My interview with AE Investimentos in Brazil on the hot topic of CEO pay is carried in its December issue.
Executive remuneration and the role it has played in promoting the excessive risks and leverage that helped give birth to the current economic crisis are placing boards and pay rewards under a microscope as never before. The story is one more example of an increasing global interest in curbing pay abuse and its wider consequences.
An excerpt from the interview in its original Portuguese follows below (click to enlarge):
Our comments about Citigroup’s hapless board of directors made their way into the New York Post today in a piece by business journalist Paul Tharp. Some of the observations first made here at Finlay ON Governance were reflected in the Post’s editorial, as well.
The Post’s story got quite a lift, appearing in the headline of the newspaper which was much discussed on CNBC this morning. Here is part of what was quoted:
Citigroup’s board of directors increasingly resembles a first-class sleeping car on a train wreck that just keeps happening,” said J. Richard Finlay, head of the Centre for Corporate & Public Governance.
“Almost whatever it does, it is too slow and too late.
“It can take months for Citigroup’s directors to clue into what others in the real world have known for some time.
Noting that Citi’s stock has lost more than $133 billion this year alone, Finlay said, “Citigroup’s board has demonstrated that it has not been on top of any major issue in more than a decade, much less ahead of it.”
You’ll be seeing some significant changes in Citi’s boardroom in the not-too-distant future. It’s one thing for directors to be portrayed as sleeping on the job. It drives them crazy when they are presented as clowns.
There is a reason why the bank’s board appears little more than a bystander to the destruction of shareholder wealth. A good part of it has to do with its discredited governance structure.
Watching Citigroup’s shares crash through the 10 dollar level, then nine, then eight, seven, six -like some kind of inexorable countdown leading to the inevitable disaster- investors might be excused for asking, Where is the board? The answer is that it is stuck somewhere back in the 1940s, when it was considered bad form for directors to actually direct. (more…)
One is forced to reach back to 1917 and a delusional Russian czar on the eve of his abdication to find such a comparative detachment from reality.
The almost heart-stopping disintegration of the value of Citibank shares seems unrelenting. It is not entirely surprising, however. This is a company that has had three CEOs in the past five years and is very likely headed for its fourth. Sandy Weill had to give up the reins when he failed to check a wave of scandals and regulatory run-ins that became costly to the institution’s reputation and stock price. Charles Prince had to relinquish power after he failed to stem an excess of overleveraging and mortgage-related bad bets that led to an unprecedented wave of losses and write-downs. Under the newest CEO, Vikram Pandit, the largest destruction of shareholder wealth in the company’s history continues unabated. As these words are being written, Citi’s stock has crashed through the dreaded $8 floor. Most investors have taken to averting their eyes every time their stock appears on the ticker. I am one of them.
Common to these problems has been Citigroup’s board of directors, which increasingly resembles a first-class sleeping car on a train wreck that just keeps happening. Almost whatever it does, it is too slow and too late. It can take months for Citigroup’s directors to clue into what others in the real world have known for some time. Sometimes they never do.
Nothing reveals the dysfunctionality of the board, and the utter failure of leadership on the part the current CEO, more than the position the company has taken on executive bonuses. Tens of billions have been wiped out in write-downs and losses. Over the past year alone, its share value has declined by $133 billion. Yesterday, Citi announced intentions to eliminate 52,000 jobs. Yet with all this, the board wants to take until January of next year before it decides whether or not it will award bonuses. One is forced to reach back to 1917 and a delusional Russian czar on the eve of his abdication to find such a comparative detachment from reality.
If the board can’t get a basic thing like executive bonuses right (meaning eliminated) at a time when the stock is in free fall and the company is receiving critical injections of capital from the American taxpayer, how can it be dealing with the larger challenges to Citi’s business model and where it fits into a radically redefined 21st century financial landscape? The answer is obvious. Citigroup’s board has demonstrated that it has not been on top of any major issue in more than a decade, much less been ahead of it. How it ever allowed the company to take on the level of risk it did and become almost suicidally overleveraged, how it permitted its once great franchise to become a laughing stock, and how it missed the mark with the company’s two recent CEOs –these are questions that quickly fall under the category “What were they thinking?” But that is a question that proceeds from a fundamentally flawed assumption. As we will show from the outdated and discredited structure of Citi’s board in our next posting, there hasn’t been a lot of thinking going on there for some time.
The company claims it is turning things around. Given the sputtering pace of progress in altering course and staggering quarterly loss of $3.41 billion, investors must be wondering if what they are turning around is the Titanic.
When its stock fell through the floor in 2006, Nortel’s “solution” was to consolidate its shares on a 10 for 1 basis. When its accounting was shown to be something of a scam, it restated its earnings. Not once, not twice. Three times would have been a record. But Nortel went for the big prize: a fourth restatement. That’s when we dubbed Nortel a serial re-stater.
Still, its losses mounted. And each time it recorded more financial disaster, it announced more layoffs. Quarter after quarter, year after year, the losses climbed and the jobs disintegrated. Here’s what we said in February:
… you have to wonder what’s going to happen when Nortel runs out of jobs to cut. Will they try to lay off workers at other companies in order to look good? Stranger things have happened at Nortel, not the least of which is the infinite patience investors have shown for a company that always promises paradise in the abstract but generally delivers disappointment in the quarter.
Today, the company announced a third-quarter loss of $3.41 billion. And, sure enough, it came up with more bodies to layoff. They say 1,300 jobs will be eliminated in the near future. Nortel has reduced its workforce by nearly 60,000, the equivalent of the entire population of Springfield, Ohio.
Nortel has never recovered from the days when it had a disconnected board and a CEO who also seemed rather detached from reality, at least the reality of the burst dotcom bubble. It lurched from that low point to full blown scandal with criminal charges laid against former CEO Frank Dunn and other top executives, along with a costly run-in with the Securities and Exchange Commission. Since Mike Zafirovski -its fourth CEO since 2002- took over, Nortel has lost more than $4.5 billion. Even before Mr. Zafirovski took over the helm at Nortel, management was claiming the company was in the midst of a turnaround. Given the sputtering pace of progress in altering course, investors must be wondering if what they are turning around is the Titanic.
We asked the question some time ago whether Nortel is capable of righting itself, or whether, given its checkered history and seemingly intractable descent into oblivion, its shrinking asset base and dwindling stock of human capital are better entrusted to other managers and directors.
Nortel’s stock closed today at less than a dollar on the New York Stock Exchange. If you took that on the basis of what it would have been before the 10 for 1 consolidation, Nortel would be trading at around ten cents a share. At its height, the stock sold around $125.
And where is Nortel’s board now? Has it laid out a plan that is capable of restoring the trust of investors and demonstrating that it comprehends what’s going on? Is it requiring any accountability from a CEO on whose watch $4.5 billion was lost? Or is it, like its predecessors, just partying in first class while Captain Z keeps hitting one iceberg after another?
A ten cent (unconsolidated) price per share seems to be a pretty resounding answer.
The law has finally caught up with the stumbling insurance giant’s out-of-control compensation and highflying junkets.
It took the sight of flashing red and blue lights in their rearview mirror before the visionless directors of AIG finally got the message about their failures and shortcomings. Last week, we commented on the excesses in executive compensation and numerous public relations disasters that have occurred on their watch. That was, of course, in addition to the complete meltdown of the company that resulted in the U.S. government’s huge bailout. We said at that time:
AIG’s directors should either get a grip on the company and show they comprehend the new public dimension to their duties, or they should find another line of work.
Yesterday, New York state’s top cop and Attorney General, Andrew Cuomo, sent a blistering letter to each member of AIG’s board demanding that they shape up and behave like the trustees of billions of dollars in public funds which they have become. As Mr. Cuomo wrote:
In the last several months, as AIG was teetering toward bankruptcy, and operating with unreasonably small capital, AIG nevertheless made numerous extraordinary expenditures in the form of executive compensation payments, junkets, and perks for its executives.
The letter went on to demand:
…the Board should immediately cease and desist these improper and extravagant expenditures which exploit the taxpayers of this Nation.
Today, in the wake of yet another revelation -this time, AIG executives taking a private jet to enjoy an $86,000 weekend of pheasant shooting at an English estate- the company announced a new policy to retrain pay, account for previous compensation deals and end highflying parties.
Is it possible the sirens of public outrage have finally awakened the slumbering insurance giant’s board? Stay tuned.
