Monday, June 14, 2004

CEO Pay Explodes, Wall Street Fiddles

Stumbled on this worthy column today about bandits of the boardroom...

"Re-thinking rules and regulations
Commentary: What if disclosure's not enough?

By Michael Collins,
Last Update: 1:36 PM ET April 29, 2004

WASHINGTON (CBS.MW) -- I believe in a free market, and was taught the less government interferes, the better. I've also been writing for years about the fight for more disclosure in the financial world, thinking that if the information was just out there, the market would take care of the other problems.

Perhaps it's time to think again.

Part of the problem is too many corporations, investment companies and financial services providers approach disclosure issues the same way drug companies list possible ugly side effects quickly at the end of advertisements.

But part of the blame lies with investors, us in the media, boards of directors, and investment advisors who don't pay enough attention to things that are disclosed but just don't seem right.

Take executive pay. It's one of the best-disclosed items in corporate America -- at least the basic elements. But pay packages still go up, sometimes regardless of how outrageous the compensation or how unrelated to the fate of the stock or the employees.

Data compiled by Bloomberg shows CEO pay at 70 of the largest 100 US firms rose to an average of $14.1 million last year -- which the Corporate Library notes is equivalent to 384 years of an average employee's pay of $36,764. The 2003 studies are showing executive pay isn't rising as fast as it has in the past, more compensation is tied to company performance, and some executives actually saw their packages shrink -- but are we getting our $14-million worth?

Shareholder value flies away

Another study out recently, by Professor David Yermack of the Stern School of Business at NYU, found that "CEOs' personal use of company aircraft is associated with severe and significant under-performance of their employers' stocks." Yermack found that firms that grant this perk under-perform market benchmarks by about 4 percent a year -- after controlling for other factors.

And the underperformance can't be attributed to the cost of providing the aircraft. Yermack speculates "CEOs who consume excessive perks may be less likely to work hard, less protective of the company's assets, or more likely to tolerate bloated or inefficient cost structures."

When it comes to outrageous pay and perks, and how they affect shareholder value, you can blame greedy executives, compliant boards of directors or misguided compensation consultants. But it's not a problem of disclosure. The pay and perks are right there in the filings -- and mailed to every shareholder every year. We just need to pay attention, and find a way to hold the companies and executives accountable.

In five years writing the Gadfly, I can't count the number of times I've heard aggrieved investors use a version of "If we had only known..." The answer seemed to be insisting that investors could get the information they needed, rather than counting on more policing from regulators.

But more frequently now, I'm seeing that even when investors could know, they either don't bother to find out, don't seem to care, or feel they can't do anything about the problem that is disclosed."

... you were right the last time -- individuals have no power to effect change in the boardroom. The same problem with unregulated monopolies applies in every executive boardroom -- there is no natural restraining mechanism to the natural proclivity toward gouging the maximum out the system. It only gets worse over time as each board looks at the behavior of the others and says "they're getting theirs, I'll get mine"

What Mr Collins fails to point out is that while CEO pay in overseas corporations is getting ever more disproportionately higher than the average worker's, the ratio is still far lower and climbing less rapidly than our bandits of the boardroom.

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