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Yesterday, we mulled investor-centric topics at The Motley Fool's 2011 Investing Conference. Although the agenda was chock-full of thought-provoking speakers, one of the most inspiring was Nell Minow, GovernanceMetrics International board member and BNET columnist, whom BusinessWeek has dubbed "the queen of good corporate governance."
Minow sounded the challenge on one area where even we Fools too often fall short: calling out the real culprits enabling egregious CEO pay and low levels of operational performance.
Companies' boards of directors, particularly compensation committees, are the core problem, and these enablers rarely take heat for their considerable share of the fault.
As we pondered hardcore investing topics, Hewlett-Packard (NYSE: HPQ ) was announcing big news. It's replacing current (and extremely short-tenured) CEO Leo Apotheker with former eBay (Nasdaq: EBAY ) chief Meg Whitman -- who, incidentally, has a seat on HP's board.
HP has been a mess for ages now; the shameful Mark Hurd debacle last year is just one example. Minow described HP's board as "the gang that can't shoot straight" -- a serial offender in the realm of shoddy corporate governance.
Goodness only knows what kind of employment agreement Hewlett-Packard's compensation committee has crafted for incoming CEO Whitman before even proving her mettle. Although Whitman's name shines with popular recognition, can she really turn HP around? It's a totally different corporate animal from eBay, and one with far less promise than the online auctioneer had when she came on board.
Shareholders have good reason to worry. Mark Hurd was first rewarded for his ethics violation with a golden parachute valued at about $40 million; he then laughed all the way to the bank, immediately landing a lucrative position at Oracle (Nasdaq: ORCL ) . (The payout was reduced all the way down to $35 million when HP questioned whether Hurd's move to Oracle was legal following his ouster.)
HP's board had written bizarre benefits into Hurd's contract from the very beginning; Minow pointed out that Hurd's first-year goals were deemed already met upon hiring.
When Whitman's employment agreement is filed, it should make interesting reading. Hopefully HP's board won't prove that it can outdo itself on outrageous pay plans.
Name-calling where it's due
Minow's affiliated firm, GMI, quickly posted about HP's history of big-time bumbling. As much as Whitman's monetary greeting could prove unpleasant, Apotheker's 11-month tenure could include a hefty price for very little performance.
As GMI's Paul Hodgson noted, "Whether it's golden hellos or golden parachutes, HP has a certain history of overpaying its serial CEOs."
Given that history, let's dig up some names and call them out. As of HP's latest proxy statement, its compensation committee consists of Lawrence T. Babbio Jr., Rajiv L. Gupta, John H. Hammergren, Joel Z. Hyatt, and Lucille S. Salhany.
Lest we forget, we investors do have access to names; the individuals who are charged with designing compensation schemes (and too often fall short on crafting reasonable ones) are publicly disclosed every year in companies' proxy statements.
There's no shortage of dysfunctional boards, either. Minow pointed to Apple's (Nasdaq: AAPL ) (sorry, Al Gore) and News Corp.'s (NYSE: NWS ) boards as two other examples of serial corporate-governance offenders. She called News Corp. "a ticking time bomb" and predicted more bad news to stream from that corporation.
Chief executives are better known for their own big paychecks and achievements (or lack thereof) at the helms of their own companies. They're far less often called out for their presence on one another's boards, causing a network effect that's positive for corporate CEOs and very negative for long-term shareholders.
Unless we investors focus far more attention on this core problem, there's no reason for this group to stop looking out for their own collective financial interests instead of the financial interests of shareholders. The rising tide of CEO compensation floats all boats, after all, and these folks really dig their yachts.
Directors' names and corporate affiliations are clearly disclosed in companies' proxy statements. It's time to identify the culprits and, at the very least, connect the names to the behavior. We also have to remember we have the power to vote against these shadowy enablers when it comes time to vote our proxies every year. Minow pointed out that the longer we let boards off the hook, the longer they can continue to get away with bad behavior.
In HP's case, last spring proxy advisory firm ISS recommended that shareholders vote against re-electing Lawrence Babbio, Sari Baldauf, and Ken Thompson; another proxy advisory firm, Glass Lewis, urged a "no" vote for Babbio. Note that Babbio is the longstanding chairman of HP's compensation committee. (A majority of HP shareholders voted down pay, although they did vote to re-elect the entire slate of directors. Perhaps this will change next year.)
Minow's presentation was inspiring, and more shareholders must catch on to the message. When it comes to CEO pay, it's time to dig deeper and then do something about it.