Archive for the ‘CEOs’ Category
Shareholders at Citigroup have voted against the pay packages granted to the company’s top executives. Under Dodd-Frank, major firms are now required to hold shareholder votes on executive compensation at least once every three years. But the vote held Citigroup’s annual meeting on Tuesday was historic: it was the very first time that shareholders at a major financial firm have used this mechanism to express displeasure.
OK, now what? Well, that’s not entirely clear. Such votes are non-binding, and so the Board at Citigroup is legally entitled to ignore this recent vote entirely. But a widely-cited statement from the company includes the following assertion: “The Personnel and Compensation Committee of the Board will carefully consider their input as we move forward.” But really, what does that mean? And really, what should a Board of Directors do in the face of such feedback?
One problem is that a simple yea or nay vote is not very eloquent: there can be lots of reasons for saying “no” to a compensation package, and of course speculation is rampant. The Board (and its Personnel and Compensation Committee) now needs to talk to major shareholders — presumably it is already doing so — to find out what the problem is.
One analyst has been quoted as noting approvingly that this vote means the owners of big corporations are finally yanking the leash, a move towards getting things back under control. Mike Mayo, author of Exile on Wall Street, says that “[T[he owners of the big banks, namely the shareholders, are finally taking a greater amount of responsibility by speaking up.” The thinking here is that shareholders may have been objecting not just to Citigroup CEO Vikram Pandit’s $15 million dollar pay, but also to the $10 million retention payment awarded to him, and the general lack of correlation between Pandit’s pay and the company’s financial performance.
But then, while the idea that shareholders “own” the company is common, it is not uncontentious. The connection between most shareholders and the company is indeed pretty tenuous. And regardless of ownership claims, lots of people reject the idea that shareholders have any special role here, or that their voices should count for more than the voices of other stakeholder groups. Under such a view, a shareholder say-on-pay vote deserves little more than a shrug. After all, if shareholders are just one more stakeholder group, then evidence that they don’t approve of CEO pay is no more important than evidence of similar disapproval on the part of workers or suppliers or whomever.
But a shareholder vote has to count as more than just one more bit of moral suasion. For better or for worse, shareholders are, under most companies’ systems of governance, the ones to whom all insiders, including the CEO and Board of Directors, swear allegiance. Managers don’t promise to make a profit — such a promise would hardly be credible — but they do promise to at least try to make a profit, to have something left for shareholders after the bills are paid. It’s the one bit of accountability that every CEO, regardless of political persuasion, pays homage to.
I’m serious. Is Mark Zuckerberg aiming to be the hereditary sovereign of the Kingdom of Facebook?
Amid all the ballyhoo about the Facebook IPO, concerns have arisen about the ownership structure — and, hence, governance structure — structure that the company’s plan implies. As Matt Yglesias recently outlined, the current plan implies considerable continuing power for Zuckerberg. Given the number of Class B shares he owns, along with proxies he controls, Zuckerberg effectively has “57 percent of the voting rights over the company.” In addition, his control will be transferred to whomever inherits his fortune.
Is this a good thing or a bad thing? A couple of points, both having to do with how Zuckerberg will use his power.
One is that, interestingly, Zuckerberg has (in a letter to investors) disavowed a focus on profits:
“Simply put: we don’t build services to make money; we make money to build better services.
And we think this is a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits….”
Some will rejoice at this. But of course, when a company says it’s going to aim at things beyond profits, there’s no particular reason to think that they’ll aim instead at goals you approve of. Facebook is a powerful company, grounded on a potent technology. Whomever controls it has the power to do a lot of good, or a lot of evil. And as I’ve pointed out before, Zuckerberg holds some dangerous views about, for instance, things like privacy.
Some of the comments under Yglesias’s piece have suggested that Yglesias exaggerates just how unique Facebook is in this regard. Other companies have been controlled by powerful central figures. Fair enough, but Facebook isn’t your average company. In a very real way, Facebook is becoming part of the infrastructure of modern life. In its role, it is more like a public utility than a private company. That puts the company — and its leader — in a very different position than, say, Ford or Exxon. Facebook really is more like a nation, and so he who controls it really is more like a political leader. This casts a very different light on how we evaluate not just the man, but the processes that are in place to guide his judgment.
Two days ago, I asked — in the wake of the Costa Concordia disaster — whether the captain is duty-bound to “go down with his ship.” The question, I said, bears not just on the obligations of sea captains, but on individuals in positions of responsibility at organizations of all kinds. It also has implications for how organizations enculture individuals so that they see following through on promises as more than just a contractual obligation.
But today I’ll make explicit the analogy that is likely on the minds of most readers of this blog: never mind sea captains…what about CEOs? Does the CEO of a “sinking” company have a duty to “go down with the ship?”
First, it’s worth pointing out that sea captains don’t literally have to go down with the ship: closer to the truth is that they’re supposed to be the last ones off, or as close to last as is possible and permits them to do their duty to preserve the lives of crew and passengers. Similarly, bankruptcy for the company doesn’t literally have to imply bankruptcy for the CEO. In some cases, surely, bankruptcy isn’t the CEO’s fault, and there’s no reason to think that justice demands that a blameless CEO walk away penniless. But they should stick around to see the job done, even if that implies some financial risk to themselves.
Second, it seems to me that, as in the case of sea captains, the answer here has to depend a lot on the details of the situation. Sometimes staying aboard will genuinely help, and sometimes it won’t. Also, a CEO’s ill health might be a decent excuse, in some cases. And indeed, some corporate “captains” aren’t even wanted on a sinking ship: in 2008, for example, the US government forced Robert B. Willumstad to resign as CEO of the faltering AIG, and replaced him with Edward M Liddy. The idea that the captain should stick around to help only makes sense where the captain’s services continue to be seen as having value.
Third, there are several different ways in which a CEO can “abandon ship,” and they might not all be equally ethically bad. Abandoning ship could mean selling shares that are about to tank, or it might mean resigning prior to bankruptcy. Or it might mean resigning prior to an inevitable criminal investigation: several rats are known to have abandoned Enron’s sinking ship — Jeff Skilling, for example. Worst of all, perhaps, are “take the money and run” situations. Arranging a bonus for yourself just prior to declaring bankruptcy is the moral equivalent of looting the ship’s safe (or perhaps scuttling all the lifeboats) prior to prematurely abandoning ship.
As always, we need to be careful when engaging in moral reasoning by analogy. A company is not a boat, and bankruptcy is not the same as sinking. But what’s certainly true is that in both cases, the ethical requirements of leadership don’t end at the first sign of trouble.
Italian cruise-ship Captain Francesco Schettino is in jail, following an incident that left 6 dead and (at present) 29 missing. Among the accusations levied against is that he fled the foundering vessel before it was empty. (According to maritime law, a captain doesn’t literally have to “go down with the ship,” but he or she is supposed to be the last one off after ensuring the safety of others.)
Legal requirements aside, is there an ethical obligation for a captain to risk life and limb to stay on board until the last passenger and crewmembers are off? The answer is pretty clearly “yes.” Like many jobs, the job of captaining a ship comes with a range of risks and benefits. As long as the risks were understood when the job was taken on, you’re obligated to follow through.
There’s a more general point to be made here about the nature of ethics, and about ethics education and training.
Ethics often requires of us actions that we’d rather not carry out. You should tell the truth, even when it would be more convenient not to. You should keep your promises, even when breaking them would be more profitable. This is necessarily the case: if ethics only ever required you to do things you already wanted to do, there’d be no need for ethical rules (or at least no need to think of them as rules in the prescriptive sense).
But there’s at least a superficial tension, here, with the idea that ethics should be useful. After all, if having and following an ethical code doesn’t benefit us in some way, why bother? Sure, it’s easy enough to say “The right thing to do is the right thing to do,” but a system of ethics needs some justification in terms of human well-being or it’s just not going to be very credible, not to mention stable. Indeed, some ethical systems are subject to serious criticism precisely because their implications for human well-being are negative. Yes yes, I understand that your code of honour requires you to kill the man who killed your brother, but don’t you see how crazy this all is?
So there’s got to be some connection between ethics and benefit. And it’s not enough to point to social benefit. After all, pointing out that the community benefits from me taking ethics seriously merely pushes the question of justification to a second level: why should I care about the good of the community, especially if doing so requires significant self-sacrifice?
None of this should engender skepticism or cynicism. It just means we need to think carefully about who benefits, and how, from a system of ethics.
It also means that we need to think about how we can help individuals keep the promises that it was in their interest, initially to make. Captain Schettino found it in his interest to make certain promises (albeit perhaps implicit ones) when he signed on to be captain of the Costa Concordia, but then all of a sudden found himself in a situation where it was not in his interest to keep that promise. Threats of punishment were understandably insufficient, here. Staying out of jail is no great incentive if you’re free-but-dead.
Organizations of all kinds — including especially corporations and professional associations — need to work hard to help members think of the relevant ethical rules as something more than the terms of a contract, to help members become the sorts of people who simply would never abandon ship when they are needed most.
It was widely reported yesterday that former CEO of Nabors Industries Ltd., Gene Isenberg, will be the recipient of a $100 million severance payment. Except, he’s not leaving the company — he’s staying on as Chairman of the Board. Confusion and criticism has ensued.
For the most part, I think that executive compensation, even outlandish executive compensation, is in principle a private matter. If a bunch of shareholders want to pay their CEO a gazillion dollars — whether because they think he’s the one guy who can build long-term value or because they just think he’s a swell guy — well, that’s none of my business. I may think those shareholders are fools, or spendthrifts. But there’s little reason for me to be morally concerned. I don’t tell you how much to spend on your babysitter or your dry cleaning or your car. And I shouldn’t tell you how much to spend on your CEO.
But two factors get in the way of applying my in-principle argument to the present case.
One factor begins with the observation that shareholders don’t, in fact, generally make the decisions regarding how much total compensation the CEO gets. That task is delegated to the Board of Directors, who in turn generally delegate it to their Compensation Committee. Now again, in principle, this is purely a private matter. If the Board isn’t serving the shareholders well, the shareholders have cause to complain, and (yet again, in principle) they can always fire the Board if they feel sufficiently poorly served. But we have ample evidence that shareholders very often aren’t well-served by boards. Add to that the fact that proper functioning of corporate governance (and hence of capital markets) is clearly a matter of public concern, and you have at least the beginnings of a public-interest argument for interference in what would otherwise be a private matter.
The other reason why excessive pay isn’t always a purely private matter has to do with the government’s (i.e., the public’s) role (and support of) an industry. Note, for example, that Nabors is an oil-drilling contractor. So the $100 million that Isenberg is getting isn’t merely a share of privately-gained profits. It’s a share of the profits from a heavily-subsidized industry.
So boards of directors do have some public obligations related to how they choose to compensate executives (even if, as I’ve argued before, outsized compensation isn’t automatically unfair). Corporate directors are not just part of private institutions; they’re part of a system justified, in part, by its public benefits. And the more they seek to gain private benefits in the form of subsidies, the greater their obligations to the public become.
It’s a perennial question, but one that still merits examination, given that one of the big complaints of the Occupy Wall Street movement has to do with the increasing wage disparity between the income-and-or-wealth of the top 1% vs the rest of us.
Economist Mike Moffat offered some new perspective on this yesterday, when he pointed out on twitter that “More NHLers earn 6 million+ a year than Canadian CEOs do.” And while sports commentators and fans sometimes roll their eyes at the astronomical salaries top athletes currently command, they’re not exactly taking to the streets in protest.
So why are people so outraged by executive compensation, but not by the salaries of sports figures?
There are two different questions to ask the question of “are CEOs paid too much.”
One is to ask whether CEO salaries are too high given what they contribute to the firms they manage. That’s a question that primarily concerns the shareholders and employees of a firm, who need to know whether their multi-million-dollar CEO is worth the money. Does hiring “Mr. A,” who insists on $6 million in pay, rather than hiring “Mr. B.”, who would work for a mere $3 million, bring more than an extra $3 million in offsetting revenue to the company? If so, then Mr. A is worth the money. If not, then he’s not. And my non-expert impression of the economic literature on this count is that evidence is mixed. Lots of CEOs aren’t worth the money. Lots are. The correlation, overall, is unclear.
The problem of how much to pay CEOs from this point of view, and what combination of kinds of payment to offer (cash, stock options, etc.), is hotly debated by top business scholars and economists. But it’s worth remembering that the money isn’t just all sitting there in a big pot, waiting to be distributed among the CEO, other workers, and shareholders. Each of those contribute some value to business. The hard question is how much.
The second way to look at CEO compensation is to ask whether CEO salaries are, in some sense, too high from a social point of view. That is, is it simply unconscionable that some people are paid that much? It is in this regard that Mike Moffat’s question about CEOs vs NHL players becomes interesting. Philosopher Robert Nozick famously raised this question of sports figures’ salaries over 30 years ago, as a way of investigating fundamental questions of justice. Modernizing Nozick’s example, we could look at a star player like the Pittsburgh Penguins’ Sidney Crosby, who was paid $9 million for the 2010-11 season. That’s a lot of money, in anyone’s eyes. But consider the process that results in that sum. Imagine how many fans Crosby has, and how many of them would each be willing to pay a dollar to see him play. It’s not hard to imagine 9 million fans, each happy — indeed, eager! — to hand over a dollar to see Crosby play. The net result is $9 million (taxable) in Crosby’s pocket, and no one else involved feels bad about it.
It’s not hard to translate Nozick’s example into business terms. Imagine a CEO who gets $9 million in total compensation. We’ll simplify and assume that’s all cash, which it never is. We’ll further simplify by looking only at the interests of employees (leaving out customers and shareholders). If the company is a fairly big one, and has 30,000 employees, then the Nozickean question is this: can we imagine each of those 30,000 employees voluntarily transferring $300 to their CEO for the value he adds to their lives? If that CEO leads the company to flourish — or, in tough economic times, even just to survive — then it’s at least plausible. And if so, then (says Nozick) there’s little grounds for complaint by employees, and even less grounds for complaint by anyone else. People might question the end result, but none can fault the fairness of the process that would have (or could have) resulted in it.
Now none of this amounts to saying that all is right in the world of CEO compensation. Many, many people inside the world of business will tell you that the situation is out of hand. And I agree. There have been outrageous abuses. The point here is just this: the fact that someone is highly paid isn’t automatically unfair. Sometimes it is unfair, and sometimes it isn’t. We need to look carefully, on a case-by-case basis, at what that individual contributes to the business they manage, and what that firm contributes to society.
Forget what your accountant tells you is tax-deductible. What counts as a charitable donation, ethically?
There have been a few rumbles around the internet recently about the lack of corporate philanthropy at Apple Computers, and about now-retired CEO Steve Jobs’ own lack of philanthropic donations. See for instance by John Cary and Courtney E. Martin, on CNN: Apple’s philanthropy needs a reboot
Apple’s…charitable identity — or egregious lack thereof — disappoints us. It’s time for Apple to start innovating in philanthropy with the same ingenuity, rigor and public bravado that it has brought to its every other venture….
Cary and Martin acknowledge Apple’s participation in the Product Red program (which has raised tens of millions for relief of AIDS in Africa, and for which Bono recently praised Jobs). But Apple made $14 billion in profits last year, and Cary and Martin think it’s pretty clear that Apple is obligated to give some of that away. They’re not so clear on where that obligation comes from, except to point to precedent within the computer industry. Both Google and Microsoft have well-established philanthropy programs — both of which, as Cary and Martin note, have drawn fire. Hmmm.
The interesting thing here is that Cary and Martin’s criticism implicitly raises interesting questions about what counts as philanthropy.
Take, for example, Apple’s sizeable donation to the fight against Proposition 8, California’s anti-marriage-equality effort. Was that a charitable donation, or a piece of political activism? Is there a difference?
Apple has also been known to donate computers to schools, and regularly gives students (and, ahem, professors like me) a discount on computer purchases. Of course, critics will propose that those are really marketing gimmicks. But then, no sane person thinks that corporate philanthropy stops being ethical when it’s a win-win proposition.
But then, back to the issue of why. Why are corporations obligated to give to charity? One group of critics is fond of pointing out that profits belong to shareholders, and so when corporate execs donate corporate funds to charity, they’re giving away other people’s money. And even within the modern Corporate Social Responsibility movement, the saner folks are at pains to emphasize that CSR isn’t about charity. It’s about making some sort of social contribution, preferably one that makes use of a company’s special capacities and core competencies.
And as a recent piece in The Economist pointed out that, if you’re talking about doing good in the world, you really must look at what Apple has done to put beautiful, highly-functional, productivity-enhancing devices in the hands of millions of consumers. That’s not exactly the same as feeding the world’s starving masses, but then neither is a corporate donation to build an opera house, or to get your company’s name on a plaque in the lobby of the local business school. The questions we ought to be concerned with are questions about a corporation’s net impact on the world, and the methods it uses along the way. A focus on corporate philanthropy risks obscuring both of those questions.
Given a scandal of the size of that unfolding at News of the World, it’s not surprising that people are beginning to look at root causes. One important causal factor is the way in which News of the World‘s parent company, News Corporation, is governed.
I wanted to hear from someone who really knows about this stuff, not just from an academic point of view but from the point of view of someone who has seen up-close just how corporate boards function, and how they malfunction. So I decided to fire a few questions at Prof. Richard Leblanc, an expert on governance and someone who has been engaged by corporations to perform board evaluations.
Here are my questions, and Richard’s answers:
CM: Rupert Murdoch is both CEO and Chairman of the Board at News Corp. From a practical point of view, why does that create problems in how a board operates?
RL: From a practical point of view, he’s running the meetings and controlling the agenda and the information flow. And as an independent director, you’re sitting there and you owe your position to him because he’s the significant shareholder. So you really aren’t independent, in the sense of making the final calls. You’re more of an advisor, or a friend, is what directors tell me who sit on control block boards.
CM: The Board at News Corp doesn’t seem to have a lot of independence. You’ve interviewed dozens of directors about what makes a board work well. How does lack of independence play out in terms of actual board dynamics? Does it really mean everyone just saying “yes sir” to the CEO?
RL: Independence is a state of mind. There are formal rules but that doesn’t capture the co-optation by the CEO, and personal and social ties. Second, independence should reflect reasonable perception standards, and in this case, independence from the significant shareholder. So when you have a non-independent board, or several directors who are beholden, things don’t get discussed, information doesn’t reach you, you don’t have executive sessions as you need to, and there’s less tone-checking.
CM: Without reference to News Corp in particular, what connection do you see between a well-functioning board and the likelihood of wrongdoing at a firm?
RL: I’ve assessed some of the best run corporate boards in the world. I’ve also assessed boards that have had massive failures, including death, property destruction and monetary loss. The best boards are independent, competent, transparent, constructively challenge management, and set the ethical tone and culture for the entire organization. Usually where there is some ethical failure, or corporate wrongdoing, there is some defect at the board level I find. Undue influence, bullying, poor design, lack of industry knowledge, and directors who are not engaged, or don’t have the power or incentives to be engaged, are some of the red flags.
Many jurisdictions have moved recently to give shareholders a “say on pay,” which typically means that companies are required to hold advisory (i.e., non-binding) shareholder votes on compensation. In other words, establishing executive pay remains the responsibility of the Board of Directors, but shareholders are given an opportunity to voice their approval or disapproval.
The Wall Street Journal recently reported that when given their say, shareholders at a resounding 98.5% of American companies have said “yes.” So it seems that, thus far, shareholders are hesitant to challenge Boards in their compensation decision-making.
This is not surprising, given the complexity of the decision that Boards face in setting executive pay. Setting executive pay is a task typically delegated to a Board’s “Compensation Committee.” Now consider the task faced by a Compensation Committee in establishing the total pay-and-incentive package offered to their CEO.
The question facing a Compensation Committee is this: what combination of cash, bonuses, equity, and perks should we put on the table in order to inspire our CEO to perform optimally? In practice, this is a pretty complex question, one not admitting of cookie-cutter solutions. A Comp Committee needs to consider, just for starters:
- pressures from shareholder (and other stakeholders),
- pressures from proxy advisory firms and various think-tanks,
- human psychology, including their particular CEO’s character and motivational levers,
- the managerial experience and expertise of Committee members,
- corporate objectives (profit, market share, sales, social responsibility, etc.),
- their company’s ‘risk appetite’ (roughly speaking, are they trying to incentivize their CEO to be bold, or conservative?),
- expert opinion about optimal compensation structures (which is deeply divided, to say the least).
The problem here is as much one of epistemology as it is one of ethics. Compensation Committees need to take an enormous amount of information and opinion and distill it into a decision that will work and that will be defensible in the face of enormous scrutiny.
Of course, there is no shortage of compensation consultants, ready and willing to help Compensation Committees with this task. But recent (not-yet-published) research at the Clarkson Centre suggests that many corporate directors are skeptical about the value of compensation consultants.
Given this complexity, it’s not surprising that shareholders — even sophisticated institutional shareholders — are so far pretty hesitant to do much second-guessing. Whether or not that’s a good thing is a separate issue.