executive compensation

This Tuesday, shareholders and the general public will get a chance to see whether anybody at Citigroup will be held accountable for the catastrophic failure of company management to oversee the colossal risks and the ensuing disaster that has impacted the global economy. That day, at the Hilton New York in midtown Manhattan, the company will hold its annual shareholders meeting. For the price of a Citigroup share of stock (trading Friday at around $3.65 a share), New Yorkers can enjoy (perhaps that isn’t the right word but whatever) theatrics surpassing anything in the neighboring theater district a few short blocks away.

The meeting agenda is chocked full of company and shareholder sponsored resolutions – thirteen in all. All of the proxy advisory services – RiskMetrics, Glass-Lewis, Proxy Governance, et al. – have weighed in with a variety of recommendations on the various proposals, which company executives have opposed.

Perhaps the most important proposals on the day’s agenda are management sponsored: reelection of the company’s board of directors and ratification of the company’s executive compensation plans.

Herein lies the toothless cats in waiting. But Wall Streets vermin have nothing to fear.

What I mean is this: Under our current system set out in the federal securities laws and regulations, shareholders are entitled to vote on an array of issues – executive compensation, directors, corporate governance issues of all shapes and sizes – but company executives are largely free to accept or ignore the outcomes of the election.

If this system were allowed in the presidential election process, George Bush could stay on for four more years if he so choose.

What the . . .

Unless you have been hibernating in a cave in northern Greenland for the last couple of years, you probably already know the facts surrounding the company but let’s recap the highlights of its stunning performance of late.

As was noted by proxy advisor, Proxy Governance, “Citigroup, along with many of its peers, have suffered from over-exposure to an array of complex and risky securities now dubbed toxic-assets. As with most systemic breakdowns, many things went wrong that led to these problems. Central to these problems were excessive risk taking by individuals, poor risk management practices and oversight, and overly aggressive strategies to grow profits – core areas of board responsibility. Such collective failure is notable not only for its price tag but for the fact that it comes despite growing adherence to so-called corporate governance “best practices” and check-the-box processes – it is tragically clear that many boards continue to fail in anticipating and addressing emerging challenges and in aligning the company’s risk taking and risk management activities with its strategic plan.”

These Guys Couldn’t be Elected Dog Catcher, But . . .

Shareholders, led by AFSCME, Change to Win and a number of other union affiliated pension funds have called for a vote against the re-election of the long-term members of the Audit & Risk Management Committee, including former Chair C. Michael Armstrong, former committee member Alain Belda, current Chair John Deutch and members Andrew Liveris, Anne Mulcahy and Judith Rodin. This is a modest request considering the massive ineptitude of these overseers.

During these Committee members’ tenures, the Audit & Risk Management Committee failed to protect shareholders from excessive exposure to credit, market, liquidity and operational risk. According to CEO Vikram Pandit, “Citi’s resources were allocated to activities that did not create enough value for our clients and did not earn adequate risk-adjusted returns for shareholders.”

I think that these shareholders have made a reasonable argument for voting these directors out of their positions and perhaps to a different universe.

So How are Taxpayer Dollars Being Spent at Citi?

Remember earlier this year when Vikram Pandit, Citi’c CEO, sat before a Congressional committee and pledged that he would take only $1 in salary until Citi returned to profitability?  I remember it clearly. Unfortunately, Mr. Pandit has the ability to, ah, shall we say evade the truth when testifying before Congress. While he noted that he would not take a salary until things straightened out at the company, he failed to mention that he would still receive more than $51 million on deferred compensation, stock options and a variety of other non-salary forms of compensation for 2008.

Ooopsie!

Anyway, as required of all TARP participants, there is an advisory vote on the company’s executive compensation program presented for shareholder approval. The American Recovery and Reinvestment Act (ARRA) of 2009 added provisions to the Treasury Department’s Troubled Asset Relief Program’s (TARP) Capital Purchase Program – a $700 billion emergency initiative approved by Congress to infuse capital into the banking sector – requiring that, among other things, participants submit an advisory vote on executive compensation to shareholders.

This proposal is advisory in nature. Regardless of the vote outcome, the company’s board is under no obligation to reconsider its compensation awards to its executives.

As is obvious to most investors, the company has performed abysmally this last year. By all measures, it has substantially trailed its peers and the S&P 500 by every measure. At the same time, the company’s CEO and other top executives have been paid handsomely, significantly higher than the median compensation paid to other executives at peer companies. While the top executives at Citi graciously gave up their salaries, their total compensation packages remained remarkably high with the CEO, Vice Chairman and Co-Head of Global Markets receiving $51M, $13M and $20M respectively.

So who are the toothless tigers? Shareholders of course. This is not to blame them as I am certain that, if given half a chance using real tools for corporate change, they would rip these executives  from limb to limb. That said, it will be fascinating to see how the meeting plays out if only to see how the play ends.

Popularity: 13% [?]

New Report Examines Mutual Fund Proxy Voting & Excessive CEO Pay

As the pitchfork populists gather and the skies darken over public companies in the U.S and elsewhere, investors are increasingly fuming about the large pay packages granted CEOs as their own fortunes evaporate. Complaints about executive pay are not a new phenomenon: people have been complaining loudly about this excessive greed for some time now. What’s changed is the fact that corporate leaders bear a large portion of the responsibility for the global financial crisis but have seemingly avoided the personal risk that has been inflicted on the rest of us. Millions of Americans have lost their jobs but they get raises.

Really big raises.

While Congress constipates and the President voices the feeling of many Americans about this economic injustice, scant attention has been paid to who allowed this sort of unseemly reward system to become so commonplace. Today, a report was released by a group of researchers that points the finger at a passive participant in the compensation mess, namely the mutual fund industry.

In a report entitled, “Compensation Accomplices: Mutual Funds and the Overpaid American CEO,” the American Federation of State, County and Municipal Employees (AFSCME), The Corporate Library and the Shareowner Education Network (SEN) analyzed mutual fund voting patterns on compensation issues in 2007 and 2008. The report found that mutual funds are increasingly supportive, as a group, of management positions on proposals dealing with executive pay.

The report found that the average level of support for management proposals on compensation issues was 82 percent in 2007 and 84 percent in 2008, a steady increase from 75.8 percent in 2006. The average level of support for the categories of compensation-related shareholder proposals was 42 percent in 2007 and 40 percent in 2008, a significant decrease from the 46.5 percent in 2006. Mutual funds did show they were more willing to withhold votes from directors over compensation issues, increasing the average level of withheld support for certain directors from 42 percent in 2007 to 52 percent in 2008.

“It was surprising to see mutual funds becoming more supportive of management positions, given the uproar over outsized executive pay and distorted incentives,” noted Beth Young, Senior Research Associate at The Corporate Library, “though one bright spot was the willingness of mutual funds to withhold votes from directors associated with irresponsible compensation practices.”

Undoubtedly, this provides little comfort to the millions of us staring at our mutual fund statements wondering how our investments could do so badly so quickly. Equally troubling is the fact that the professionals we hired to add value to our hard earned investments, retirement accounts and children’s college funds can’t seem to connect the dots between executive pay and corporate performance. If this report is any indicator, not only didn’t mutual fund managers get it years ago, when hit between the eyes by the current economic crisis, they seem truly dazed by the executive pay morass that ordinary investors see with great clarity.

“Why might this be?” one could ask.

One possible answer lies in the too cozy relationship between mutual fund companies and the corporations in which they invest our money. This conflict of interest arises when a mutual fund company manages a public company’s corporate retirement plan or also provides investment banking or custodian banking services to the companies it invests in for its mutual fund investors. The conflict plays out when the mutual fund – often one of the largest investors in many public companies – goes easy on its proxy voting for those very same companies.

So what can be done here?

The report offers several recommendations:

1. Mutual funds that are the “pay enablers” should revise their proxy voting policies to ensure that they promote responsible compensation programs.
2. Mutual funds should have clear mechanisms for establishing and communicating their view of pay to compensation committee directors.
3. Retail investors in mutual funds should evaluate how their mutual funds vote on pay issues and hold those funds accountable for votes that enable pay abuses.
4. The SEC should require funds to distribute a Plain English report on proxy voting to their investors and revise and improve the N-PX data disclosure.

The timing of this report is critical for the mutual fund industry. As the 2009 proxy season rapidly approaches, the industry has a real opportunity to serve its customers – that would be you and me. However, as the report recommends, the task of holding both public companies and their major institutional investors – mutual funds – falls on us.

Popularity: 7% [?]

As the debate rages about compensation paid to executives of America’s publicly traded companies, there seems to be a disconnect between the issue of excessive compensation and the bigger picture with regard to the performance of American businesses. While we grouse about the grotesque levels of wages and benefits paid to CEOs, we must not lose sight of the fact that this is also a symptom of a far greater problem that has come home to roost with damning consequences. I am speaking of the failure of boards of directors to do their jobs to protect investors.

[click to continue...]

Popularity: 9% [?]

The Man on the Street

Sam, “The Man on the Street” shares his views on the current debate about executive pay for financial institutions receiving Federal bailout money.

Popularity: 11% [?]

The Wall Street bailout legislation, formally known as the Emergency Economic Stabilization Act of 2008, includes limits on compensation for executives of companies receiving taxpayer support.  So what does this mean for taxpayers who are footing the bill?

Not much.

Unfortunately, as drafted the provisions are practically meaningless and will do little to limit the gross payouts already available for these executives. Section 111 of the Act only restricts compensation paid to the top five executives at these companies. In addition, it provides for the recovery, or “claw back,” of ill gotten compensation, that is, performance pay received based upon materially inaccurate financial information.

The “big” provision that has both Republicans and Democrats squealing to their constituents is the provision in the Act that bans payments of “golden parachutes.” These are executive severance agreements that usually pay executives when there is some sort of change in control in the company or, as is often the case, when the executive is fired.  This later provision only applies as long as the federal government holds an equity or debt position in the company.

As noted in last week’s Wall Street Journal, the stakes are significant. The paper reported that executives of financial institutions receiving federal assistance are owed more than $40 billion for past years’ pay and pensions.  Deferred compensation coming due includes $11.8 billion at Goldman Sachs Group Inc., $8.5 billion at J.P. Morgan Chase & Co., and $10 billion at Morgan Stanley.

Since most of these firms haven’t set aside the cash required, they are a drag on current earnings and will be paid out of the corporate coffers.

The liabilities are an essentially a hidden obligation. Even when the debts to their executives total in the billions, most companies lump them into “other liabilities” and only a few of the companies identify amounts attributable to deferred pay.

In today’s Financial Times, it was noted that these Wall Street firms have promised not to use public support to pay these executives’ bonuses.  Bank of America, Bank of New York, Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo all promised to pay salaries and bonuses from existing cash resources.

So lets walk through this scenario and look at the situation at Morgan Stanley.

The company received a capital infusion of $10 billion from the federal government. They stick their newfound money in their corporate pocket (this is a really big pocket by the way) along with their other cash reserves. Let’s say that tomorrow is “bonus day” at the company.  Colm Kelleher, Morgan Stanley’s Chief Financial Officer reaches deep into the company “pocket” and pulls out $21,015,689, which he intends to use to pay himself (this is the total compensation that Mr. Kelleher received in 2007 according to company filings).

“Ooops! That looks like “government” money. Back in it goes,” he muses. Digging around for “loose change,” he eventually finds some “corporate” money and marches off to his bank in the Hamptons where he can console himself over the terrible financial crisis facing America.  This shell game would be laughable if it weren’t our money!

Meanwhile, our leaders in Congress are calling on the government to tighten restrictions on executive pay for these institutions receiving our money. House Speaker Nancy Pelosi and Senate Leader Harry Reid are wringing their hands with concern.  If their last attempt at reining in executive compensation is any measure, we shouldn’t expect real reform anytime soon.

The task of holding corporations responsible for grossly excessive executive pay falls squarely on shareholders. The only problem is that, in years past, the Securities and Exchange Commission has prevented shareholders from raising compensation issues in the form of shareholder resolutions, arguing that such matters constitute “ordinary business” that is exempt from proper shareholder consideration. Let’s hope that, given the massive public policy issues raised by using public funds for executive compensation, the SEC will reconsider its policy in regard to this important matter.

Stay tuned.

Popularity: 6% [?]