with return to shareholders, or in this case, creditors, which should as a matter of law, be the board’s focus. Something is wrong with a scenario where a board is motivated to act in accordance with its fiduciary duty only when raucous behavior comes to light, and had no such motivation in the face of poor financial performance resulting in a protracted bankruptcy, and drastic loss of market share.

Something needs to be done about our corporate law environment when CEO’s who have enough sense to avoid personal indiscretions (or keep them private) get a pass on poor strategy or execution, and their performance is subjected to real scrutiny only when juvenile antics come into public view. Similarly, boards should have at least as much legal exposure when they don’t hold management accountable for a lousy job with their core functions as when they don’t react to personal level foolishness.

It’s a curious legal environment indeed when an HP CEO who presided over a doubling of shareholder value and a Tribune CEO who presided over a bankruptcy filing and deterioration of business value during the process suffer the same fate on account of extracurricular personal indiscretion. It’s also a reflection of a system that needs drastic updating to take substantive performance into account as part of directors’ fiduciary duty.

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Lead Directors: 2nd Best or A Valuable Tool?

, September 14, 2010 ,

It’s common knowledge that separating the roles of CEO and Board Chairman (see Chairmen’s Forum) is considered by most the epitome of best practice, but is far from universal. In the wake of Sarbanes Oxley, many companies designated a genuinely independent director as a “lead director” to run meetings of non-management directors and represent independent directors in dealings with the CEO and with respect to review of the CEO’s performance. The NYSE and NASDAQ now require a comparable designation.

Joann Lublin of the WSJ on Monday September 13, 2010 had an excellent article on this topic entitled “Lead Directors Gain Clout to Counterbalance Strong CEO’s,” on the experiences of many lead directors and the value they are adding at companies such as NCR, E*Trade and Occidental Petroleum, and how they are seen by many as at least a viable alternative to independent chairmen. Specific roles and responsibilities are noted, as is the potential for lead directors to step into broader roles.

This article is an excellent “on the ground” discussion of how lead directors can improve day to day governance and well worth your time to read.

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Walden Proposes Spit Chair/CEO at HP

, August 11, 2010 ,

Walden Asset Management filed a letter and resolution (WaldenHPLetterSepChairCEO8-10-10) with HP seeking separation of CEO and chair positions. Given the recent resignation of Mark Hurd (Mark Hurd’s Termination from HP: Case Study), timing seems ripe and important as HP searches for a new CEO. Walden cites Chairing the Board: The Case for Independent Leadership in Corporate North America by the Millstein Center for Corporate Governance and Performance at Yale’s School of Management. HP should take this opportunity to transition to this growing successful model of corporate governance and leadership.

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Medium CEO Pay Declines

, April 14, 2010 ,

Median total annual compensation for North American CEOs declined for the second straight year, according to a preliminary CEO pay survey from The Corporate Library.

The study analyzed CEO compensation data for fiscal 2009 drawn from 823 proxy statements filed in the United States between July 1, 2009, and March 25, 2010.

The report titled The Corporate Library’s Preliminary 2010 CEO Pay Survey, is available for $45 from The Corporate Library’s online store. According to Paul Hodgson,

The decrease marks the first time since The Corporate Library began publishing its annual CEO pay survey in 2002 that the median change in compensation has declined for two consecutive years.

Median total annual compensation for all CEOs in the study declined by 2.78 percent from 2008 to 2009.

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Goodyear Vote and the Timeliness of Analysis

, April 12, 2010 ,

The Corporate Library Blog today carries a great post, Inflated CEO pay at Goodyear Tire. Good puns and even better information on CEO Robert J. Keegan’s “maximum payout for a net loss.”

Mr. Keegan received four separate stock option grants. The largest of the four market-priced grants, almost 500,000 of them, was at $4.81. Less than six months later he’d made $6.23 million worth of notional profit on that. This is just irresponsible, and it’s taking advantage of a super-low stock price to grant any stock options at all in such circumstances. It’s virtually impossible NOT to make money in such a situation.

This is Paul Hodgson writing in excellent form, including his conclusion that “it might even be time to vote against Denise Morrison, Rodney O’Neal, Craig Sullivan and Thomas Weidemeyer,” members of Goodyear’s compensation committee.

I’ve only got one complaint. The meeting is tomorrow; for many, voting has already ended. Hopefully, those who subscribe to “Board Analyst,” or other services at The Corporate Library, got this analysis earlier. However, I see, as reported by ProxyDemocracy.org, CalSTRS voted in favor of compensation committee members, so I’m left wondering if timeliness is a frequent issue during the busy proxy season.

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Church Investors to Vote as a Bloc in UK

, March 30, 2010 ,

PIRC Alerts reports that the UK Church Investors Group (CIG) issued a report on executive pay saying that a ratio between the pay of the top executive and that of the average pay of the lowest 10% of employees in excess of 75 times would be hard to justify. They’ve adopted a common framework.  PIRC will provide research and voting advice on group members’ holdings in the FTSE100. In practice this will mean that members participating in the initiative will be able to adopt the same voting stance, making the CIG an important new shareholder voting bloc in the UK’s capital markets.

PIRC also reports, the average vote against a remuneration report at a UK-listed company last year was 17.28%. That compares to a figure for 2008 of 3.2%. If you would like a copy of the 2010 UK Shareholder Voting Guidelines, please contact Janice Hayward on janiceh@pirc.co.uk or phone 020 7392 7894.

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CEO Jet Set: BofA Gets Finger

, March 30, 2010 ,

A free report from The Corporate Library concludes that expenses related to CEOs’ personal use of corporate aircraft increased by over 9% at the median between 2007/2008 and 2008/2009. The increase occurred as the incidence of personal corporate jet use held steady.

The report, titled “Proxy Season Foresights #8: CEOs’ Personal Use of Corporate Jets Still Flying High,” analyzed such expenses at more than 2,500 Russell 3000 companies for which data was available for the last two years (as of January 29, 2010). For companies that had not yet filed proxy statements for the 2009 fiscal year, the sample included data from 2007 and 2008; 2008 and 2009 data was used for those that had already filed 2009 proxy statements. Key takeaways include:

  • Fifteen percent of Russell 3000 and 40 percent of S&P 500 report aircraft expense for CEOs’ personal use
  • Increase in the averages of reported expenses in the last year: 3.3 percent
  • Aircraft expense is up an average of over 70 percent (median 9 percent) for Russell 3000 companies with expenses in both years
  • Average payout in 2008/9: $131,340
  • Median payout in 2008/9: $80,368
  • Incidence rate holding steady (around 400 Russell 3000 companies in each of last two years)
  • McGraw-Hill is an example of best practices in recouping personal expense
  • Tax gross-ups and family use are still prevalent

The report concluded, “in the cases where tax gross-ups and family use were approved, it calls the corporate culture into question: if the board cannot set appropriate limits for the CEO in this regard, will it be able to do so in matters of greater strategic consequence?”

On a related note, Finger Interests Ltd., the Houston investment firm that tried to oust Ken Lewis from Bank of America last year, has a new target this year: The firm filed a motion Monday urging shareholders to vote against director Chad Gifford. According to the Fingers:

Mr. Gifford knew that Bank of America did not undertake sufficient due diligence when they acquired Merrill Lynch. He also knew it was a bad deal for Bank of America shareholders. But he did not have the courage or moral conviction to fulfill his duty to shareholders. Rather, he was more concerned with maintaining his position as a director of Bank of America and making sure that his employment agreement, which entitled him to 120 free hours on the corporate jet (each year), was renewed for another year.

According to a report in the Charlotte Observer, “Gifford had enjoyed a perk from the bank that let him use company-provided aircraft for up to 120 hours a year, in addition to his regular pay as a director. In 2009, Bank of America spent $956,007 on Gifford’s airplane use, plus $293,004 to help him pay the accompanying taxes. It did not renew the agreement for this year.” (Shareholder wants Bank of America director out, 3/30/10) Hat tip to Tweet from Bob Monks.

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Directors & Boards

, March 24, 2010 ,

The current edition features a cover article, The Great Divide: Separating the Chairman and CEO Roles. Thought leaders tackle the issues involved in splitting the two top leadership positions of the corporation. On one side of the debate: “The development is inexorable,” says Ira Millstein. “Beware the simplicity of saying two heads are better than one,” says James Robinson. Sure, the consensus of this group is that such a split should not required by law. Maybe they’re right, but the arguments in favor of splitting the roles in most cases were far more compelling than those opposed. What do you think?

New disclosure requirements are going to make many boards rethink the issue, especially when they have someone in the combined role stepping down. In another article, Henry D. Wolfe offers more timely advice in What you want in a nonexecutive chair, while Diane Lerner and Ira T. Kay offer up Revisiting the pay of the nonexecutive chair.

Several other excellent articles round out the issue, including an interview of Dennis Kozlowski by John Gillespie and David Zweig, authors of Money for Nothing. Their interview is entitled If he had it to do all over. Sure, in hindsight, Kozlowski wishes he had done some things differently; maybe he should have been a little less ambitious.

However, what is presented is mostly the self-portrait of a victim… a victim of a system well documented by Gillespie and Zweig which cedes too much authority to CEOs. If Tyco had a stronger board, he wouldn’t be working in a prison laundry. Staying out of jail, another good reason to strengthen boards by splitting board and chair positions.

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How to Be a Good Lead Director: Be the Chairman

, January 6, 2010 ,

In July 2009, the SEC proposed new proxy disclosure rules that will require public companies with a combined CEO/Chairman to disclose why the company believes such a leadership structure is appropriate and what specific role the Lead Director plays in the leadership of the company. via How to Be a Good Lead Director – Boardmember.com.

Unreported in the article is the fact that the new rules have an effective date of February 28, 2010. A January 6th Georgeson Report provided much better and more specific advice: “If the same person holds both positions, companies should disclose whether they have a lead independent director and what role that person plays. In this regard, companies would be well advised to review the details that RMG considers when evaluating whether or not to support a shareholder proposal calling for an independent chairman.” They also discuss what is required in the way of disclosing consideration of diversity in the nomination process.

I think the concept of “lead director” is on the way out. Are the new SEC rules an indication of the U.S. heading toward “comply or explain”?

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European Corporate Governance: Readings & Perspectives

, January 4, 2010 ,

This new reader, edited by Thomas Clarke and Jean-Francois Chanlat offers up one of the first critiques of the subprime financial crisis within a framework that compares Anglo-American governance features with those of Europe.

At the heart of the collapse was the growth of the derivatives market that was supposed to hedge against losses. Settlements grew from $106 trillion in 2002 to $531 trillion by 2008. In the introduction, Clarke and Chanlat provide an excellent overview of how the crisis unfolded, both in the US and in Europe. They then turn to the contributions of the governance framework: re-regulation, ratings agencies, risk management, incentivization and to more specifics within the framework of financial institutions.

Convergence is in progress but there is tension between the parallel universes. The Anglo-American is characterized by liquid markets, high transparency and where the market for corporate control provides the major discipline… until markets fail. Europe and Asia are characterized by controlling shareowners, weak markets, less transparency and more monitoring by banks.

Many are now questioning convergence and what appears to be a basic philosophy behind the American model… growing inequality. “In the last few years alone, $400 billion of pretax income flowed from the bottom 95% of earners to the top 5%, a loss of $3,660 per household on average in the bottom 95%.”

With the highest level of inequality and poverty among its peers and the lowest job satisfaction rate in two decades, why follow the US? What about the rights of workers and citizens to a more sustainable system? Can the EU transform its economies so that they can sustainably continue to provide a high standard of living? Those are just a few of the topics addressed in the reader through an examination of various dimensions and examples.

Most of the essays are excellent. I especially enjoyed Robert Boyer’s, “From Shareholder Value to CEO Power: The Paradox of the 1990s.” Boyer looks at why CEO remuneration continues to skyrocket in an era of shareholder value. Labor long ago lost power in the US and managers have used the pressure of institutional investors to their own benefit.

Boyer reviews the rise of concern over CEO pay, various options that have been used and their limitations. A series of long-run transformations has occurred in the bargaining positions of workers, consumers, financial markets, the international economy and nation states. The 1960 were characterized by an alliance between workers and managers.

By the 1980s internationalization eroded worker power and by the 1990s we entered a period of hidden alliances between managers and financiers. Managers used the demands institutional investors to redesign their own compensation. Part of that alliance involved a shift away from defined benefit plans to 401(k) type plans and a huge inflow of savings into the stock market with workers at risk.

As support for a political hypothesis of increased managerial power, Boyer analyzes the micro-structure evidence concerning insider trading, diffusion of stock options, lower CEO pay sensitivity of large firms, surge in M&A activity, windfall profits, asymmetrical power on compensation committees, distortion of profit statements, innovation in hiding compensation and the financialization of CEO compensation in a corporate culture that has shifted from engineering to financial management.

He then looks at the larger political arena where economic power is converted into political power. Here he discusses the context of rising inequality and growth of the super-rich with evidence that concentration of wealth is enhanced by stock market bubbles and a tax system that tilts in favor of the rich.

How do we extricate ourselves from this situation? Boyer’s analysis provides some hints. A shift towards a stakeholder conception “would reduce the probability of managerial greed and erroneous strategic decisions.”  More public control of accounting practices is needed “to prevent an alliance between CEOs and auditors, at the expense of rank-and-file shareholders.” Last, we need to recognize that monetary policy has been “at the heart of erroneous business strategies and unjustified wealth from CEOs.”

The volume should give readers pause concerning the desirability of convergence on an Anglo-American model and provides well-informed analysis of European models that may lead to a more sustainable path.

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CEO Greed Doesn't Work for Shareowners

, December 26, 2009 ,

“Firms that pay their CEOs in the top ten percent of pay earn negative abnormal returns over the next five years of approximately -13%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results are consistent with high-pay induced CEO overconfidence and investor overreaction towards firms with high paid CEOs.” That was the conclusion of Performance for pay? The relationship between CEO incentive compensation and future stock price performance by Cooper, Gulen, and Rau… one of two studies highlighted in Does Golden Pay for the CEOs Sink Stocks? (Jason Zweig, WSJ, 12/26/09).

According to Rau, CEOs in his study averaged $23 million—but leave their shareholders poorer (relative to other companies in the same industry) by an average of $2.4 billion per year. Each dollar that goes into the CEO’s pocket appears to take $100 out of shareholders’ pockets. If that is true, there is obviously something very very wrong with the typical incentive structure.

The CEO Pay Slice by Bebchuk, Cremers, and Peyer investigated the fraction of the aggregate compensation of the top-five executive team captured by the CEO – and the value, performance, and behavior of public firms. They found “CPS is negatively associated with firm value as measured by industry- adjusted Tobin’s Q.” CPS is found to be correlated with

  1. lower (industry-adjusted) accounting profitability,
  2. lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements,
  3. higher odds of the CEO’s receiving a “lucky” option grant at the lowest price of the month,
  4. greater tendency to reward the CEO for luck due to positive industry-wide shocks,
  5. lower performance sensitivity of CEO turnover,
  6. lower firm-specific variability of stock returns over time, and
  7. lower stock market returns accompanying the filing of proxy statements for periods where CPS increases.

Zweig’s article goes on to cite Benjamin Graham’s 1951 recommendation that directors “must have an arm’s-length relationship with management; they also should combine “good character and general business ability” with “substantial stock ownership.” (They should have purchased most of their shares outright rather than getting them through option grants.)” He also notes that Graham called to independent directors to publish a separate annual report analyzing whether the business is “showing the results for the outside stockholder which could be expected of it under proper management.”

Each month I take readers on a time trip in CorpGov.net’s “WayBack Machine,” to see what we were discussing 5 and 10 years ago. It is interesting to see how often we are grappling with the same issues. If we had only listened to Graham 58 years ago, how different would corporate governance be today? While we can’t change the past, we can at least work to ensure CEO pay is better aligned long-term shareowner value in the future.

Service Employees International Union (SEIU) Master Trust launched a campaign recently, mostly aimed at banks, proposing the following reforms:

  • Requiring that at least 80 percent of an executive’s annual compensation be subject to multi-year vesting and/or holding periods;
  • Requiring executives and directors to hold a significant equity stake in the company and basing that stake on the value of the executive’s annual compensation package;
  • Making the timing of the equity awards predictable so shareowners know by the annual meeting date the total compensation level awarded to the executive team in the previous year;
  • Enacting effective clawback provisions that call for the automatic return of any bonus or incentive compensation awarded on the basis of financial results that subsequently required restatement;
  • Requiring a substantial portion of annual cash and/or equity bonuses to be held until performance criteria are achieved;
  • Making retention grants conditional upon executives remaining with the company;
  • Prohibiting executives and directors from engaging in any hedging, derivative or other transactions with respect to equity-based awards granted as incentive compensation;
  • Placing restrictions on severance payments, death/disability payments, compensation related to changes in control and perquisites;
  • Forming a shareowner advisory committee to advise the board and the compensation committee on executive and director compensation;
  • Allowing shareowners to cast an annual advisory vote on executive compensation;
  • Including in proxy statements information about the steps being taken to align compensation with long- term incentives, to avoid incentives that promote undue risk taking and to prevent windfalls where there is no long-term shareowner gain;
  • Requiring that at least three independent directors serve on the compensation committee;
  • Prohibiting compensation committee directors from serving on the audit committee; and
  • Adopting bylaws that allow shareowners to place director candidates on corporate ballots subject to certain conditions.

These seem like a good start. However, the devil is in the details. For example, requiring 80% of an exec’s annual compensation be subject to multi-year vesting and/or holding periods… getting 80% two years later meets that vague definition but certainly doesn’t meet criteria that would dissuade CEOs from gaming the system. Certainly, much more needs to be done in this area. RiskMetrics made an important change to their policy for 2010 by assessing the alignment of CEO’s total direct compensation and total shareholder return over a period of at least five years.

More discussion at How to Tie Equity Pay to Long-Term Performance, HBR, 6/24/09; Executive Compensation, Ethicsworld.org; Are senior executives worth what they are paid? Steven N. Kaplan vs Nell Minow, The Economist, 10/28/09.

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Whole Foods Splits Positions

, December 24, 2009 ,

Whole Foods Market Inc. said co-founder and Chief Executive John Mackey has given up the title of chairman in order to conform with current standards for good corporate governance. As of last spring, about 37% of companies in the Standard & Poor’s 500 stock index had separate chairmen and CEOs, up from 22% in 2002, according to the Corporate Library, a research firm in Portland, Maine. (Whole Foods CEO Gives Up Chairman’s Post, WSJ, 12/24/09)

Both the Conference Board’s Commission on Public Trust and Private Enterprise and the Council of Institutional Investors have long recommended roles of the CEO and Chairman be split to ensure an appropriate balance of power.

CEOs who retain the dual role make it extremely difficult to challenge a powerful chief executive if necessary to protect shareowner interests. When I approached WFMI on this issue several years ago, independent directors didn’t even routinely hold meetings without the CEO present. and be “more likely to have certain troubling governance characteristics than companies where the roles are separated.”

Spearheading the reform effort is the Chairmen’s Forum, an organization of independent chairs convened by The Millstein Center for Corporate Governance and Performance at the Yale School of Management. Last spring, Mary Schapiro told the Council of Institutional Investors that the SEC is “considering whether boards should disclose to shareholders their reasons for choosing their particular leadership structure – whether that structure includes an independent chair, a non-independent chair, or a combined CEO/chair.” If such a requirement goes through, expect withhold votes for directors at companies that provide poor explanations of why they haven’t split the roles.

As an activist shareowner of WFMI, I’ve been after them for years to make this change, along with others such as John Chevedden. I’m under no delusion that Mackey is now under the thumb of the board chair. I’m sure he remains the driving force behind WFMI. However, given his track record of blunders like faking his identity on blogs and denying shareowners the right to present resolutions during the business portion of the annual meeting, at least he now has a better chance of not making a mockery of WFMI’s shareowners. The content of Mr. Mackey’s online postings were directly at odds with the Company’s core values of transparency and stewardship. His refusal to allow shareowner resolution proponents an opportunity to speak during the normal business portion of an annual meeting, even though SEC Rule 14a-8(h)(3) requires that a proponent or representative of a resolution contained in the company proxy must present their proposal, also conflicted with our Company’s "Declaration of Interdependence," which "requires listening compassionately, thinking carefully and acting with integrity."

According to Richard Bernstein, chief U.S. strategist at Merrill Lynch, companies in the top 100 of the S&P 500 with split chairman and CEO outperformed those that combine the roles during the last decade. Corporations with split roles posted a 22% annual return since 1994, outpacing the 18% return earned by firms that did not. WFMI is a great company that could be even better if it took the role of shareowners as seriously it does that of customers and employees. Splitting the roles of CEO and chair is a good sign attitudes may be changing. Instead of viewing participation by shareowners as creating a circus atmosphere, as Mackey has characterized it in the past, maybe now we will see real dialogue that will increase long-term value.

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