Session One Highlights
Executive Compensation – Where do we go from here?
Moderator: Kurt Schacht, Managing Director, CFA Institute Centre for Financial Market Integrity
Panelists:
- Lucian Bebchuk, Director of the Program on Corporate Governance, Harvard Law School
- Richard Schiffrin, of Counsel, Grant & Eisenhofer P.A.
- Honorable Leo Strine, Jr., Vice Chancellor, Delaware Court of Chancery
- A. Richard Susko, Partner, Cleary Gottlieb Steen & Hamilton LLP
The following is a synopsis of the panelists’ discussion and responses to questions from the live and internet audiences.
20 Years of Excess – With No End in Sight
Although they certainly disagreed on many points (particularly the degree to which problems can be effectively addressed through regulation), the panelists agreed that corporate executives have fared far better than shareholders in recent decades. They also agreed that two fundamental, systemic issues are at the root of the problem:
- The objectives of investors and management are misaligned: CEO’s are focused on short term results – keeping the stock price up – while most investors are focused on long term gains
- Performance incentives all too often have negative unintended consequences
Moderator Kurt Schacht set the stage by giving a brief history of over two decades of uproar over excessive executive compensation. The past 20 years has been a mixture of class jealousy, overhype and extravagance. It’s been about corporate directors both doing and not doing their job. In 1992 we tried to tax the problem away. We had the mega option grant era; we’ve had options re-pricing, options backdating and options grants on the eve of merger announcements. Recently we’ve been treated to the spectacle of the use of corporate aircraft and subprime CEO bonuses. And now we have a cop – a ‘Pay Czar’ in the government watching what’s been going on. The history, and the press, has been almost all negative – yet it’s still good to be the boss.
Disadvantaged Shareholders
Richard Schiffrin: It’s hard to argue that compensation levels are fair, if one ties compensation to performance. Over the past few years, executives in the top 100 US companies have received about half a trillion dollars. Shareholders are severely disadvantaged in the current structure.
Richard Susko: I disagree. Recent studies show a good deal of correlation between executive performance and shareholder return. The loss of wealth, including unrealized wealth, was more significant for senior executives than for shareholders. We can’t rely on caps and regulations to fix the problems. When you look back over history, every attempt to reform executive compensation has had unintended consequences. We need a positive solution.
The Problem is Systemic
Vice Chancellor Leo Strine: I think the whole debate is childish because everyone is discussing issues in isolation – pointing fingers instead of taking responsibility. The people who really got hurt are the long term investors, the employees. We need to look at deeper answers and look at the problem systemically.
Lucian Bebchuk: I agreed that there’s a substantial disconnect between pay and performance when you look at the long term. Executives didn’t anticipate the meltdown; they had incentives to increase short term results – at the price of elevated risk. Their incentives are different from those of shareholders.
So What’s New?
Moderator Kurt Schacht: The current crisis has put executive compensation in the forefront. Is it different from before?
Vice Chancellor Strine: No. People’s nifty financial ideas were put in place in total ignorance of history. People were trying to make money, supported by government policy. I would like to see the range of proposals that boards have resisted: increase capital requirements, reduce leverage, not get into these highly risky markets. I’d like to see activism around that. Let’s restore good, old fashioned prudential regulation. When managers are a tool of the stock market, you’re going to have public companies engage in riskier strategies.
Beware the Unintended Consequences of New Rules
Richard Susko: I see a greater involvement of government in institutions. This crisis has spawned a number of regulatory responses to safety and soundness and long term mismanagement. I haven’t seen that in the debate before.
Lucian Bebchuk: There’s a very good argument for making changes in compensation structures and governance structures. But while the stock market was booming, no one wanted to tinker with the system. Now, in the midst of a crisis, people need to own the collapse, even as they owned the gains. We should look hard at compensation structures to ensure that the ultimate beneficiaries are served well in the long term as well as the long term. In the past, people looked at incentives as a way to make people exert enough effort. The problem today is not that CEOs are not hard working. Rather, the incentives are wrong. If incentives are wrongly structured, it’s worse than no incentives at all.
Richard Schiffrin: Not all shareholders have the clearest of motives. We have a mix of shareholders – some with short term interests and others with long term interests. If arguments were advanced by the shareholder community years ago that led us down the wrong path, that doesn’t mean that that part of the community should be ignored if they’ve got some reasonable proposals this time around.
Strategies for Increasing Shareholder Power
Kurt Schacht: Let’s talk about the two issues that have been most discussed with respect to reforming executive pay: Say on Pay and Shareholder Access.
Richard Susko: It’s critical to get input from shareholders. I encourage internet surveys to get shareholder views on specific areas that need change.
Richard Schiffrin: I question the independence of consultants. They tell boards and committees what they want to hear, but generally support the positions of those who employ them. Corporations rely on board members who can spend the most time; independent directors tend to just go along. Say on Pay is useful, but not a panacea.
Vice Chancellor Strine: Stockholders should choose; there should not be a federally mandated rule. Same on elections. Courts are not good at pay; let stockholders decide.
Professor Bebchuk: Research shows that when directors have skin in the game, boards perform better.
Audience Questions:
What makes you think that investors will be more proactive? There’s a real problem of investor inertia. Should certain rules be laid down?
Vice Chancellor Strine: We need pricing strategies. Informed proxy mandate is the most powerful thing we’ve done. It makes people spend money on voting. I want CEO’s to be more risk averse – and I think they need a higher base pay.
Richard Susko: We need an investor code of conduct.
Should we require CEO’s/managers to eat their own cooking? Keep their own stock?
Richard Susko: That that already happens.
Lucien Bebchuck: I believe we should go further, with restrictions on unloading of stock – such as limited the percentage of a portfolio one can sell each year.
Richard Schiffrin: The entire panel agrees that the right policy is one that promotes thoughtful, rational long-term thinking about what’s in the best interest of shareholders.
How do we avoid (especially in European markets) of being accused of acting in concert?
Vice Chancellor Strine: Investors need to be more open about their interests and purposes. Kurt Schacht: My experience with pension funds shows that you can educate without being accused of acting in concert. If shareholders can vote, won’t that give proxy advisors a lot of power – and will they be any better than what we have now?
Vice Chancellor Strine: I agree that proxy advisors are very powerful.
Lucien Bebchuk: I would argue that their power is overstated.
The conference continued with a discussion of Shareholder Activism. Click here for highlights.
| Conference Sponsors:
Moderator:
Kurt Schacht
Panelists:
Lucian Bebchuk
Richard Schiffrin
Honorable Leo Strine, Jr.
A. Richard Susko
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