Owners of American corporations have rarely spearheaded the kind of landmark reforms the capital markets have needed to ensure public confidence or avoid the club of government regulation. They are reprising their Laodicean roles by failing to force a say on executive compensation.
More than a decade ago, we described the growing trend of inflated CEO pay as the mad cow disease of the North American boardroom. The comment, made at a speech in Toronto, was quickly picked up by the press. The metaphor was used because the trend toward excessive compensation appeared to be galloping from company to company, rendering directors seemingly incapable of applying good judgment and common sense when it came to compensation decisions. We repeated that idea in an interview in BusinessWeek in 2002 and in submissions to committees of the U.S. Congress.
But recent events struck us with the fear that this disease has spread to the shareholder body itself. The telling symptom is the revelation this week that at Merrill Lynch, Citigroup, Morgan Stanley and JPMorgan Chase, four companies that have seen their stock plunge, on average only 37 percent of investors supported recent proxy resolutions for a non-binding say on pay. In the case of Merrill and Citigroup, record multi-billion dollar write-downs and losses have been posted. The compensation of the CEOs who headed these companies during their descent into the world of subprime folly has been a recurring theme on these pages. It, along with the wider concern over soaring executive compensation, has sparked a mounting crescendo of outrage on the part of the public that has found its way into the current U.S. presidential campaign. Even Republican presidential hopeful John McCain has chided the level of greed that is sweeping America’s boardrooms.
The larger issue that draws our attention is the perennial fecklessness of shareholders as a group. After the panic of 1907, it was not investors who demanded the creation of the Federal Reserve System, nor did they rise up and call for such now basic measures as audited financial statements, annual reports and insider trading laws after the market crash of 1929. And when the Enron-era scandals revealed systemic weaknesses in American corporate governance, it was not the mass of shareholders who stood up at annual general meetings and demanded tougher audit committees and fewer boardroom conflicts – or any other provision of Sarbanes-Oxley legislation, for that matter. They are reprising their Laodicean roles by failing to force a say on executive compensation.
For American investors, too harsh is the tether that does not even bind. It is bad enough that directors insist on treating shareholders like children while they convey the idea that a say on pay would be almost the final step in the undoing of capitalism as we know it. But for the owners of American business to act as though they can’t be trusted with such advisory powers in connection with their companies and their money boggles the mind and is a complete abrogation of the responsibilities of ownership. It is our choice for the Outrage of the Week.
In Burma, where bloated corpses still line the banks of swollen rivers and the cries of orphaned children for food go unheeded, the efforts of the civilized community to bring relief on an organized basis to a cyclone ravaged people continue to be rebuffed by that country’s paranoid military regime. U.N. Secretary General Ban Ki-moon has mustered all the leadership skills of Michael (you’re doing a heck of a job) Brown during his feeble response to Hurricane Katrina. Only France, at this point, seems to have shown the courage to say that humanitarian duties trump national sovereignty when it comes to dealing with the corrupt powers at Nay Pyi Taw.
When the West, or any larger community of nations that aspires to call itself civilized, fails to act to relieve the suffering of people made worse by a corrupt junta, it is an indictment that history and human conscience cannot ignore. The major nations of the world have shown themselves to be unwilling to deal with this humanitarian emergency and confront the rulers of Burma, even though that country continues to be a member in good standing of the United Nations. It is an assault on moral standards that offends humanity.
It is our choice for the Outrage of the Week.
The absence of any discussion concerning all the roles held by these important Wall Street figures, including in the governance of the Fed itself, does a disservice to the stakeholders who are entitled to all the facts.
It is widely held, even by Fed Chairman Ben S. Bernanke, that the Federal Reserve System helped to bail out Wall Street when it agreed to “loan” $29 billion to facilitate JPMorgan’s purchase of distressed investment bank Bear Stearns. We will have more on the subject of that so-called loan in an upcoming posting. What has gone unnoticed and uncommented upon by the press, analysts and members of the U.S. Senate banking committee during its hearing last week, however, is the fact that key Wall Street figures, including Jamie Dimon, chairman and CEO of JPMorgan Chase, Richard S. Fuld, Jr., chairman and CEO of Lehman Brothers and Jeffery R. Immelt, chairman and CEO of GE, are directors of the Federal Reserve Bank of New York, the institution that is putting up the money.
Mr. Dimon is a “Class A” director of the New York Fed, elected by member banks to represent member banks (i.e., Wall Street). Mr. Fuld and Mr. Immelt are elected by member banks to represent the public. One might take the view that foxes are generally elected to guard the henhouse, too. The New York Fed’s governance brings to mind the crony-stocked, self-serving boardroom of the New York Stock Exchange under Richard Grasso before it was forced to make major changes to ensure higher standards of independence and accountability. It is clearly time to look at to whom and how the New York Federal Reserve is held accountable.
We know that JPMorgan benefited handsomely from the Fed’s dramatic measures. Lehman Brothers, widely rumored a few weeks ago as the next possible Bear Stearns, got a boost from the Fed’s market soothing actions. And GE, who just today jolted the market by announcing a 5.8 per cent decline in first quarter net income, was also having problems with its financial services division. Mr. Immelt told CNBC (a unit of GE) that he began to be aware in March of a weakening company outlook. (In an interview earlier that month, he indicated the company was still on target to meet its previous positive guidance.) A less volatile capital market temperament was no doubt helpful to him as well.
More and more, the picture is emerging that this was a bailout of Wall Street, prompted by Wall Street, over problems caused by Wall Street, with terms dictated by Wall Street. The Fed’s agreement constitutes the single most significant market intervention in generations. Such a decision, which places substantial taxpayer dollars on the line and the concept of moral hazard in jeopardy, should be arrived at in a manner that is beyond reproach not only in fact but also in appearance.
The absence of any discussion by the media, the Federal Reserve or legislators concerning all the roles held by these important Wall Street figures, including in the governance of the Fed itself, does a disservice to the stakeholders who are entitled to all the facts in order to properly hold government and its agencies to account. It is our call for the Outrage of the Week.
He was, more than anyone, responsible for bringing Bear Stearns to its demise. Already fabulously compensated over many years, he has now been made even wealthier by the American taxpayer.
On a cold April night in 1912, as the ill-fated Titanic was preparing for its unscheduled journey to the bottom of the Atlantic, White Star managing director J. Bruce Ismay pushed himself ahead of the throngs of horrified women and children and stepped into a crowded lifeboat. Though he escaped death on that calamitous occasion, he never overcame the clutches of odium history held him in and became a reviled figure whose spirit lives in infamy. For us, the name Ismay has become synonymous with the class of leader who puts himself first in times of crisis and leaves others to fend for themselves in the cruel seas of betrayal and folly. We have seen many CEOs, like those at Enron, Nortel and Hollinger, do that in recent years.
Our thoughts turned to the Ismay metaphor when we read that James Cayne had liquidated his remaining holdings in Bear Stearns. He netted some $61 million on the sale of 5.7 million shares. Much of the stock was obtained over the years through generous options that allowed him to purchase shares well below their earlier highs. The move sends a clear signal to the market, and to Bear Stearns employees, that Mr. Cayne will not be leading any effort to get a better deal for the company or to save it as a stand-alone entity. An unceremonious end to the 85-year-old institution now seems unavoidable. It was the final act of a leader who was more distinguished in recent months by absence and folly than crisis management and vision. We chronicled his antics earlier on these pages.
For all of the time since 1993 and up until just the past few months, Mr. Cayne was CEO of Bear Stearns. He has been its chairman continuously since 2001. In the past five years alone, he received more than $155 million in salary, bonuses and other compensation. He was, more than anyone, responsible for the colossal misjudgments of the company and for taking the steps that brought it to its demise. And when the alarms were sounding this past summer and earlier this month, he was nowhere to be found. The New York Times reports that he played little role in talks with JPMorgan Chase about how the companies will integrate their operations.
Given what we have seen in the past, we are not surprised that he was the first to bail out big time. Many, particularly those on Wall Street, will point to how much he has lost on the $10 bid for Bear Stearns stock. Mr. Cayne’s rich compensation over the past several years, when he was overseeing the mistakes that created this catastrophe, will no doubt console him somewhat. Many others at the company, who did not play a decisive role in the bad decisions, will not be so fortunate.
The American people helped make Mr. Cayne, who was fabulously compensated, even wealthier. The Fed-orchestrated bailout ensured that his shares would be bought at $10 –instead of nothing. He was happy to step into the lifeboat taxpayers provided him as the company sinks to the bottom and the casualties are still being tallied. Mr. Cayne’s closing performance at Bear Stearns, as with his previous inexplicable lapses, bring discredit to the term leader. They are our choice for the Outrage of the Week.
Never in modern business has so much been given to so few for such colossally failed results.
In just five years, these three CEOs made more than $460 million while leading their companies into the greatest losses in their history. One of them, Charles O. Prince of Citigroup, even got a bonus of $10 million, despite presiding over more than $20 billion in losses and write-downs. Stanley O’Neal left with $161 million after Merrill Lynch chalked up its largest losses ever. And Countrywide Financial‘s Angelo Mozilo, one of the highest compensated CEOs in America, has pocketed more than $400 million since 1999. The company has lost four times that amount over the past six months. Never in modern business has so much been given to so few for such colossally failed results.
To the average working person, who rarely receives a bonus even for doing an exemplary job, much less a bad one, this performance must have seemed like something of an out-of-body experience. Pay and accomplishment seldom have seemed more disconnected.
But to the past and current CEOs who testified before the House Committee on Oversight and Government Reform this week, there is no disconnect at all. The universe, for them, unfolded exactly as it should. It was about as we expected.
They, and the heads of the board compensation committees which approved these deals, all offered the usual bromides: The amounts were fully approved; the money was earned; the market is king; high pay is needed to attract and keep the best talent. How it is that CEOs who preside over record losses represent the best talent was never quite explained. One claimed only to want to help homeowners live out the American dream. Another cited his grandfather being born a slave. A third trumpeted his company’s ethics and corporate governance reforms. Mr. Mozilo ventured that the subprime meltdown had a notable culprit: “There was a lot of fraud there.” he told lawmakers. Many will agree, but they might not be thinking about the garden variety mortgage applicants to which Mr. Mozilo was referring. What role more lofty figures had in pushing out subprime loans, and who benefited from the resulting torrent of fees and record bonuses, will be something regulators and legislators should be looking at more closely.
The group of CEOs and directors who appeared before the comittee managed to slice and dice their compensaton decisions so much that they looked like they came out of a boardroom Veg-O-Matic: the pay wasn’t for this year, it was for last; it wasn’t severance, it was deferred compensation; it wasn’t a bonus for this year, it was payment for previous excellent performance. They said they actually lost a lot of money when the stock went down, just like all the other shareholders. Except most other shareholders did not head the company and make the wrong decisions. Most did not run up record losses and most did not receive tens or hundreds of millions in stock options and bonuses and salaries bigger than the state of Texas. One more thing: the process, they testified, is all fully in accord with the Business Roundtable guidelines on CEO compensation. Now that’s a really high bar. The Roundtable is made up of America’s top and best-paid CEOs. The ranking Republican on the Committee, Rep. Tom Davis (R-Va.), called the Business Roundtable guidelines the “gold standard” for corporate compensation. Is that because it makes sure the CEOs get all the gold?
Astonishing even for this group, when asked by Rep. Paul Kanjorski (D-Pa.) if there was any amount they would consider to be too much, there was silence, punctuated by self-serving proclamations of satisfaction with the way things are. All reassured the committee that they were not underpaid, however, and thus a sigh of relief was heard across the country.
America is experiencing one of the worst economic downturns since the Great Depression. The brokerage and mortgage lending industries played the central role in creating this contagion. But if high CEO pay is truly linked to performance and is good for the economy, people will want to know why it is, during a period that has seen the largest transfer of wealth from investors to the boardroom in history, the result is now one of falling stock values, shrinking economic growth, galloping home foreclosures and mounting job losses.
The hearing this week gave a rare opportunity for business leaders to admit that CEO compensation has gotten out of control and that it’s time for a new reality show in the boardroom. What began with the attendance of prominent CEOs and boardroom luminaries ended with the spectacle of men twisted like pretzels, having engaged in every type of contortion to show that these compensation arrangements were reasonable and had nothing to do with decisions to pump out more fee-generating subprime loans and structured investment vehicles. They also sent a veiled warning: any change to or reduction in the way CEOs are compensated, and capitalism as we know it may not survive. Here’s a bulletin for the boardroom: capitalism may not survive the kind of leadership that permits an ever increasing gap between CEO pay and everyone else’s, rewards failure with multi-million dollar bonuses and severance, and sees CEOs spinning off with a king’s ransom while leaving everybody else in the dust.
This was an opportunity for real leaders to admit that there are serious problems between the leadership class of capitalism and those who depend upon it for their well-being. To stand up and acknowledge the trend toward excess, to take the lead in stepping back and not being the first in the lifeboat when disaster strikes, to show some meaningful sacrifice at a time when so many are hurting instead of flashing five figure watches, five thousand dollar suits and a tan direct from the winter mansion at Palm Beach (or Palm Springs) -this would have been the kind of leadership that CEOs showed during two great wars and other times that tested America. This group showed none of that. One suspects they are, regrettably, an accurate reflection of the pool of CEOs and directors of which they are a part.
Excessive CEO pay has become synonymous with what is worst about American business: crony boards where one back scratches the other; compliant compensation committees made up of past and current CEOs; and an ethical value system enabling displays of greed and over indulgence that is not something parents generally want to impart to their children. It has been associated with every scandal from Enron and WorldCom to Nortel and Hollinger and countless failures in between. It is now a contributing factor to the recession that is unraveling the world’s credit markets and crippling economic well-being for millions.
What was obvious, too, from the testimony is that none of these CEOs and business leaders is possessed of superhuman ability. All seemed rather ordinary in the insights they offered and in the information they imparted, despite being recipients of extraordinary compensation and a corporate publicity machine that makes superman look like a slacker.
Despite the number of experienced CEOs and directors who appeared before Congress this week, one voice was distinguished by its absence: that was the voice of genuine leadership. America is entitled at a time of crisis to more than the spectacle of hugely paid, decidedly self-satisfied CEOs who feel that the system is working as it should. It needs leaders who recognize there is a need to restore public confidence in capitalism and the ethics of those who steer it. And that requires shared sacrifice and an understanding that, even in the great American boardroom, there are limits to what rational people both need and deserve.
Capitalism, like any household, should be governed by values, and not just who can get the most as quickly as they can. And so the actions of the CEOs and directors who appeared before Congress this week, and the failures of their boards that produced these results, is our choice for the Outrage of the Week.
If it were a crime for legislators to bring discredit to parliament, the MPs investigating cash payments to a former prime minister would long ago have been carted off and locked up.
A lot of people I have talked with over the years view Canada’s system of government as something akin to a relative without personality: they’re nice enough to invite to the party but nobody will be terribly disappointed if they don’t show up.
Canada’s parliamentary-style democracy lacks the history and majesty of the British and misses out on the vigorous checks and balances that define the U.S. system. Its politicians, except for the few rare figures like Lester B. Pearson and Pierre Elliott Trudeau, seldom stand out on the world stage. And if you happened to be watching the action in Ottawa this week, the experience would have caused you to have an even lower opinion about how Canada is governed.
The House of Commons ethics committee investigating cash payments to former prime minister Brian Mulroney (he had always denied receiving any until recently, and those assurances formed part of the basis for the federal government paying out $2.1 million to settle his lawsuit with it in 1997) held more of what can only be charitably called hearings this week. It’s a committee that has demonstrated a chronic inability to engage in a straight line of inquiry with anything approaching discerning and well-researched questions. Even the fact that while he was prime minister, envelopes of cash were regularly being dispatched to the first minister’s official residence every month, seems to have gone over members’ heads. Can you imagine the scandal that would erupt in Washington if a former presidential chief of staff admitted that cash payments were being delivered like pizzas to the president and first lady at the White House? In Canada, it barely elicited a shrug.
Over the years, I have frequently been asked to testify before committees of both Canada’s House of Commons and Senate on ethics and governance issues. The experience generally leaves me astonished at the lack of preparation revealed in the questioning. But this House of Commons ethics committee really takes the prize.
Its members are often juvenile, unprepared and disgustingly partisan. Questions are disjointed and answers rarely followed up. The committee looked like a ship of fools when it was interrogating the former chef at 24 Sussex Drive, the prime minister’s official residence. Yes, I mean chef as in top cook. The committee seemed stunned that he had nothing of value to offer that would assist in its deliberations. A soupcon of arsenic might have been in the public interest.
One member of the committee has the unimpressive habit of curling his finger through his hair, which he wears with bangs, while questioning witnesses. The “questioning” part is generous; it’s really a whine delivered while mumbling. Other members are so far over their heads that it is painful to watch. The committee chair lets the witnesses decide if they want to take an oath to tell the truth at the beginning of their testimony. His pedantic displays and facial contortions of impatience make all the lame vice principals I have known look like paragons of manliness and virtue. So lacking in backbone is this committee and its chair that when a witness refused to give evidence unless the chair recused himself, Liberal MP Paul Szabo obliged and turned the gavel over to another member. Try pulling that stunt on Chris Dodd, chairman of the U.S. Senate banking committee, or Barney Frank, head of the House financial services committee.
Yesterday, Canadians learned that Mr. Mulroney is refusing to re-attend the hearings to answer further questions. His lawyer claims he doesn’t need to and that he wants to move on. So now it’s the subjects of investigation and their lawyers who are running the show. The committee, which has the power to summons witnesses, apparently is not going to demand that the man who stands at the center of its inquiry, appear again. If it were a crime for legislators to bring discredit to parliament, the members of this committee would long ago have been carted off and locked up.
Canadians over generations have nobly opposed the onset of tyranny around the world and for that reason and others they are a people who deserve respect among the ranks of those who value freedom. It is a shame that they are so often underserved by the mediocrity of their elected representatives.
The ability of law makers to hold meaningful hearings on significant matters of public policy has been a central feature of American democracy. How many failures, cover ups and scandals would have gone undetected if it had not been for the fact that Congress can actually assert itself and demand answers? Testifying is generally not an option as a long line of figures from John Dean to Roger Clemens have discovered. It’s part of the checks and balances that make the American system, for the most part, the closest thing to a model of sound governance in the world today.
As this week’s antics in Ottawa revealed, the Canadian system is often so far removed from that model it’s hard to believe it inhabits the same planet, much less the same continent. The Ethics Committee of Canada’s House of Commons was given an important opportunity to strengthen public confidence in the political system. Instead, it did the opposite, which makes it our choice for the Outrage of the Week.
