Share Buybacks - another Problem

The motives behind share buybacks - and their positive/negative consequences - have received much attention during the recent past. But one aspect that is neglected is the treatment of losses when shares are bought back at ever-rising prices and the share price subsequently declines. It appears that current accounting rules allow these notional losses to disappear in a black hole. While this may be within the rules it still prevents management from being taken to task for a failed policy. Basically it allows companies to squander the shareholder's equity worth without punishment. Money gets redistributed from the majority of continuing or permanent shareholders to those who have cashed out at elevated prices.

Millstein on Corporate Boards

Given that Corporate Boards are the immediate authority tasked with supervising and guiding a company's management one could argue that dysfunctional boards are the root of all evil in the corporate world.
So I have some sympathy with the general drift of this article (Fortune, What's behind Corporate Scandals?) but one is also left with the feeling that while we can easily point to problems it is much more difficult to come up with solutions.
General exhortations for boards to become 'better', more 'hard-working' etc are very well, like Sunday prayers, but they are of no practical use.
Any suggestions?
As always your Comments are welcome, but please no direct messages - use this blog instead so that others can see your contribution! 

Five Proposals to make Executive Pay benefit Society

It is refreshing to see that the (endless?) discussion about the level of Executive Pay is not completely dominated by pious wishes, hand-wringing and nebulous remedies.

So I read with interest the contribution from Alex Erdmans in a recent article published by CityAm. He is not only professor of finance at London Business School but also a member of the Purposeful Company steering group.

Here is a short summary of the key proposals Erdmans makes:

1 - Give only Equity and Option grants with a long vesting period, preferably until after the executive has left - or even retired.

2 - De-emphasise long-term Incentive plans or bonuses that are only tied to financial targets.

3 - Grant deferred cash compensation or similar long-term awards so that they are eroded in case of bankruptcy.

4 - Launch a Fair Pay Charter and consult workers on the Charter.

5 - Require a binding vote on executive remuneration when less than 75% of shareholders support pay proposals two years in a row.

But while these proposals are a valuable contribution the observer is left with two key questions:

How will these ideas actually be translated into concrete action? And by whom?

And the 64,000 Dollar question regarding the absolute level of Executive Pay is not touched at all. As with so many proposals about pay reform, this is really the elephant in the room. All technical remedies are pointless if at the end all they achieve is that pay is ratcheting higher and higher even when modifications in the way it is set are introduced.

The key question is: Why should an executive be awarded 5, 10 or 20 million if his pay is somehow 'aligned' with company performance? Ultimately this is a question of morality and not economics.

All very well to see BlackRock pledging 'to hold boards' feet to the fire' when it comes to executive pay' when the most critical question of executive pay reform - the way the absolute level of pay is set - is left open.

As always your Comments are welcome, but please no direct messages - use this blog instead so that others can see your contribution!

Eumedion - just another talking shop?

There is a never-ending procession of seminars, conferences, position papers and industry associations that have improvement of corporate governance as their main aim. One has to wonder, however, what the result of all this activity is. Is it just a disguised form of marketing and public relations? There is also one key deficiency - there is no input from the real end investors, the clients of private banks, asset managers, pension funds or insurance companies. Case in point: Eumedion, only one (!) blog entry since late 2013. Need I say more?

Pay for Performance?

The debate about Pay-for-Performance (only for a select few at the top of the company pyramid) rages on. To justify high pay for good performance as a management tool is based on questionable logic. Naturally those benefiting from the resulting excesses that result are finding reasons to defend this relatively recent ideology. But what about the CEO who struggles heroically in a business that is beset with problems that are out of its control, does an excellent job but has to live with results - while much better than they could have been if he would have made wrong decisions - that do not reach the performance yardsticks that some well-paid 'compensation consultant' has sold to a company board or compensation committee?
Council of Institutional Investors comment on Say on Pay
Is the CII speaking for corporate Management or defending the interests of the REAL owners of the businesses the CII claims to represent?
(25 Sept 2016)

Aberdeen's Martin Gilbert: Regenerating Capitalism

When a senior manager writes about the subject of Capitalism I am always curious: is it a serious effort to show the way towards a solution or is it a disguised form of corporate advertising?
Sadly this article belongs to the second category as the piece is completely devoid of any specific suggestions. Apart from that one would also need a clear definition of what is supposed to be wrong with present day Capitalism.
 Martin Gilbert: regenerating capitalism for the benefit of all (Aberdeen Press and Journal)
(16 August 2016)

Red Line Voting - good idea but...

The initiative from the Association of Member Nominated Trustees is a step in the right direction. But what is really needed is a way to give the real end investors, the pension fund beneficiaries, the investors in mutual funds or the clients of Private Banks a say in all votes that are held in the corporate world. Only if a conduit for them is designed will there be meaningful change in matters or corporate goverancne, ethical and social responsible investment. While it will not be possible for all individuals to vote on each and every issue and for every company whose shares are held (directly or indirectly) the solution could be to extend the role of proxy agencies. The investors should be able to select an Agency of his choice (similar to voting for a political party or politician). Agencies would be required to clearly state their voting policies and strictly adhere to them.
Red Line Voting
(11 August 2016)

CEO packages soaring in UK - Black Eye for CorpGov Crowd

While there are many arguments for and against high pay awards to CEO's the one for Sky's Jeremy Darroch merits a special comment. Given that Sky is operating in a heavily regulated environment is should be noted that only thanks to failed Government policies (no proper control on bundling of TV channels, no proper control of Sports Rights) the company can produce such strong earnings and therefore 'reward' its CEO so lavishly.
CEO pay packages get 10 percent boost despite shareholder, staff unrest (CNBC)
(8 August 2016)

Executive Pay Reform

As long as Boards are left in charge of determining executive compensation there is little - or no - hope of serious reform. Examples such as the (Ab)use of non-GAAP numbers in setting 'incentive' compensation show that Boards are only too eager to use any ruse that can justify more and more egregious pay numbers. Little wonder, most Board members are on the receiving end when pay is set in the companies they are managing. And even if they are serving on Boards to boost their - usually already bloated - retirement income they belong to the same 'Club' as they will have been on the receiving end of similar 'incentive' plans during their active working lives.
Why Management Is Incentivized to Fabricate Earnings: It's All about non-GAAP Bonuses (
(31 May 2016)

Activists go to Washington

One can only wait to see what the 'luminaries' of the Activist investment scene want to achieve by setting up a lobbying group.
Have they not already influence way beyond their actual investment stake in the companies they try to influence - for better or worse, depending on your point of view.
The purpose of their grouping can only be to have a freer hand when getting involved in 'activist' investments, stifling criticism from the media, politics and - most importantly - other shareholders (we may call them the silent majority).
Their aims may often make sense, managements may need a nudge in the right direction. But basically that would just mean to give advice, and free advice. Management should then react in a fashion that it considers appropriate. If the outcome is contrary to the interests of ALL shareholders there is the Shareholders meeting that can decide to change management if that is considered appropriate.
But efforts to get paid off (blackmail in effect) or being able to place a disproportionate number of directors on the board are nefarious practises that have been going on for much too long. If the efforts of the Lobby group are directed towards extending these and similar practises the real aims would be exposed as just another scheme to make a buck at the expense of shareholders and the welfare of companies and their stakeholders.
(19 May 2016)

Simple Solution to CEO Compensation problem

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 (and a select caste of other 'senior' executives) help themselves to 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 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 exceptional performance pay for individual employees can continue to be freely set by the respective line managers.
11 Nov 2013

Weasel Words on Executive Pay

'Concern', 'Dissent' and 'Rebellion' are coming up again and again with respect to Exec Pay, but they are weasel words used by the media and commentators, where is the BEEF? There is no clear approach to the problem, neither what level the pay should be, the way it should be decided and how any reforms should be implemented. The usual refrain that soandso company has decided to engage with shareholders says it all. The shareholders OWN the company, it is not the other way round! And who are the shareholders? they are NEVER asked as it is only the Fund Managers, i.e. Fiduciaries, who are in cosy chats with management without asking for ANY input from end investors!
(10 May 2016)

Outcry about Exec Pay - but still no viable Solutions

A few recent headlines picked from the acres of print dedicated to the question of how to limit 'excessive' Executive Compensation:

"Shareholder Voices heard loud and clear" (CityAM, 4 April 2016)

"Time for Shareholders to stand up for their Rights" (Times, 30 April 2016)

"Snouts still in the Trough" (Daily Mail, 23 April 2016)

You may agree or disagree with the basic premise of Exec Pay being 'excessive'. I would be in the camp that thinks it is way out of line with what is necessary to 'motivate' CEO's and senior Management to do a good job, and let's not forget that there is the question of the morality of the whole process.

But one aspect receives very little mention: If one agrees with the underlying argument that these - and many other - commentators make with respect to Pay, what measures will be required to bring Exec Compensation back to earth. Just hoping that Company Boards will do a better/different job would just be a triumph of hope over experience to speak with Samuel Johnson.

And this leads to an even more important question that will have to be addressed first: What is the 'appropriate' level of Executive Pay? Just setting a limit with reference to average/medium pay in an organisation will not do the trick.

And hoping that the 'Shareholders' (who really are nothing but Fiduciaries for the real End Investor) will suddenly be able to exert a decisive influence is not going to be successful without clear and firm rules and standards. Ad-hoc decisions on the pay arrangements for thousands of companies that require in turn scrutiny by hundreds if not thousands of fund managers that are under constant pressure to perform and manage their business may lead to some high-profile scalps but not change the basic problem in a sustainable fashion.

Your author does not have the answer to these questions - although you will find some tentative efforts in this blog. But maybe you want to contribute your thoughts in order to start a discussion that ultimately will lead to some practiable solutions to the problem.
(10 May 2016)

Proxy and Compensation Consultants - part of the Problem

Reading this post about some technical aspects related to Equity Compensation Plans makes it clear that advisors are barking up the wrong tree. A simple-to-understand Executive Compensation Plan would make siperfluous the highly technical issues discussed in the post. The main problem is the very level of the compensation dished out to CEO's and higher levels of management.
(18 April 2016)

Blackrock: Governance just PR?

Actions speak louder than words. That is something that Blackrock's CEO, Larry Fink, should keep in mind when he pontificates about Corporate Governance.
BlackRock Wields Its Big Stick Like a Wet Noodle on C.E.O. Pay (New York Times)
(16 March 2016)

Governance stuck in quasi-feudal period

Never underestimate the stupidity of politicians and regulators. France is a particular case, it is masquerading as a Northern Democracy but the mentality is still Top-down, and Who-youKnow is all-important. But the Governance Crowd is the main culprit as the 20-30 largest institutional investors (incl Private Banks) would be able to dictate better rules but instead prefer to chase elusive 'performance' while being absentee landlords. That the great unwashed public, i.e. the REAL owners of the business have no voice/say shows that corporate governance is stuck in a quasi-feudal period. Pro Governance has made specific proposal of improvement and encourages those sympathetic to get in touch.
Investors suffer in the Vincent Bolloré game of thrones (FT)
(16 April 2016)

Citigroup Bonus Cap fails to sway Executive Pay Critics

While I applaud that some observers are rattling the cage in the C-Suite I am afraid the result will at best be an adjustment of some decimals behind the comma. 20 or 22 or 18 million, or whatever the number the CEO and his cronies in the Board decide to be 'fair' compensation to show up at the office, it is a number that is decided in a circular fashion - CEO 'invites' board members, board members 'reward' their buddy and hey presto we are all in this together.
The basic deficiency in Executive Compensation - and more importantly CEO pay - is the fact that the fiduciaries who are now supposed to represent the end investor (be they direct or indirect share owners) are just not doing their job, partly because they are in the same boat - be it as recipients of similar pay packages or because they try to get investment mandates from the pension funds the companies they invest are managing.
Only a dismantling of this nexus will lead to lower Executive Pay. As I suggested before, if just the pay of the CEO is controlled the rest of the executive pyramid will adjust accordingly. CEO pay ( and the 'incentive schemes' which have demonstrably be found to be useless) should always be voted on before it is set for each year (during the Annual Shareholder Meeting). All votes by fiduciaries should be based on proxies received not from some proxy agency that makes up its mind divorced from the desires of the end investor but from real people that are the ultimate owners of public companies.
(9 April 2016)
100 CEOs have more saved up for retirement than 41% of U.S. families combined (ValueWalk)
One would have thought that Apartheid has come to an end, but instead it resurfaced in Executive Compensation

What is Inside Information?

A prominent Fund Manager was recently quoted as saying that he has the mobile phone numbers of most of the CEO's and CFO's his fund is invested in.
I seems strange that the question of inside information has not yet received more scrutiny by regulators as well as the media and industry representatives.
One has to assume that any conversation would lead to at least SOME bit of new information about the business progress these companies are experiencing. This information is by definition not available to the rest of the shareholders, large ones as well as individuals. So it is clear that this state of affairs makes a mockery of the idea of a level-playing field for all investors. Oddly enough fund managers seem to boast of - and expect - access to senior managers. And one has to assume that they are not just discussing the weekend's sportive events.
Even more astounding is the long-established practice that so-called 'sell-side' firms, aka as stock brokers, are the self-appointed gatekeepers and allocate access to company managements to their favoured stock broking clients thus introducing another murky element into the situation.
(1 April 2016)

Premier Foods told Nissin of US Interest

Strange things happen in Corporateland. It will be interesting to see what regulators have to say about this situation. Was Nissin an Insider after being told of potential bid interest? I guess if Joe Blogs would have been told by his girlfriend in the mailroom at Premier before quickly buying some shares the regs would have come down on him like a ton of bricks. So come on chaps at the FCA and/or PRA (wherever you hang your hats in the revolving regulatory circus) and shed some light on this. And the concerned 'fiduciaries' in the investment management firms should have a word to say as well, not least about the off-board transaction when a 'Private' Equity firm (handling the money of the wider public but keeping a hefty share for itself) got a sweet deal selling a stake to Nissin.
(30 March 2016)

CEO Pay - another Black Eye for sleepy Governance Crowd

Sotheyby's CEO Got $20 Million Pay Package in First Year at the Helm (Bloomberg)
And what should be even more infuriating - total earnings were just $46 Million!
(27 March 2016)

Chairman - only Jobs for the (mostly) old Boys?

American Banks are standing tall, and most of them do not have an 'independent' Chairman to micro or macro manage their CEO's. So what IS the point of employing expensive Chairmen? Most of them are past their best years and this reverse ageism surely does not lead to the desired performance as the examples of quite a few (all?) of the European Banks attest. Maybe HSBC could save a penny or two by not wasting money on headhunters.
( 18 March 2016)

Anger at £60 Mio Sorrell Bonus Deal

Report that PIRC's head of governance and financial analysis criticised the £60 Mio. compensation package for WPP's Martin Sorrell can only be welcomed. But it leaves the wider question why the fiduciaries in the asset management industry cannot be more effective in reigning in the pay for top executives. Apart from the question whether or not such incentive schemes are really required to obtain top performance from executives - it also leaves the wider question of morality that both sides of the deal have to answer for.
(16 March 2016)

CEO Pay Depends on Board's Independence

This study (paywall) may well be one useful contribution to explain (excessive) CEO pay. There is too much circularity in the appointment of board members, who in turn appoint the CEO. So they scratch each other's backs. But that leads to the question: how to find and appoint board members that ARE independent. And even if that problem is solved: what is the appropriate compensation for the CEO? The pay for performance mantra can be manipulated to justify ANY number
(14 March 2016)