Declining bonuses this year? How about boards showing a little spine and demanding that executives give back a chunk of the oversized paychecks that were awarded in the years when these ill-fated decisions were being made.
It’s dangerous to be walking around Wall Street these days. You never quite know when another company will hit the ground with a walloping loss or some CEO will tumble out of his job. Is it not astonishing that when chief executives are elevated to god-like status, with a commensurate compensation package, sometimes they are a little light in the miracle production department? Many are appearing a bit too human in the wake of the subprime fiasco. It is not a role to which they have been accustomed.
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The real purpose behind the Bush Administration’s plan is not to help the victims of the subprime turmoil, but rather the perpetrators of the economic crime who unleashed it in the first place.
To justify their out-of-this-world bonuses, the titans of Wall Street and the kings of the home lending business, like Countrywide Financial’s Angelo Mozilo, claimed they were merely being compensated according to the dictates of the market. No mere mortal dare challenge or question the end result where many received $40- or $50- or $100-million paydays. It was the invisible hand that decided. And it was sacred.
But now the results of that invisible hand look more like a rubble of confusion and ruin, at least as they related to the subprime mortgage industry and the unsettling economic blunders created by Wall Street on a global scale. So it is government that is expected to intervene to bring stability to the market’s jittery hand. An ever-receding Fed interest rate has been one response, along with world central bankers flooding the market with cash. One wonders how the same low interest rates, which saw the concept of risk take a very long vacation, will improve over the long run a situation that was created substantially by low interest rates.
Yesterday, President George W. Bush and Secretary of the Treasury Henry M. Paulson Jr., who are generally advocates of the free market when it is more convenient than present circumstances permit, announced a plan that purports to help distressed home owners by bringing lenders and borrowers together to solve problems. Only a fraction of those expected to need help will benefit. A more realistic interpretation of what is at work here is an effort to bring stability to Wall Street’s largest institutions, which are facing giant losses, slumping share value and increasingly nervous clients.
As much as we admire the discipline and innovations a well (and we hope fair) functioning market can produce, the case for the constructive use of government policy and influence in that market is well established. Some argue that FDR did more to save capitalism than all the J.P. Morgans combined. What is galling is that Wall Street and American business are eager to accept the idea when it is in their own narrow interests, such as now, while at other times –and especially at bonus time– government is exhorted to stay out of the market. And don’t think for one moment that the big players do not see a considerable direct benefit in government efforts, supported by Fed accommodations, that help to stabilize the effects of the housing meltdown.
The plan announced yesterday is something in the nature of saving the financial community that created the ticking time bomb of subprime loans and syndications from itself. Offensive as that may be to some, the indignation pales in comparison to the fact that those who created this mess are the ones that have benefited most handsomely from it. The sting of that image is not reduced as some, like Merrill Lynch’s Stanley O’Neal, are seen making a fast exit with piles of money to ease their pain. We set out some of our views on the public stake in CEO compensation as it relates to the subprime meltdown in a recent guest column on the corporate governance blog of Harvard Law School.
What might have restored confidence in the moral underpinnings of this system–without which it cannot continue to function– would have been a statement from President Bush or Secretary Paulson that they have also worked out a plan whereby a substantial part of the compensation and bonuses that were derived from these toxic loan concoctions would be given back and placed into a fund to assist distressed homeowners. The symbolism would have been significant and a major boost to the idea that fairness, too, is a commodity that the marketplace values.
That did not happen because the real purpose behind the Administration’s plan is not to help the victims of the subprime turmoil, but rather the perpetrators of the economic crime who unleashed it in the first place.
Boards don’t just anoint an emperor CEO and remain a hapless bystander of events. Their job is to assess and oversee issues of risk, as well as the CEO’s performance.
First it was Warren Spector, co-president of Bear Stearns. Next it was Merrill Lynch’s E. Stanley O’Neal. Yesterday it was Charles O. Prince of Citigoup. In the space of a few months, the subprime meltdown that is producing calamitous losses in the banking and financial services sectors is also producing suddenly-empty corner offices. More will doubtless follow. But isn’t there an idea that maybe boards have some role in helping to prevent these disasters, too? They don’t just anoint an emperor CEO for a period of time and remain a hapless bystander of events. Their job is to assess and oversee issues of risk as well as the CEO’s performance. It seems too many boards have been a little slow to adjust to that heightened level of responsibility. (more…)
The corporate governance blog of Harvard Law School is running another guest column by me, this time on the Countrywide Financial meltdown. I introduce some issues about the company’s decidedly subprime corporate governance and CEO compensation practices which have not been raised anywhere before, except at Finlay ON Governance, as our consistently astute readers already know. Here is an excerpt:
The lesson of Countrywide is instructive at a time when there is considerable pressure to retreat from Enron-era reforms, with many claiming they are too costly and not necessary. On the contrary, Countrywide shows that improvement is far from universal when it comes to corporate governance and that, once again, excessive CEO pay is still the Typhoid Mary of the boardroom, showing up time and again just before calamity strikes, as it did with Enron, WorldCom, Tyco, Adelphia, Nortel, and more. It also shows that a single company’s misjudgments can carry profound consequences for other corporations, public institutions and a wider community of interests, which is why society itself has a considerable stake –separate and apart from that of shareholders– in seeing CEO pay returned to reasonable levels.
Earlier in October we commented on Countrywide Financial CEO Angelo Mozilo’s accelerated sale of shares gained from a generous stock options program. We thought the timing was interesting and noted: (more…)
CEOs today make an estimated 400 to 500 times the average U. S. worker. When they made just 40 times the average paycheck five decades ago, and apparently had about one-tenth the incentive they have today, it makes you wonder how anything important got done. They just helped to change the world. That’s all.
“It is not a coincidence that the Dow Jones industrial average, which stood at 5,000 in 1996, is now well above 13,000,” the authors write. “While U.S. executive pay practices do not entirely explain this rise, there is little doubt that it would not have occurred without them.” (more…)
