(L-R:  Bill Patterson, CTW Investments; Jay Eisenhofer, Grant & Eisenhofer; Nel Minow, The Corporate Library; Steven Caponi, Blank Rome LLP)

We’re all to blame

In his keynote speech, Congressman Paul Kanjorski, D-PA, Chairman of the Financial Services Subcommittee on Capital Markets assured the audience that Congress is focusing on regulatory reform.  “…what we have to do is lay out all the regulatory capacity of the country, see where the holes are and direct ourselves to closing those holes.”  He asserted that “95, 99 percent of executives I deal with…really want to do the right thing” and that everyone is responsible for the current economic crisis.  “We’re all part of it.  We all took part in the extra greed, we all took part in the materialistic life of too much, we all took part in not being good value judgers of other people or of ourselves.”

Excessive pay:  both symptom and disease

The Clawback Breakfast panelists were more pointed in their assessment of corporate wrongdoing.  Moderator Nell Minow, dubbed the “queen of good corporate governance” by Business Week online, asserted that “the credibility of capitalism…is tremendously deteriorated right now and the only way to rebuild that brand is to make people confident that when they put a dollar into the system, it will be treated fairly. ..Pay is both a symptom of bad corporate governance, bad economic judgment, but it’s also the disease.  Pay that is out of whack with performance is I think the single most important indicator of a bad board of directors (and my company rates boards of directors).  The congressman said that the bonuses at AIG were meaningless.  In terms of materiality perhaps, but I can tell you that Americans are very forgiving of mistakes.  We understand mistakes, we are not forgiving of injustice and that’s the part of the AIG bonuses that is so disturbing.”

We need Board member accountability

Bill Patterson, Executive Director of Change to Win Investments, focused many of his comments on the need to improve corporate governance.  “…the first line of defense against excessive CEO pay is a vibrant, independent executive compensation committee of the board of directors …and I say that with a straight face because none of you have that experience with boards of directors…boards are captive of the CEO… and they do not behave independently in any way shape or form....So what we’re trying to do is change the culture where boards of directors see themselves as accountable as individuals…if we can achieve that dynamic of individual accountability by individual directors, particularly on the compensation committee, we’ll take a huge step to reining in compensation.“

No one anticipated the consequences

Corporate Attorney Steven Caponi, a Partner of Blank Rome LLP, offered a more forgiving perspective.  “..as someone who spends his time in boardrooms, I can say categorically they are good decent people trying to do the right thing….There’s a big distinction between what seems like a good, reasonable compensation system at the time you set it… in 2004 and 2005, when individuals were making insane amounts of money for the companies for the stockholders, for the people in this room, were they entitled to be compensated?  Everyone at the time said, ‘yes.’  What they didn’t anticipate were the unanticipated consequences.”

How do we get the bonuses back?

Bill Patterson, whose organization (Change to Win Investments) is engaged in numerous initiatives to protect shareholder interests and improve corporate governance, spoke pointedly about Merrill Lynch’s inflammatory bonuses paid just before the company merged with Bank of America.  “You can fix the board prospectively, which we intend to do, but how do we get the bonuses back?  That’s the question that we are not going to let sit idle.”

Jay Eisenhofer, a co-founder and managing partner of Grant & Eisenhofer, has been lead counsel in many of the largest securities class action recoveries in history.  G&E has also been in the forefront of the institutional shareholder activism movement, acting as lead counsel in many landmark corporate governance cases.  “…there is a direct connection between some of the compensation abuses that we’ve seen in compensation systems and the financial problems we’ve had recently…  The way in which compensation systems are designed has a direct influence on the behavior of the officers of a corporation in terms of whether or not they are going to be more prone to manipulation of financial results, whether or not they are going to be more prone to enter into speculative transactions, whether or not they foster corporate behavior that encourages short-term results at the expense of long-term gains.”

Sarbanes-Oxley clawback provision is weak

Mr. Eisenhofer explained that “Sarbanes-Oxley included a clawback provision. The problem with that provision is that it didn’t include any private right of action and as a result, it has never been effectively used.  Boards just are not going to employ a clawback mechanism on their own volition.  I think that the current obstacle to whether or not there’s going to be any clawback of the hundreds of billions of dollars worth of compensation that was paid based upon inflated results over the past four or five years is whether or not boards of directors are going to exercise their responsibility.  Having failed to exercise their responsibilities in setting these compensation packages, are they now going to put their heads further in the sand and hide from the fact that they have a responsibility to try to address some of the wrongs that they have helped create? Or are they going to actually consider the issue and take effective action in at least some circumstances?”

SEIU’s current clawback action

Turning the conversation to action currently underway to claw back ill-gotten executive bonuses, Mr. Eisenhofer revealed that “G&E currently represents SEIU in their efforts to obtain clawbacks from a number of companies.”  The legal strategy “follows along a couple of cases over the past 10, 15 years that have established principles that say that executives who are unjustly enriched based on mistaken financial results can be forced to give back those gains.”  G&E hopes to avoid formal litigation and achieve these clawbacks by applying pre-suit demands on targeted corporate boards of directors.

A call for systemic change

Anna Burger closed the morning’s discussion with a rousing call to action.  “It's clear that we can't sit back and let the financial industry regulate themselves because they just won't do it.  We cannot just trust them to do the right thing…People of good will might do right things, but we need more regulation and more of that. …That's why the SEIU master trust, which includes three SEIU sponsored pension funds, recently issued demand letters to 28 corporations …I hope other unions join this approach because I think that we have to clawback whatever we can.

“But I think that clawing back is only one piece of this,” Ms. Burger continued.  “We need systemic reform. We need real regulatory reform… to have a broader comprehensive approach to the crises that we've confronted. We need shareholders to have a real voice on pay, and we need to put executive pay structures in place that discourage instead of encourage excessive risk taking. We have to reform the credit rating agencies to remove their conflict of interest so they don't rubber stamp products and pass them on to pension funds and other investors, and we need to provide real protection against abuse…We need to act creatively through litigations, we need to act creatively through the law, and then we need to make sure that we stay on it so that it doesn't drift away. I think that we can do all of those things together, and I think that we can actually turn the financial system, we can return banks to what they used to be - responsible partners in our community that were actually helping families, helping businesses, helping our economy grow so we could all be prosperous together.”

Sharing concerns with Congress

Several of the Clawback Breakfast speakers noted that they will be participating in Congressional hearings on these issues in the near future.  They said that the panelists' concerns and ideas will be included in their testimony.