The incentives of corporate executives are too often detached from the people they work for -- shareholders. In his 2005 letter to Berkshire Hathaway (NYSE: BRK-B) shareholders, Warren Buffett explained:
Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won't change, moreover, because the deck is stacked against investors when it comes to the CEO's pay. The upshot is that a mediocre-or-worse CEO -- aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet, and Bingo -- all too often receives gobs of money from an ill-designed compensation arrangement.
And this goes far beyond compensation. Low dividend payouts, ill-fated mergers, lack of transparency ... there are countless ways executives have come to view shareholders as annoyances to deal with, rather than owners to serve.
Giving shareholders a voice is the best way to solve this problem. Last month, I sat down with an investor who is trying to speak up: Joseph Dear, chief investment officer of CalPERS, the nation's largest retirement fund, with nearly a quarter trillion dollars under management. Here's what he had to say about how corporate America is treating investors. (Transcript follows.)
Morgan Housel: Do you think corporate America is doing a good job at serving its owners?
Joseph Dear: Well, with respect to corporate governance, there's been a lot of improvement by corporations. I mean, 25 years ago, when CalPERS was just starting out with the Council of Institutional Investors, I mean, we had trouble getting our calls returned. Now we call up a company and say we're concerned and we're thinking about putting you on our focus list and sort of publicizing you as a poor return/badly governed company, and they're like, "How soon can we get the investor relations team to Sacramento to talk to you all?" We have good organizations like CII [the Council of Institutional Investors]. We pay attention to public policy legislation rules that the SEC and the CFTC [put in place], so I think there's been a huge improvement. Now I don't think we're all the way there, but companies definitely are paying more attention to their investors.
And I think another thing we've shown is that the ability to have a dialogue before there's a public fight can produce really constructive engagement and agreement, so one of the issues pension funds have had is board composition and eliminating staggered terms, because staggered terms are one way companies defend themselves from takeovers, which may provide a premium to investors.
And part of that board is assuring that board directors are actually elected by a majority of the investors, because now you don't really have a contested election. If you get one vote, you're in there, so having a majority vote requirement, and over the five or 10 years that investors have been working on that, we've seen over two-thirds of the S&P 500 adopt one-year terms, getting rid of staggered terms and more and more adopting majority vote standards, so we also know that a dialogue can improve things.
So yes, things are better from corporate America. Are they all the way there, or are there some boards and managements that don't get it and don't listen? Yeah, and we're here. We're working on that.
