January 22, 2006
Behind Every Underachiever, an Overpaid Board?
By GRETCHEN MORGENSON, NY TIMES

LINK

IF the executive pay proposal floated last week by the Securities and Exchange Commission comes to pass, shareholders may finally be able to fathom just how cleanly their pockets are being picked by me-first managers. And who knows? Maybe more shareholders will do something to try to stop the insanity.

It is indeed one of life's mysteries why so many institutional stockholders have stayed silent on the subject of outrageous pay, lo these many years. We are talking real money, after all: Lucien A. Bebchuk, professor of law, economics and finance at Harvard Law School and director of its program on corporate governance, said compensation paid to the top five executives at all public companies in the three years ending in 2003 reached 10 percent of those companies' earnings.

One institutional investor who has been shouting from the rooftops about this shareholder robbery is Daniel J. Steininger, chairman of the Catholic Funds, a mutual fund company in Milwaukee. At dozens of annual shareholder meetings in recent years, he and his team have spoken out against excessive pay. This year they will be back again.

Rather than attack the recipients, however, Mr. Steininger will focus this year on corporate directors, the people signing off on the giveaways. They are supposed to be working for the shareholders, of course, but in too many cases directors are lapdogs for management, giving them whatever pay they feel entitled to.

To address this problem, Mr. Steininger has written a shareholder proposal related to how public company directors are compensated and has muscled it onto the proxy statements of seven companies. The proposal requires that shareholders approve director pay each year and that precise details of the compensation paid to directors - including charitable contributions and other perquisites that involve the use of company assets - be made public annually.

The companies whose shareholders will vote on the proposal later this year are Bank of New York, Cendant, Exxon Mobil, Home Depot, Honeywell, Merrill Lynch and SBC Communications, now known as AT&T.

"The theory of our resolution is that if shareholders set the pay for directors, there would be more honesty and integrity," Mr. Steininger said. "Directors themselves would feel more accountable to shareholders, rather than to the C.E.O. and whatever consulting firm he hires to aid and abet the setting of high directors' fees."

Too many boards remain stacked with top management's pals, Mr. Steininger said. He cited an academic study from 2002 by Ivan E. Brick, Oded Palmon and John K. Wald at Rutgers Business School in Newark and New Brunswick, which concluded that excessive executive pay was associated with ineffective "monitoring" by directors, or "cronyism." The study examined pay at 2,404 businesses from 1992 to 1999. Executive pay has risen steadily since then.

"We believe that any board that pays excessive C.E.O. compensation fails in one of its most important duties," stated Mr. Steininger's proposal to Cendant shareholders. "There is evidence that directors who enjoy high director compensation are more likely to pay excessive C.E.O. compensation and that high director pay coupled with high C.E.O. pay correlates with underperformance of the company."

Mr. Steininger identified the seven companies mostly because they underperformed relative to their peers, he said. But another consideration was a grade of D or F for one or more aspects of each board's performance from the Corporate Library, an independent research firm in Portland, Me.

Officials at all seven companies either did not respond to questions about the proposal or declined to comment on it.

To be sure, director pay at most companies has not reached the obscene levels of C.E.O. compensation, though board members' pay and benefits can be substantial. Mr. Steininger estimated that each director at Bank of New York, for example, will receive $172,000 this year in cash and company stock. Directors at SBC, he estimated, each took in $189,148 last year in cash, stock units and telecommunications and satellite television equipment and services.

Even in the mainstream, however, director pay is rising quickly. A study published on Jan. 10 by the Corporate Library noted that individual director pay at more than 2,000 companies jumped 16.5 percent last year, on average. Total board pay at these companies reached $801,000 last year, a 20 percent increase, according to the study.

At many companies, it is surprisingly tough to determine exactly what directors receive for their board work, Mr. Steininger said. "You really have to sift through this - travel, accident insurance, charities that benefit by their directorships - there is a whole raft of other things," he said. "It is written in obscure language deliberately. I have a full-time lawyer working on this."

Additional companies could have been targets, Mr. Steininger said, but for the fact that he has only six people on his advocacy team.

"Pay without performance has been tracked and studies show an absolute correlation between excessive C.E.O. pay and underperformance," Mr. Steininger said. "Any director should be reading the same things we're reading. It's pretty clear there is a fundamental problem with the way directors do not exercise their fiduciary duties."

Company boardrooms remain far too clubby for their shareholders' good. It is unfortunate that in 2006 directors still have to be told who their real bosses are. Perhaps making their pay subject to shareholder approval would awaken some directors to what can only be described as their misplaced loyalties.

S.E.C. to Propose New Rules on How Executive Pay Is Reported
By STEPHEN LABATON (NYT) 821 words
Published: January 11, 2006

LINK

WASHINGTON, Jan. 10 - Outlining the details of his first major initiative, Christopher Cox, the new head of the Securities and Exchange Commission, said that next week the agency would propose the most extensive overhaul since 1992 of the way companies disclose compensation to senior executives and directors.
'The marketplace for executive compensation has proceeded apace in the intervening decade and a half and the results have been an increasing amount of executive compensation that is escaping disclosure,' Mr. Cox told a group of reporters over lunch at the agency's headquarters.

Once adopted, the new rules would provide considerable assistance to investors, who are often unable to glean from corporate filings the total compensation of top executives. But the rules would still fall far short of the ambitious corporate democracy proposals made for many years by stockholders and some lawmakers, including one proposal that would give the investors some say in setting pay scales.

Those proposals have gained little political traction in Washington, even as a growing body of evidence has emerged to suggest that at many companies there is no correlation between executive pay and company performance.

Still, in a sign of how much the landscape has changed over the last decade, business groups that previously had resisted changes on executive compensation disclosure rules now appear generally supportive of the effort.

Mr. Cox and other officials emphasized that the proposed changes were not intended to reduce skyrocketing compensation packages but to make them more transparent. They are also supposed to force boards to provide more explanation for them, he said.

He dismissed the notion that more information about large packages could result in ever-escalating salaries and bidding wars for top executive talent.

'There is a counterargument that says making more information available will cause upward pressure,' he said. 'But that's just not how markets work. Markets function best when there is more disclosure.'

At the luncheon Mr. Cox and Alan L. Beller, director of the commission's corporate finance division, said the rules would require greater disclosure of deferred compensation and executive compensation when a company's ownership changed hands.

By lowering the disclosure limit for executive perks to $10,000, from $50,000, as the current draft of the proposal contemplates, companies would be required to provide more information about a wide range of benefits that often go undetected or are imprecisely described. Those include club memberships, the use of executive jets and cars, and payments made by companies to cover the taxes on compensation and benefits.

Companies would also have to provide more statistical tables listing retirement plans and would have to go beyond boilerplate language in justifying compensation packages. They would require companies to put a precise value on stock options in the table listing executive compensation.

The new rules would apply to the chief executive, the chief financial officer and the top three other executives, as well as all board members.

High compensation packages in recent years have prompted a series of suggestions for legislation, and the proposals being promoted by Mr. Cox have been under study at the agency since 2004. In recent years, companies including Tyco, General Electric and Walt Disney have settled accusations by the commission that they failed to properly give shareholders the details of large pay packages.

Officials hope the rules can be in place by the 2007 proxy season, although investors at some companies may begin to see changes this year.

Recent studies have shown that compensation of top executives has increased at a far greater rate than for other workers, and that there is often little correlation between pay and performance.

A report two months ago by the Corporate Library, a research organization that promotes better corporate governance, found that compensation of chief executives at 2,000 of the biggest companies increased 30 percent in 2004, compared with 15 percent in 2003 and 9.5 percent in 2002.

A study by Lucian A. Bebchuk of Harvard and Yaniv Grinstein of Cornell found that corporate assets used to compensate the top five executives at companies grew from less than 5 percent to more than 10 percent of aggregate corporate earnings from 1993 to 2003. The result was a large decline in company and portfolio values with no associated strengthening of management incentives.

Another study, by Mark Van Clieaf, managing director of MVC Associates International, a management consulting firm, and Janet Langford Kelly, a Northwestern University law professor, found that 60 companies in the bottom 10th of the Russell 3000 index lost $769 billion in market value and $475 billion in economic value in the five years through 2004.

They paid their top five executives more than $12 billion over the same period.

Executive Paywatch

LINK

Every year, shareholders and America's workers learn of new jaw-dropping executive compensation packages that seemingly defy rational explanation. In 2004, the average CEO of a major company received $9.84 million in total compensation, according to The New York Times.

2004 Trends In CEO Pay

What Is Wrong with CEO Pay and What Can Be Done to Fix It

CEO and You

Campaign and Action Tools

Behind the Curtain

Jan. 11, 2006, 12:14AM
SEC wants more disclosure on corporate pay packages
Stockholders angry about lavish hidden benefits
By MARCY GORDON
Associated Press

LINK

WASHINGTON - Public companies would have to disclose far more details about their executives' pay packages and perks under a proposal coming before the Securities and Exchange Commission.

The changes address a source of shareholder and public anger: lavish pay for executives, often not fully and clearly disclosed to investors, even as their companies stumble and lay off employees.

The five SEC commissioners are scheduled to vote on the plan, which makes the biggest changes in rules governing disclosure of executive compensation since 1992. The proposal would be opened to a public comment period and could be formally adopted by the SEC sometime afterward  possibly in time for the spring company proxy season next year.

Companies would for the first time be required to furnish tables in annual filings showing the total yearly compensation for the chairman and the next four highest-paid executives. The true costs to the bottom line of their pay packages, including stock options, would have to be spelled out.

"It has been a very long time" since the SEC has revised the rules, agency Chairman Christopher Cox said Tuesday in a meeting with reporters.

The tighter rules are needed "in order to eliminate the surprise of hidden payments" to executives and to ensure that shareholders are fully informed, Cox said.

Cox, a longtime Republican congressman from California who became SEC chairman last August, said he had focused on the issue of compensation disclosure as a high priority before he was confirmed by the Senate.

Still, some critics of corporate conduct don't believe fuller disclosure of compensation goes far enough because it won't rein in runaway pay and may even create competitive pressure that will push it up.

"Disclosure can produce resentment and demands for controlling the pay," said Tamar Frankel, a law professor at Boston University who specializes in corporate governance. "Or it can continue to produce followers of a culture for squeezing more and looking for soft benefits that cannot be quantified."

Even after the corporate scandals of 2002, as some companies continued to lavish on their executives extravagant pay packages with scant justification  often tied to short-term leaps in stock prices  the SEC began in 2004 to consider tightened disclosure requirements for compensation.

In a high-profile case, the SEC said in September 2004 that General Electric Co. violated the law by failing to fully disclose to investors the millions of dollars in perks enjoyed by its retired chief executive Jack Welch.

They included unlimited personal use of GE's planes, exclusive use of an $11 million apartment in New York City, a chauffeured limousine, a leased Mercedes, office space, financial services, bodyguard security and security systems for Welch's homes.

The SEC did not fine GE in the settlement but won a promise from the company to fully disclose such benefits in the future.

Details of the SEC proposal were still being worked out. They include:

"Reducing from $50,000 to $10,000 the level at which executive perks must be detailed if they add up to the latter amount or more.
"Requiring new disclosure tables for executives' retirement benefits and the compensation of company directors.
"Requiring companies to explain the objectives behind their executives' compensation.

January 11, 2006
Executive pay proposal a good start

LINK

I must admit I had my doubts about Christopher Cox when he was named chairman of the Securities and Exchange Commission given that his nomination came amid a burgeoning anti-Sarbanes-Oxley backlash. But his latest effort to improve disclosure of executive pay shows he's got the commission headed in the right direction.

Critics of the plan argue that more disclosure will lead to even higher pay, which is absurd. More scrutiny, not less, is what will bring executive pay into line, which is basically what Cox was quoted as saying in the New York Times:

"There is a counterargument that says making more information available will cause upward pressure," he said. "But that's just not how markets work. Markets function best when there is more disclosure."

Sure, some executives may use the exorbitant pay of others to justify their own, but shareholder outrage may be the most effective tool in curbing runaway pay across the board.

Besides, Cox's plan isn't aimed at stifling executive pay, it's designed to make boards more accountable. Shareholders who are receiving solid returns don't typically complain about their executives being well-paid. It's when executives reap benefits while shareholders suffer that investors get upset. Under Cox's plan, boards would have to offer shareholders a detailed justification of pay packages.

Too much of today's pay and benefits are hidden from shareholders' view, and Cox proposes more detailed disclosures in proxy statement. Bringing that out in the open is the first step to addressing the problem.

Assuming the commission follows through on the plan, Cox next needs launch a renewed effort give shareholders a stronger voice in board elections, pay decisions and proxy proposals.

Then his executive pay proposal will have some real teeth because shareholders will have the two tools they need: information and the power to do something with it.

Patriot Corporations
Jan Schakowsky, The Nation, Thu Jan 19, 2:28 PM ET

LINK

The Nation -- If you want to make Americans of all stripes mad, tell them about the billions of dollars in subsidies and tax breaks our government gives to companies that outsource jobs, exploit workers (both here and overseas) and dodge taxes. Tell them about Accenture, for example, which advises other companies how to outsource jobs overseas while avoiding its fair share of tax payments by incorporating offshore in Bermuda. Yet like many other US corporations, Accenture continues to qualify for tax breaks, and it currently has more than $500 million in government contracts--courtesy of taxpayers.

Meanwhile, urban communities and small towns are devastated by plant closings. Often these plants are owned by profitable corporations like Maytag, which moved its Galesburg, Illinois, plant to Reynosa, Mexico, in 2004, leaving 1,600 workers without their good-paying jobs. The number of manufacturing jobs in the United States has fallen all the way back to the level it was in 1945. And our government continues to provide carrots--and no sticks--to companies harming our economy.

To end this race to the bottom, we must stop rewarding outsourcers and tax dodgers, and start rewarding companies that care about America and American workers.

A sensible proposal to create "Patriot Corporations" was developed by Bill Edley, a former State Representative in Illinois, and political scientist Robin Johnson of Monmouth College. Funded by rolling back all of President Bush's tax cuts and recouping taxes lost through corporate offshore loopholes, the Patriot Corporations program would be entirely revenue-neutral and voluntary. It would give significant tax advantages and shareholder incentives to corporations that agree to create a real partnership with American workers. Patriot Corporations would also move to the front of the line for federal contracts--no small incentive.

To qualify, corporations would have to produce at least 90 percent of their US-sold goods and services in the United States. They would also have to:

§ limit top management salaries to 100 times the lowest-paid full-time worker;

§ spend at least 50 percent of their research and development budgets in the United States;

§ operate a profit-sharing plan for all employees, contribute at least 5 percent of payroll to a portable pension fund and pay at least 70 percent of the cost of a standardized and portable health insurance plan;

§ agree to neutrality in employee organizing drives;

§ be in good standing with EPA, OSHA and NLRB regulations;

§ and agree not to price-gouge consumers.

Companies that meet those standards are the ones that deserve carrots. With Patriot Corporations we can create a new class of companies as committed to American workers as they are to selling goods in the American market. And we can create a new patriotic ethic in America--one that unites workers and their employers in the mutual goal of building a stronger, more prosperous, more democratic business sector that can vigorously and proudly compete in the twenty-first-century global economy.

Like this article? Try 4 issues of The Nation at home (and online) FREE.

Copyright © 2006 The Nation