Nabors' Absurd Defense of Its Compensation

Apparently, Nabors Industries (NYSE: NBR  ) doesn't want to be held accountable for the results of its bad decisions. But it doesn't want shareholders looking over its shoulder to prevent future bad mistakes, either.

When shareholders took Nabors to task in 2012 for "repeatedly [awarding] excessive CEO compensation and perks despite long-term underperformance," the board defended itself by saying it has simply complied with its contractual duties each year and paid out the compensation spelled out in binding employment contracts.

In other words, the board didn't think it should be blamed for mistakes it made in the past, when it approved contracts that were not sufficiently tied to performance. But it also wants to block a shareholder proposal that would give shareholders the power to prevent similar bad decisions in the future -- a proposal that already received 66%  support in 2012 and is on the ballot again in 2013. Preliminary results should be announced at the company's annual meeting on June 4.

Nabors' compensation woes
It's understandable that shareholders would want to do whatever they could to monitor and prevent some of the outrageous compensation decisions Nabors has been making. Here are some issues I find particularly concerning:

  • Chairman Eugene Isenberg was awarded $100 million in severance when he left the CEO position. Granted, Isenberg forfeited this payment following significant shareholder outrage. However, I believe the fact that this type of severance agreement, which called for such a high payout despite long-term underperformance, raises red flags.
  • Nabors' executive compensation plans failed to receive majority support from shareholders in 2011 or 2012. In fact, its 2012 compensation plan received only 25% support.
  • Executives and directors have been granted significant access to company aircraft -- some of which may have been used for personal benefit rather than for the benefit of Nabors' shareholders. In 2011, Nabors had to disclose that the SEC was looking into some of the company's perks, including aircraft use.

It's also worth noting that according to a 2011 study (link opens a PDF) from GMI Ratings, corporate governance expert Nell Minow's organization, "companies with unusually high personal jet use costs also have other compensation and accounting characteristics that we have found to be associated with poor governance." Some of that poor governance includes pay packages not sufficiently connected with job performance and SEC enforcement actions.

Four of the companies that had the highest jet use costs were labeled as having a "Very High Concern" for compensation and had a "Very Aggressive" AGR (Accounting and Governance Risk) rating, including RaytheonAnadarko PetroleumGeneral Electric, and International Business Machines.

The study offers a good explanation for why companies offering these perks might have other governance problems. It states that "personal jet use, like all executive perquisites, tells you something critical about the relationship between the board of directors and the CEO. That relationship, of course, is at the very heart of what makes good—or bad—governance. If a board can't say 'no' to a CEO's request that the company pay for his or her vacation, or taxes, or tax advice (to list just a few examples), that board may not be exercising very strong oversight of CEO performance."

I'm concerned this may be what's happening at Nabors.

The Foolish takeaway
While I think shareholders are right not to trust Nabors' board to create reasonable compensation plans that are adequately connected with performance, to me the ultimate conclusion is that it's not worth owning the stock. If investors can't trust Nabors' board to make decisions that are in the best interests of shareholders, and can't trust its top executives to refrain from looting the company or to manage it effectively, then the stock isn't worth owning.

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