All the talk about reining in executive compensation at our country’s public companies isn’t so much about corporate governance reform as it is about the lack in public trust in the markets and the companies themselves.
Having watched the recent Securities Industry and Financial Markets Association (SIFMA) speech by The Conference Board CEO Jonathan Spector on executive compensation (Watch speech here.) and read the testimony of Special Pay Master Kenneth Feinberg (www.treas.gov/press/releases/tg334.htm), I get it. There needs to be a restoration of public trust in the financial system now or we may never get out of this economic morass. It’s not like it was at the start of this decade when there were accounting frauds at Enron and WorldCom.
This time a Sarbanes-Oxley-like act won’t do the trick. This time the solution lies in adhering to principles, not rules and new laws. It is about having the C-level suite, the board room and shareholders understand each other’s roles and truly communicate with each other in order to meet one common goal: value creation through the lens of strong risk management.
This movement towards principles-based governance, if you will, over more regulations is starting to catch on in some organizations. From The Conference Board Task Force on Executive Compensation Report, SIFMA’s own Guidelines on Executive Compensation to the Independent Directors Executive Compensation Project (IDEC) principles, public companies now have some models to use to develop their own compensation principles.
“While the government has an important role to play in modernizing our regulatory frameworks, trust in our corporate institutions can only be fully restored if private sector institutions themselves take meaningful action,” Spector said Tuesday when addressing the SIFMA annual meeting. “You are probably asking yourselves how you can define ‘meaningful action.’ I’d like to offer a very simple answer: When deciding how to address the issue of executive compensation, take the steps that will do the most to restore trust and confidence.”
Pastora San Juan Cafferty, longtime director and leader of IDEC, writes on her organization’s blog that “we believe that directors still have an opportunity to recapture the high ground of responsible, independent oversight of CEO compensation. And the best way to do this is by working together on a program that directly addresses the public’s distrust of how compensation is administered.
“By remaining silent, boards continue to lose control to shareholders, regulators, government appointees and Congress.”
That last statement really sums up the dilemma facing public boards. If they wait for Congress, the SEC or some other regulator or, in the case of shareholder actions, courts to act, they stand the chance of losing control of their companies. And what’s next, director elections, proxy access, board leadership?
If the actions taken last week at the seven TARP companies (AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial, General Motors and GMAC) by Feinberg are any indication, I don’t think companies want the government in the practice of determining executive compensation. Just look at how he determined that he was going to cut cash base salaries and bonuses by 90 percent and overall total compensation by 50 percent at six of those companies.
Feinberg’s Reasons for Cutting TARP Company Compensation
He said: “I can summarize the flaws in the six individual company submissions as follows:
1. The companies requested excessive guaranteed cash – salaries and bonuses – for company executives;
2. The companies requested that stock issued to these executives be either immediately redeemable or redeemable without a sufficient waiting period;
3. Many of the companies did not sufficiently tie compensation to performance-based benchmarks and metrics;
4. Many of the companies did not sufficiently limit or restrict financial "perks," such as private airplane transportation, country club dues, golf outings, etc., and in some cases provided excessive levels of severance and executive retirement benefits;
5. The companies did not make sufficient effort to fold guaranteed compensation contracts – entered into prior to the enactment of the current compensation regulations – into 2009 performance-based compensation.”
Do other public companies want this to be their executive compensation plan? I highly doubt it.
Executive Compensation Task Force Endorsement FAQ Available
That is one of the reasons The Conference Board decided to create the Executive Compensation Task Force. Next week, The Conference Board Governance Center will release its Frequently Asked Questions on endorsement for the Task Force principles. To receive a copy, you can read this blog or contact Editor Gary Larkin at firstname.lastname@example.org.
The IDEC Project has also put up its Web site. The address is www.idecproject.com. SIFMA’s Guidelines on compensation are available here.
Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…