 No spas, riches or rewards for Wall Street's failed executives
(China Daily)
Updated: 2008-10-14 08:08 Normally you can predict which companies are headed for trouble by finding those that slather multimillion-dollar bonuses on executives without regard to their performance. "There is no more reliable indicator of litigation, liability and investment risk," Nell Minow, co-founder of the Corporate Library research group in Maine, told Congress last week.
When boards of directors refuse to demand excellence for hefty compensation, dole out riches to reward short-term gains or pay according to quantity of deals rather than quality, where's the incentive for building a solid company? Worse, those sorts of pay packages signal a deeper problem than mere wrong-headed incentives. They show that the directors aren't minding the store. "It's not just a symptom" of internal weaknesses, Minow said regarding executive compensation untethered to performance. "It's a cause," she told a House committee this week investigating the demise of Lehman Brothers, American International Group, et al. At Lehman, Chief Executive Officer Richard Fuld pulled down nearly $270 million over the past five years, including base salary, annual bonuses and stock options, according to the Corporate Library. To be fair, much of that stock is now worthless, and no one lost more than Fuld when the share price sank. Nor did he have a golden parachute to cushion his exit. But an exchange of e-mail disclosed by the House oversight committee shows an astoundingly arrogant attitude at Lehman's highest levels toward executive pay. As recently as June, Fuld and Lehman's head of global investment management, George H. Walker IV, scoffed when a couple of in-house fund managers suggested that top executives forgo their 2008 bonuses. That would not only "represent a significant expense reduction", urged Judith Vale and Robert D'Alelio in an e-mail. "It would send a strong message to both employees and investors that management is not shirking accountability for recent performance." They said they "feel compelled to express our views" to the members of the board's executive committee. This didn't sit well with Walker. He e-mailed the other top Lehman managers who had received the message and apologized for the ridiculous suggestion. "I'm not sure what's in the water" where Vale and D'Alelio work, Walker wrote. The notion of giving up bonuses was "hardly worth the EC's time now." Frankly, it was a notion the executive committee should have come up with on its own. Could anyone have been more dismissive than Walker? "Don't worry," Fuld e-mailed him. Those complaining "are only people who think about their own pockets". But who was looking out for the shareholders' pockets? Perhaps a little more risk management was in order. But the board's risk management committee met only twice in 2007 and twice in 2006. Lately, pretty much every company is doing badly because of the spectacularly bad decisions of a relative few, from loan originators to aggregators to credit default swappers. Executives made off with millions while leaving the rest of us to spend hundreds of billions of dollars to clean up their mess. In most of America, people understand that risk brings reward when it works. But in most of America, risk that fails doesn't pay off. It hurts. So it's hard for those of us who aren't Wall Street wizards to understand why the folks whose recklessness is shaking the world economy have been so richly rewarded, while the plodding, rule-abiders are hurting. Congress took a first step toward changing that last week when it passed the humongous Emergency Economic Stabilization Act, a/k/a Wall Street Bailout. The law gave the Treasury secretary authority to set executive pay and corporate governance standards for firms getting help. Treasury must forbid any compensation that rewards executives for taking "unnecessary and excessive risks that threaten the value of the financial institution", the plan says. Bonuses already paid out will be clawed back if they were based on illusory gains, and no more golden parachutes.But the damage has been done. What about encouraging boards to stop rewarding recklessness and start paying more attention to what the hell the executives are up to? If shareholders had a say on pay, it would help. A bill giving them a nonbinding vote - a voice on executive compensation - passed the House last year and has been languishing for 19 months. The White House opposes it, and business groups complain that shareholders breathing down their leaders' white collars would drive away the best executives. Now they can expect hotter breath on their necks. As a measure of the anger out here in the real world, consider this week's outpouring of righteous indignation over the $440,000 junket AIG salespeople enjoyed at a California St Regis resort just days after taxpayers took over the company. The blowback prompted AIG to call off another such trip. If AIG'S golf trips and spa treatments cause that kind of tiff, can givebacks on bogus bonuses, shareholder say on pay and tougher regulatory oversight be far behind? We can only hope. Ann Woolner is a Bloomberg news columnist. The opinions expressed are her own. (China Daily 10/14/2008 page16) |
