In too many boardrooms across North America, executive compensation has descended into the farce of rewarding CEOs for super-human abilities they don’t possess, on the basis of performance they frequently didn’t achieve, with money from compensation committees that is not theirs.
Do a search on the Internet for the highest paid CEOs and shareholder outrage, and the name Yahoo soon pops up. The compensation of the company’s now former CEO Terry Semel featured prominently in a recent AP roundup on executive pay. I was interviewed by the report’s author and had a few comments in the piece about CEO compensation in general and about the boardroom culture that permits its abuses. Yahoo lagged behind Google in profit growth and stock performance. Still, that did not prevent the board from awarding Mr. Semel a 2006 package of more than $71 million, according to the AP survey. That amount raised the ire of investors. This week Yahoo announced that Jerry Yang, a co-founder of the company, will replace Mr. Semel as CEO. Mr. Semel’s departure from the top slot was not a surprising development.
What is surprising is that Mr. Semel’s previous pay package of a neck-snapping $230 million prompted barely a mutter. That’s one of the things about CEO compensation. Reactions to it can change very fast. Investors might not care how much a CEO receives when the stock is performing well. When shareholders are giddy, the sky seems to be the limit. But when the party dies down and the reality of lower stock levels hits, they can get very testy. What is missing is the recognition that a culture of excess on the part of directors, which seems to dominate too many North American boardrooms, like a boorish in-law at the family reunion, once arrived is slow to depart. Yahoo had such a culture.
Indeed, nothing reveals the folly of its compensation regime more starkly than the loony idea that it needed to enrich the fortunes awarded to its senior executives by giving them something called retention pay. Each of Yahoo’s top executives —Terry Semel, Farzad Nazem and Susan Decker— received a bonus for staying with the company. Think about this for a moment. They collectively own millions of Yahoo shares. Is it reasonable that, with so much invested, they would have to receive additional incentive to stay with the company and try to improve the value of their holdings? What better than a top position inside the company to contribute to your own financial growth? Yahoo’s board would have been better off taking the stance that if someone with that kind of stake still needs extra inducement to stay, it has the wrong person in the job.
But in a contemporary corporate culture where CEOs seem constantly to be crying out “motivate me,” ever obliging compensation committees, aided by clever pay consultants whose creativity would make a science fiction writer seem dull, can dream up endless reasons to give more of the store away to management. They seem considerably more challenged when it comes to holding back. Another interesting sidebar in the Yahoo compensation story is how much the board, and management, were obsessed with the subject. Last year (the most recent figures available) Yahoo’s compensation committee met on 12 occasions. That’s even more than its audit committee.
The huge sums being paid out to Yahoo’s executives prompted the company to go back to shareholders this year to ask that more stock be earmarked for options purposes and prescribed vesting periods be eliminated for restricted stock. They had no trouble getting support for the widened gravy train. That’s another part of the problem, by the way: there doesn’t seem to be a culture that understands the concept of “too much,” or even enough, when it comes to executive compensation. No form of contortion seems to be beyond the ability of boards and management to twist themselves into in order to try to show themselves deserving of still more. At a certain point, it becomes as demeaning to witness as it should be to engage in.
Yahoo, like the case of Home Depot and Bob Nardelli before it, provides yet another high profile illustration that Pharaonic pay does not always translate into superior results, and —as I have suggested and on these pages and elsewhere— that there is no proof that even superior results cannot be achieved by more modest compensation.
For the privilege of paying its CEO nearly a third of a billion dollars over the past two years ($451 million since 2001), Yahoo has seen its growth rate decline and its stock gains flag. Its brand has been eclipsed by Google, which has established itself as the preeminent knowledge factory on the Internet. By any reasonable standard, such performance should have been available for far less. But the question of whether boards really have to pay that much for the performance being sought never occurs in many boardrooms. And Yahoo’s board, like others, had to be hit with an onslaught of shareholder anger before it got the message and acted.
When wildly excessive and unjustified levels of CEO pay are the product of the best thinking in Yahoo’s boardroom, you have to wonder what other broader strategic decisions on the part of directors are equally lacking in sound judgment and vision. One already seems to be taking shape —appointing Mr. Yang, who is 38 and has no experience running a publicly traded company, much less one with the profile and capitalization of Yahoo, to the top executive post. Though clearly not intended as such, I suspect the move may be a harbinger that Yahoo’s days as a stand-alone entity under its current ownership configuration may be numbered.
As noted previously, CEO compensation was not always like this. It has been transformed into an instrument that, while creating a new class of super rich, is also undermining public respect for the institution of modern business and the economic system that underpins it. But then the current class of CEOs and directors don’t really see themselves, much less act, as guardians of capitalism for the well-being of future generations. They have turned a relatively minor aspect of business decision-making —executive pay— into a high profile, headline-grabbing lightning rod that has become an emblem to much of society of everything that is wrong with business and its self-aggrandizing leaders.
In too many boardrooms across North America these days, executive compensation has descended into the farce of rewarding CEOs for super-human abilities they don’t possess, on the basis of performance they frequently didn’t achieve, with money from compensation committees that is not theirs.
No wonder the scam is hard to stop.
Every few years, business needs to come up with a new savior. If only we had zero-based budgeting; if only we were driven by the search for excellence; if only we could stick to our knitting or follow the seven habits of seven successful people. If only… The newest addition to this grand litany of salvation seems to be the arrival on the scene of huge private equity funds and their ability to rescue publicly traded corporations from the curse of public shareholders. We have discussed this subject, and our reservations about the trend, on a few occasions previously.
So often it seems there has to be a crutch to explain away failure or a magic elixir that will solve all the problems. Rarely will management admit that it dropped the ball or that a company’s difficulties were the result of limited vision or poor judgment. You never see complacency, which is often the real culprit in boardroom misadventure, booked and fingerprinted as an accomplice to underperformance. Spend a few hours with senior managers, as I have done on thousands of occasions over some 30 years, and you will quickly see that arrogance, denial and a stunning disconnection from the real world of customers and markets are too often the overriding characteristics of their style and the seeds of their folly. As I have long contended to rather stunned audiences of business students and corporate executives alike, if businesses were actually run by well-grounded managers with a true sense of vision, a genuine appreciation of the people and stakeholders who shape corporate success and an ability to be governed by sound judgment, many companies could improve their performance by between 20 and 33 percent. Too often, it is the over-paid, game-playing manager with the Napoleonic power complex, the one who will cut corners to look good in the short run, who places himself ahead of all others and lacks an understanding of the contribution of employees and other stakeholders —and then looks for scapegoats when his plan fails— who is at the helm today.
Which brings us to the Chrysler-Cerberus deal. Look at these words carefully:
We’ll be able to run it the way we want to run it and not worry about quarterly numbers or what somebody might think on the outside. We’ll do what’s best.
—Chrysler CEO Tom LaSorda, May 15, 2007
To suggest, as Mr. LaSorda has, that Chrysler’s investors, or the fact that its stock was traded on the New York Exchange for the better part of the past century, prevented the company from being run the way they “want to run it,” or that they were hampered from doing “what’s best” during this period, shouts of a disingenuousness that will not serve the company well. Why not blame the full moon? At least it has some effect upon the Earth’s reality.
Chrysler performed unsuccessfully because of a number of factors —high production costs, poor image, quality problems and the fact that Japanese makers seem to get so much more right. The company was looking for a crutch when it merged with Daimler nine years ago in another deal that many, myself included, thought ill-advised. (Is it not curious that, during this time, the Mercedes-Benz division also experienced a marked deterioration in the quality and reputation of its cars, along with a significant slump in sales? As a three time Benz owner, I can attest to the fact that cars being built during much of this period were nothing like the ones built in the pre-merger days, which is why I have a new Japanese-brand car today.)
Chrysler is looking for another crutch with Cerberus. Many depend upon Chrysler, especially its 88,000 employees and 111,000 retirees and their families, so it is natural to hope for the company’s success —if one views success as restoring Chrysler to a point where it is optimizing its assets and its capacity for innovation and advancing the well-being of customers and stakeholders.
I am skeptical that the Cerberus deal will do that, however. Chrysler was a great American icon — a business institution that had a distinct culture and history. It was the master of its own destiny for generations. That will change with its new owners. Cerberus makes money, not icons and institutions. It does so secretly and behind closed doors, not as a transparent corporation with pubic investors. There’s no roster of executives or board of directors on its web site. There’s no code of ethics that is held out to the public governing the way they do business. You don’t get to see who is behind the company and from where —and what countries— the investing dollars are coming. If you believe that accountability and transparency are indispensable attributes of success, and that they are necessary characteristics of great power in a complex society, as I do, you might have some misgivings about this deal.
Ultimately, what is likely to happen is that much of the company will be dismantled and the American public will be saddled with a large part of the pension and health care liabilities facing Chrysler. Cerberus can play hardball with unions, governments and others, and not care much about what people think. They can hire—and already have— platoons of lobbyists to advance their case, which will invariably involve whatever enhances their profits —the profits of a select and unknown few. It can become a troubling matter when concentrations of wealth and power become untethered from the discipline of public opinion. Because it is not a publicly traded company, it is said Cerberus doesn’t need to be worried about how it is perceived by the public. J.P. Morgan and his cronies thought the same. Then there were those pesky hearings in the House of Representatives headed by Arsène Pujo in 1912 that changed some of the ground rules under which the likes of Mr. Morgan operated. The power and privilege which today’s cabal of private capital is accumulating, and the troubling issues of responsibility, lack of transparency and social impact it raises, will, I predict, one day see a similar burst of legislative involvement.
The myth that removing the company from what some now regard as the shackles of quarterly statements will make all the difference is just one of the ironies in this deal. Cerberus, like the other members of this secretive club of private funds, is known neither for its patience nor its altruism. When you move from the cold of the storm into the mouth of the whale it may seem warm and quiet. But it’s only a short-term feeling.
You’re still in the mouth of the whale.
It was a week where it was reported that hedge fund manager James Simons made over $1.7 billion for 2006, the Dow Jones set a new record high and CEOs as a group continued to make more than at any time in history. Yet amid such unparalleled wealth, the U.S. Congress is only now getting around to finalizing a bill that would raise the federal hourly minimum wage from its current $5.15 to $7.25 —but not until 2009.
The increase was passed by the House and the Senate earlier this year and would take two years to be phased in. The final bill has not been placed on the President’s desk and there is no indication that he is looking for it. Those who are struggling to make their lives better, not by welfare but by work, single mothers and Wal-Mart employees —just three large groups who would benefit from this modest raise and long overdue visit to planet Earth by lawmakers— apparently have no voice worthy of being heeded. It has been more than 10 years since the act setting the federal minimum wage was changed. In that time, a generation of low-paid workers has come and gone. Many have died in the poverty to which their elected representatives consigned them by their inaction.
In his column today, The New York Times’s Paul Krugman echoes the worry we expressed here in March about a return to a distant era of economic division. Mr. Krugman writes:
Well, in at least one respect, everything old is new again. Income inequality — which began rising at the same time that modern conservatism began gaining political power — is now fully back to Gilded Age levels.
…
But it’s much too soon to declare the march toward a New Gilded Age over. If history is any guide, one of these days we’ll see the emergence of a New Progressive Era, maybe even a New New Deal. But it may be a long wait.
On a similar theme in March, we observed:
Capitalism has experienced these kinds of episodes in the past —the Gilded Age from 1865 to 1901 and the “malefactors of great wealth” that sparked the fury of Theodore Roosevelt and his promise of a “square deal” in a fledgling 20th century come to mind. The results produced considerable upheaval. One of the more turbulent periods was the aftermath of the Great Depression, when the hope of a “new deal” began to resonate with displaced workers who rode the rails in search of work. It is not encouraging that we are seeing a return to the milestone of 1929 in 2007.
It is becoming apparent that the snail’s pace in advancing the minimum wage is part of an accelerating backward march into a past of wealth inequality and economic polarization. Significant portions of the middle class are being carried out of sight by its momentum as well. When the leaders of capitalism and government permit this during times of unprecedented gain for themselves and those at the top, history teaches that they are treading upon a perilous course.
It has taken far too long for the legislative and executive branches of the U.S. government to enact a functioning bill to increase the minimum wage, which, in this time when a few are doing very well and so many others are not, is our choice for the Outrage of the Week.
Perhaps a little slow out of the gate, but The Times has an editorial today on the most recent evidence of a widening gap in U.S. wealth. It follows similar lines as those voiced last week by Finlay ON Governance in our Outrage of the Week. The Times includes reference to record levels of CEO pay, which we, too, noted last week. The editorial rather obliquely calls this “the largess of top-tier compensation.”
In our post, we talked about the social turmoil previous periods of wealth disparity have caused. Here is an excerpt:
Capitalism has experienced these kinds of episodes in the past —the Gilded Age from 1865 to 1901 and the “malefactors of great wealth” that sparked the fury of Theodore Roosevelt and his promise of a “square deal” in a fledgling 20th century come to mind. The results produced considerable upheaval. One of the more turbulent periods was the aftermath of the Great Depression, when the promise of a “new deal” began to resonate with displaced workers who rode the rails in search of work. It is not encouraging that we are seeing a return to the milestone of 1929 in 2007.
The Times entitles its editorial “It Didn’t End Well Last Time.” Well said.
It is a number that haunts the human conscience at any time: 18,000 children die every day because of a lack of adequate food, according to James Morris, the retiring head of the U.N. food agency. But to have this tragedy happening in a time when the world has never known as many billionaires, and Wall Street is enjoying record bonuses at the top, the figure is almost too difficult to comprehend. The equivalent of a medium-size town in the U.S. or Canada disappearing. Every day. Filled with 18,000 young people. Dying. Day after day
There are many wonderful individuals and groups struggling to right this terrible wrong. They do so at great sacrifice and personal risk. They see things in Darfur and other parts of Africa that are incomprehensible in their horror and sadness. Yet the problem persists.
Here’s a thought: As noted on these pages earlier this week, Goldman Sachs announced its co-presidents received a total compensation package of $106 million between them. The company announced that it had awarded $54 million to its CEO late last year. That’s just the tip of the bonus iceberg throughout the investment industry. As the Wall Street Journal reports: “Overall, Wall Street will pay a record $23.9 billion in bonuses this year, according to an estimate released by New York state.”
Why doesn’t Wall Street, which is making the fattest profits in its history, set for itself the task of alleviating this problem? It takes money, for sure. But it also takes leadership and organization. It takes computers and logistics and the purchasing of large commodities. These are things Wall Street does well. Most of all, it takes the determination of intelligent men and women to do something about an intolerable problem. There would be no better way for Wall Street to re-connect with Main Street—the ultimate source of all its fees and investment income. And that’s where the real values of America are tested and set.
Wall Street could do it. It seems to be able to do anything it sets its mind to. The rest of the investment community in Canada and Europe would likely follow its lead on this, as they do with so many other things. And the vast constituency of individual investors, mutual fund holders and pension plan members who have made the investment community so wealthy would be enormously proud and grateful. It would be a demonstration of responsible capitalism at its finest from a land where stakeholder capitalism has become a driving force.
Record bonuses and billionaires. Eighteen thousand children dying every day from malnutrition. It doesn’t need to be this way. Every week this is tolerated in a world of luxury and plenty, is indeed, the Outrage of the Week.
One sees in this annual Alpine pilgrimage of Davos fragments of the grainy black and white movies showing the imperial families of Europe gathering in their toy soldier costumes and opulent surroundings, oblivious to the marshaling clouds of change and discontent that would bring their primacy to an end.
Fortunately, the annual spectacle known as the World Economic Forum at Davos has folded its tent for another year. It occurred not a moment too soon, as my supply of antacids was running dangerously low. There is, of course, nothing wrong or surprising about elites from business and government getting together. Having worked with these types for many years, I am well aware that many need constant reassurance and affirmation of their significance. Being among other CEOs or heads of government is the way these people remind themselves of their importance and remind the world that they are still running the show –even in en era of YouTube and WordPress. Such vanity is best taken with a large grain of Swiss salt, I suppose. As Philip Barry sardonically observed: “One of the prettiest sights in this pretty world is the privileged classes enjoying their privileges.”
What is galling is the pretense that these events are actually transforming the social and economic landscapes. It is the disguise of social gravity, the spin that seeks to turn global CEOs into crusading St. Georges slaying the world’s evil dragons, that makes these events so offensive. These forums have become the CES (Consumer Electronics Show) of CEOs –a gigantic trade show of, by, and for the self- impressed who visit one another’s booths to see how each measures up. Sure, there are earnest proclamations about the problems of the world. And everybody has to be seen embracing Bono. The Irish have that effect on people. Everybody loves embracing my Irish Setter, too. But real change requires constancy of effort, not candlelight and wine. What affronts the reasoned mind is the idea that this gathering actually makes a difference. Restating the obvious about the problems of the world does not make a difference. Talking about issues long ago advanced by others does not make a difference. Listen, if Davos actually had the level of influence it claims over CEOs and kings, presidents and dictators, the world would rightly be jumping up and asking who elected these people and how are they held accountable for their decisions. And if it doesn’t –which is my thesis– why do we, and especially the world’s media, encourage the pretense of these people by paying so much attention to them year after year?
Here’s an idea: Since so much discussion at Davos seems outwardly, at least, to center on issues of Africa and global poverty, how about a World Economic Forum that takes place in an impoverished region so that it can be experienced first-hand. True, there might not be the luxurious surroundings of Davos or the glittering parties, but surely that’s not really the purpose, as the organizers of the event take regular pains to point out. And if the growing economic divide is really as troubling as some Davos participants argue, how about the wealthiest CEOs at Davos volunteering to freeze their own pay for a few years as a sign of leadership and as a model for others? These things won’t happen because Davos is not really about correcting terrible wrongs. And it is certainly not about leadership. It is about contacts and connections, knowing the right number to call and how new deals can be won.
As German steel baron Jürgen Großmann admitted, “The spirit of Davos doesn’t just float around. You have to look for it in the conversations…Furthermore, we’re interested in wealthy clients. The richer our client countries are, the more stuff we sell them, especially cars and machines that Germany makes lots of.”
Of all the deficits and shortages in the world today, it is the lack of genuine character in so many leaders and the absence of truly transformative leadership that is the most striking. In this, Davos is an apt mirror. One sees in this annual Alpine pilgrimage to Davos fragments of the grainy black and white movies showing the imperial families of Europe gathering in their toy soldier costumes and opulent surroundings, oblivious to the marshaling clouds of change and discontent that would bring their primacy to an end. Those who are trying to make the world better are doing it anyway, regardless of Davos. And for those who are not so inclined, going to Davos won’t likely make any difference.
This year, Davos organizers attempted to make use of social media –blogs, videos, podcasts and the like- to bring ordinary people into the tent –but at a safe cyber-distance, of course. The effort bombed. Did they really think that people back on planet Earth would be impressed by the opportunity of clicking on the comment button of a blog in order to send back a short message in small font to some big poobah? YouTube can do many things. But making imperious titans more trustworthy or sympathetic as they schmooze or answer an amateur videographer’s questions on the fly are not among them. By the way, the really big players didn’t bother to post on any blogs. And very few mortals at the bottom of the mountain bothered to send any comments. This one certainly hits a note:
The Davos Conversation was a total failure. The end of a demagogue is when the mob pulls a no show.
And so the overfed princes and business potentates exited as they came, in a mist of mutual admiration and private jets, all the while lamenting the vexing issue of global warming –this year’s topic du jour. What is saddest about Davos is that these leaders have a chance to make a real difference. Some would argue, and I count myself among them, that they have a moral obligation to do so. Instead, they have become actors in a predictable side show of self-indulgence and extravagance –two vices which one might think would be incompatible with the ills they claim to be fighting.
Which is why the spectacle known as the World Economic Forum at Davos is the Outrage of the Week.
