Compensation in Shares - Solution to pay discussion?

News that Goldman Sachs top executives will only be paid in shares this year is supposed to take the wind out of the sails for opponents of excessive bonuses. But does it really solve the problem of excessive executive compensation? Would it be better to pay someone $100 million in shares? After all, the recipient of this compensation would not be able to consume more than a tiny fraction of the amount in any case - whichever way the amount is awarded - the rest would be saved and invested in one way or another. We argue that TOTAL compensation for senior executives (including all perks, bonuses, incentive payments) must be more closely monitored by the fiduciaries that handle savings for the real end-investors (pension fund members, holders of mutual funds).

Overpaid and Over here!

Unilever's James Lawrence, yesterday resigned as chief financial officer. The American, who joined the company only in September 2007 received an annual salary including bonus of Euro 1.37 million. But amazingly he will also be allowed to draw down the remainder of a $1 million “golden hello”, along with 80,000 shares that he was offered in stages. He will also keep Unilever shares worth an estimated Euro 14 million which demonstrates the way that executive compensation is stacked in favor of a select few members of top management. Would an ordinary factory worker who leaves after two years be mollycoddled in the same way? How long will the company owners stay asleep at the wheel?

Index Idiocy

News that Petropavlovsk (formerly known as Peter Hambro Mining) will be soon be included in the FTSE 100 Index raises a number of questions: Is it proper that a company that is predominately active in countries outside the UK (and the EU) is included in an index that is after all designed to reflect the fortunes of companies active and/or based in the UK? In our opinion there would be a number of indices that would be more appropriate (Russia, Emerging Markets, Mining).
More importantly, the impact on investment behaviour is a serious distortion. A company with a £ 387 million (12/08) turnover but a towering market capitalisation of £ 2,265 million
may be numerically suited to be included in the index but the rationale behind such an index construction is more than questionable. Some analysts already claim that the gold price is in bubble territory and the same may be said of a share that closely follows the gold price. Is this the right time to include it in a prominent index?

Cadbury - another unfair battle

In what can only be suspected to be courtesy of a PR effort by Kraft in today's paper we read that Irene Rosenfeld, the CEO of Kraft, has a history of high achievement. As if it would be relevant to the takeover bid for Cadbury that is being pursued by Kraft we are then treated to gems like this one: '...summers were spent at Tyler Hill Camp, a children's camp in the picturesque Pocono Mountains...'. Is is a disgrace that PR jobs like this one are supposed to be a critical factor in the serious question of how public companies are being managed. We have repeatedly argued that the way takeovers are currently regulated is seriously deficient and short-changes the existing owners of the business, not mentioning the other stakeholders such as employees, pensioners, customers and public authorities in the locations the business operates in. In addition, the army of 'advisers' is a costly burden on the shareholders of the acquiring company as well as the target company.

Chairman - just another dead weight cost?

News that Legal & General, one of Britain's leading life insurance and pension providers, has finally managed to identify its preferred candidate to become chairman leads us to ask why the role of Company Chairman is seen to be a cornerstone of good corporate governance in the UK. While the US system of the all-powerful CEO may well have its defects, the UK system in turn has not lead to much better performance by the listed company sector. Both systems need a major overhaul but one thing is certain: separate chairman do cost money and may create friction as the CEO is constantly second-guessed.

Shareholder rip-off documented

A report by Patterson Associates, a firm of remuneration consultants, documents the sorry saga of (Senior) Executive Compensation schemes that are designed to feather the nest of chief executives and their acolytes in senior management. As we said in an earlier post, the fish starts to smell from the head and we stand by our suggestion that all efforts to reduce excessive executive compensation have to start with resolute action to reign in the compensation of chief executives. Then, and only then, would there be an incentive to bring the compensation of companies into a more equitable equilibrium and reduce the disparity between top pay, average pay and difference between top and bottom pay in the organisation.

Patent on Investment Methodololgy

News that Research Affiliates has been granted a US patent for an indexing methodology that selects and weights securities using fundamental measures of company size, such as dividends and sales should set alarm bells ringing in investor circles the world over. While the ruling only affects the United States there is the danger that US law gains ex-territorial reach or gets copied by other legislatures.Granting a patent on an investment methodology is akin to granting a patent to the first person that has opened a self-service supermarket. It is nonsense and makes a mockery of the true purpose of patent protection for technological and medical innovations. Fees charged by Research Affiliates are a extra drag on investment returns achieved by investor's funds. We hope that fund providers have enough intelligence to do their own index construction. This work requires only minimal skill and can be performed on any standard PC.

Simple way to make executive pensions transparent

'Filings don't tell full pension story' warns the headline in an article about the difficulty of finding out the full amount of pensions promised to company executives. Our prescription for simplifying executive compensation would also avoid this problem as all employees would be in the same company-wide scheme. Pension entitlements would be proportionate to base salary without any exception. (Compare our earlier post)


SEC to eliminate flash order exemption

We have filed the following comment with the SEC.

'It is essential that the following feature is present in any market place: all orders, of any size have to be executed according to clear rules with respect to 'priority' and 'precedence'. The execution trail has to be verifiable after the trade in case there is any dispute as to the accordance with these rules. Publication of transactions has to be as near to 'real time' as is technically feasible. There should be no exception (neither to market makers, semiprofessionals or large investors)'.

A more lenghty comment (no surprise there) has been submitted by Goldman Sachs and can be found here.

HealthSouth to reimburse for proxy fights

News that HealthSouth Corp. is moving to become the first big U.S. business to reimburse activist shareholders for the expense of unseating management-backed directors is welcome but we think there is a better - and cheaper - solution. In the Internet age it should be easy to eliminate 'snail mail' and transfer all communication between companies and their shareholders to the Internet. This would also include annual and interim reports. One has to assume that individual shareholders as a group are a sophisticated group of people who by now have full access to the Internet.

Matalan - Public Shareholders lose out

In 2006 the founder and owner of a 53 pct stake in the company took Matalan private. Now the company may be sold on for more than twice the price that was paid in the 2006 transaction. Pro Gov argues regularly against transactions that treat public shareholders as temporary guests on a path to riches - with the beneficiaries being majority owners, company management or so-called 'private' equity investors. It is in the public interest that as many companies as possible are owned by a wide spread of private investors and we argue that public companies should benefit from beneficial tax treatment in order to prevent the concentration of wealth among a very small part of the population. Those in charge of public companies (and the institutional investors acting as fiduciaries for the wider public who is the ultimate owner of the money they manage) must see a public listing not simply as a ticket to get rich but as a duty that carries significant responsibilities. Unfortunately, the way ownership in public companies gets traded is in contradiction to the rationale of publicly listed companies as we see it. There is no proper democratic process that decides the outcome of merger bids and buy-out offers. In the case of Matalan, for example, a clear majority of the shares not already controlled by the majority owner should have been required to vote for the bid. In addition, a single bid should be required in bid situations and that bid would have to be accepted by 95 per cent of the public shareholders in order to succeed. This would prevent the 'gaming' of bids and the process of haggling that currently occurs between the parties to the bid (and the media). As matters stand, the public - thanks to the casino mentality displayed all too often by their 'fiduciaries' - is the helpless spectator to another case were they see that someone reaps huge profits on the shares they were coerced to sell only a few years back. Is this Casino Capitalism in the public interest?

High-Frequencey or High-Priviledge Trading?

In the (distant?) past exchanges had clear-cut rules about how orders were treated. The New York Stock Exchange for example had clear rules defined with respect to priority and precedence that insured that orders large and small had a level-playing field. The present discussion (Wall St Journal, 13 Oct 09) about unfair advantages gained by giving priority access to so-called high-frequency traders makes it clear that these rules have to be adjusted in light of the technological advances we have seen in the past few decades. Now time intervals are measured in milli or nano seconds but technology also gives the tools the regulate high-speed trading orders. What is intolerable is the fact that certain market participants can claim faster access than is available to other market participants. It is high time that the arms race to ever-faster access speeds gets regulated by the authorities. The exchanges are no longer non-profit making institutions that have the interests of the wider investment public at heart and if necessary have to be told to put traffic humps in order to slow down order flow from certain market participants.

Blackstone getting bullish?

News that The Blackstone Group may plan to list up to eight of its portfolio companies in the near future is seen by some commentators as 'bullish'. We would rather think that the seller must have a cautious view of the upside potential for share prices, - why else would Blackstone want to sell now? Apart from the question of why anyone would want to purchase recycled merchandise from a well-informed insider this announcement of a wholesale clear-out of the portfolio brings the question of the purpose of the 'private' equity 'industry' to the forefront. We would argue that the business in its present form is neither 'private' (nearly all its money is coming from Joe Public) nor an 'industry'. If anything, it is a clever scheme to make a small number of people (very) rich at the expense of the wider investing public that has the privilege to repurchase businesses that were previously sold too cheaply by the fiduciaries handling their investments. Recent studies have also put in question the rationale for investing in IPO's, and the old saying 'Buyer Beware' should be remembered.

Options Self-Service - more from Eliezer Fich

Eliezer Fich just sent us the link to a fresh piece about the abuse/use of special option awards during merger negotiations. Happy reading!

Option Awards - Self-service by greedy CEO's

Again we have to reiterate: the fish starts to smell at the top. If CEO's would not be the main beneficiaries of the gaming of option awards the problem would not exist. Today's report in the Wall Street Journal about egregious abuse of executive share option awards by chief executives of companies that are in the middle of merger negotiations illustrates the unrestrained greed that is seen as acceptable by some executives. It beggars belief that Ronald Rittenmeyer, CEO of Electronic Data Systems Corp. finds no fault in accepting a share award just before a takeover deal allows him to take a profit $13.4 million on these very share options. He even has the temerity to claim: 'I did my job and I did the right thing by my shareholders'. Need we say more?

Did Banker's pay add to financial crisis?

In a New York Times article Mark Hulbert carefully looks at the evidence for and against the argument that banker's pay added to the financial crisis. There are, however, other aspects that are relevant in the debate about executive compensation. There is also an ethical and moral dimension to the problem of executive pay. As we have stated before, the excesses start at the top. We believe that restraints on the compensation of chief executives would have a beneficial 'trickle down' effect that would moderate compensation further down the corporate hierarchy. In addition, if it is not clear whether top pay contributed to the financial meltdown it should also be difficult to prove the opposite: that high pay for senior executives was beneficial for the economy and the companies concerned. It so any compensation above what can be considered reasonable was a waste of shareholder's money.

Marvel CEO awarded options just before bid

A report states that Marvel Entertainment Inc. Chief Executive Isaac Perlmutter was granted stock options for more than a million shares in the weeks after a subordinate opened discussions with Walt Disney Co. that ultimately led to a merger agreement (Wall St Journal, 24 Sept).
ProGov suggests a simple solution to the problem of excessive executive compensation. As the fish starts to smell at the top the problem really is in essence a problem of excessive chief executive compensation. In order to control executive pay all chief executive compensation should consist only of a basic salary and perks (incentive bonus, share options, pension and medical care) that are granted pro-rata to all employees of a firm. That way any discriminatory pay that favors the man at the top is prevented. The gaming of option, incentive and pension schemes is avoided. No complicated performance targets have to be designed and policed. It is also morally repugnant if chief executives get gold-plated pensions, parachutes etc while the rest of the workforce gets the crumbs that fall off the table. Of course, chief executives may receive base salaries that are (too) high but that will be more easy to monitor and police. Discretionary and discriminatory option awards such as the one awarded to Mr. Perlmutter will be a thing of the past. And Chief executives will have more incentive to moderate compensation further down the ranks. All incentive schemes and pension schemes should be based purely on a pro-rata basis and pay for exceptional performance by individual employees can continue to be freely set by the respective line managers.

How can Argentina be allowed into G20?

As far as we know, Argentina still refuses to settle its outstanding debt at full face value. So it is surprising that the country has been invited to participate in the G20 sessions. Need we more proof about the cavalier attitude that today's politicians take to investor rights?

Madness 'Mit Methode'

An expression that may need to be introduced from German into the English language is: 'Der Wahnsinn hat Methode' (Madness with Method). It means an ironic reference to something considered mad that is perpetrated with single mindedness and complete neglect of the fact that the action makes little or no sense at all.
This expression comes to mind when one has a look at the recently released interpretation to the Investment Tax Law released by the German Ministry of Finance. We did not expect a short and succinct paper but our jaw dropped when the paper popped up on our computer screen: a full 147 pages!
Given the thousands of pages of new legislation and edicts that are produced by our Solons every year this may not be a surprise but it highlights in chilling detail how far removed from the real concerns of the citizens the political class has become in the past few decades.
This is just another building bloc on the way to the destruction of private saving and pride of citizenship.

CIT pays $ 85,000 in expenses for CEO's contract extension

CIT Group Inc. extended the employment contract of Chairman and Chief Executive Jeffrey Peek for a year, according to a regulatory filing. CIT said it would pay as much as $85,000 of Mr. Peek's legal and advisory bills related to negotiation of his contract renewal. We think that it is pathetic for an experienced professional to need such expensive advice for a simple contract extension, it is unbelievable that a board agrees to such a waste of corporate (and ultimately shareholder's) funds.

CEO moving on to role of Chairman

We fully agree that allowing the outgoing CEO to move on to the role of Chairman poses serious problems for good corporate governance. But as we do not really think that the separation of the two roles is essential for the running of a company we consider this discussion to be a sideshow. The United States have a perfectly efficient economy and most companies combine the role of CEO and Chairman (and President) in one person. The problem with excessive remuneration of CEO's (and other senior corporate executives) cannot simply be explained with the fact that the two positions are held by one and the same person.

Absurd treatment of owners in Proxy Access battle

That companies can try to derail the SEC's proposed changes in the rules governing proxy access in the United States can only be called absurd. After all the companies ARE the same as the owners and should not bloc themselves. The only explanation is the self-interest of a narrow and interbred clique of senior managers and board members that do not want insolent owners disturbing their cushy - and lucrative - sinecures.

Pension Fund Trustee forced out

The news that the Chaiman of the EMI pension fund trustees was forced out for supposedly demanding that EMI tops up the fund shows that the regulation of pension funds is inadequate and creates similar problems of moral hazard as can be found in other segments of the financial service industry. Employees are generally discouraged not too put too many eggs in one basket and avoid excessive exposure to the shares of their employer. That way they avoid being hit by a double whammy should their employer hit trouble. In that case, not only would they risk losing their jobs but their investment would also be diminished at a time when they need it most. (This is a dilemma for all advocates of increased employee share ownership participation). Having one's old-age retirement provision dependent on the fortunes of the employer - over which the average employee has no influence at all - is a risk that should be eliminated in any sensible pension fund legislation. Companies subject to financial engineering that has very little to do with sound management but more with boosting the personal wealth of a few managers at the control - mostly in the so-called 'Private' Equity sector - are most at risk of neglecting the best interest of the pensioners past and present.

Sulzer - another victim of poor takeover protection

The fact that a Russian 'Oligarch' can exercise control over a century-old company like the Swiss Engineering firm Sulzer is an indictment of the system of corporate governance that is allowed by 'free-for-all' takeover rules. While this system may just be acceptable for football clubs (and a simple rule change limiting the votes for each owner to a modest level would be welcome there as well) it is questionable whether the interests of good management and wider stakeholders (employees present and past, customers, the community the company is based in) is really served well by giving individual shareholders too much influence just on the basis of a minority stake in the company (even if it is 31%). Minority governments are bad enough (The UK suffers from this for more than 30 years now) but there is no reason to replicate this in listed companies. If Mr. Vekselberg, for example, thinks he has a superior business plan for Sulzer he could either (1) try to convince the other shareholders and/or management about the quality of his ideas or (2) try to gain control about the majority of the share capital in a supervised auction process that avoids premature squeezing out of Shareholders that see long-term growth potential in the shares and do not want to be deprived of it due to weak takeover controls.

Equal Pension treatment for all employees

In bygone times the majority of the larger companies in the UK offered their employees participation in a defined-benefit (DB) pension scheme. While these schemes produced their share of iniquities (treating early leavers poorly) they offered stability to the workforce and appeared to represent a fair deal for employer and employee alike. A variety of factors which we will not discuss here contributed to the decline in DB schemes during the past 15-10 years. This is contrary to efforts in many other countries to introduce a 'second leg' for retirement provision (in addition to the state pension and private savings which are the third leg). The result is that the majority of employees - and certainly those on middle and low incomes - face a period of penury in their old age. What makes the decline in DB schemes particularly galling to those employees is the fact that the managerial class - and in particular the top executives - escape from this dilemma. Not only are they compensated particularly well during their working life, in addition they also arrange to pay themselves pension contributions that are way above what they are willing to pay for the general workforce. In the interest of good corporate governance it is essential that all pension payments are made on a strictly pro-rata basis based on base salary with no distinction between different types of employee.

Mintzberg: Eliminate Executive Bonuses

We have to make a few observations about the radical view on executive bonuses espoused by McGill University's Henry Mintzberg. First of all we do think that the main problem of all executive incentive schemes is the fact that it is arbitrarily allocating too much glory (and blame) to the CEO of a business. That may or may not be justified - individuals CAN make a massive difference as is demonstrated in sport, art and science. But there is the question of the right degree to which this is possible - and morally justified. Otherwise the US President could demand to be paid a share in the growth of the GDP during his period in office. Our position is that all incentive schemes that benefit the CEO and the top executives should only be those that are made available to ALL employees on equal terms and should be calculated on the basis of base salaries. This should include all perks and benefits (pension, health insurance, share options etc). Not only would this system be equitable and fair, it would also be transparent, easy to understand and not easy to game by top management. At the same time it would probably reduce the gap in compensation between top management and the average employee. This link between pay levels would in all likelihood also put general downward pressure on compensation for top management.

Executive Pay Grab accelerates

A new study by James F. Reda & Associates comes to a surprising conclusion: instead of tying executive compensation more closely to long-term performance the incentive plans tend to put more emphasis on short-term results. This should surprise no one given the sad fact that the majority of institutional shareholders and their industry organisations still take a cavalier attitude to corporate governance issues and at best pay only lip service to it.

Lording it over the shareholder peasants

Not much has changed in German Corporate Governance - Governments of the Left and Right come and go, commissions publish their reports, regulators slumber in their plush offices and collect their secure salaries and pensions (at least no bonuses there!). The farce that just seems to come to an ignominious end with the takeover of Porsche by Volkswagen illustrates all that is wrong with Corporate Governance in Germany - one of the leading industrial nations but still stuck in deep 19th Century ideas of shareholder democracy. The German expression 'Gutsherrenmanier' comes to mind as the most appropriate word to sum up the way that the political and business 'Elites' carve up the control of businesses that are owned by the shareholder community (which comprises not only German investors and savers but also those from many other countries). How is it possible that Volkswagen agrees to pay a price for Porsche that many analysts describe as overly generous and has not been discussed properly with the public shareholders? How can people that have an economic interest in both companies be allowed to be party to the merger discussions? How can a government (The state of Lower Saxony) be part in this questionable arrangement? All we can say: anyone considering investing in German Shares does so at his own peril and should demand an extra premium to be at least partly protected against these shenanigans.

Friends Provident Shareholders to be sold out?

By sheer coincidence (or foresight?) your author bought a few FP shares during the darkest days of the credit crunch. It looked like a nice bet at a time when the banks were shaky and there was no light at the end of the tunnel (yet). So when talk about a 'rapprochement' between the FP board and management and Resolution started again during the past few days my blood started to boil about this sell-out by the shareholder representatives. By looking at the FP chart any idiot (only a strong word will do here!) could see that the share is building a bottom formation and that the shares are still in seriously cheap territory. Of course, news flow is still poor - but otherwise the shares would be flying. So why sell now to a predator? If management is not up to the task it could be changed (again). And the unnamed institutions (and fellow-travellers in the media) that push management and the board to talk to Resolution, are they blind or do they really want to sell out at the bottom (or for a short-term flip if they were lucky and bold enough to buy during one of the downwared spikes in the winter months)? Maybe the Institutional Shareholders are really not the right forum to oversee corporate governance and should be limited to play in the secondary markets.