Finding the Real Fault in CEO Pay

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.

Perfect timing!
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.

Dig deeper
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.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of Apple and Oracle. Motley Fool newsletter services have recommended buying shares of Apple and eBay and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 24, 2011, at 12:40 AM, skypilot2005 wrote:

    Aylce wrote:

    "When it comes to CEO pay, it's time to dig deeper and then do something about it."

    Absolutely!

    Fools: Be sure to take the time to vote and return the form(s) to each company you own.

    Together, we can make a difference.

    Sky Pilot

  • Report this Comment On September 24, 2011, at 12:41 AM, skypilot2005 wrote:

    Aylce wrote:

    "When it comes to CEO pay, it's time to dig deeper and then do something about it."

    Absolutely!

    Fools: Be sure to take the time to vote and return the form(s) to each company you own.

    Together, we can make a difference.

    Sky Pilot

  • Report this Comment On September 24, 2011, at 4:32 AM, Clint35 wrote:

    I was wondering how Meg Whitman got the job so fast. I didn't know she was on the board. That explains it. I wonder how much money she'll get after they fire her. I'm shorting HP on caps. I think it'll turn out to be one of my best calls.

  • Report this Comment On September 24, 2011, at 11:25 AM, deemery wrote:

    Unfortunately, until the institutional investors take this seriously, the crap will continue.

  • Report this Comment On September 24, 2011, at 10:10 PM, srikli wrote:

    Do institutional investors typically vote their shares? I always vote my own individual investor shares at every opportunity but hadn't ever really considered how/if the big institutions vote.

    I don't own any HPQ, and I'm somewhat leery of becoming a shareholder right now, even if it would be a good thing to "vote the rascals out" ....

  • Report this Comment On September 25, 2011, at 8:03 PM, vidar712 wrote:

    I think that the reason that Directors keep getting reelected is that investors who don't like how a company is being run will just not purchase shares of that company. So the investors voting are the people who bought the stock and, by extension, like how the company is being run.

    So share price would be a better measure of director performance than the vote results.

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