Ironfire Capital CEO Eric Jackson’s thoughts on ‘the best boards in America’, posted earlier today on TheStreet.com, are a worthwhile read. One of the more influential and highly successful activist investors, Eric identifies three key identifiers of strong boards: equity ownership, independence and time, all of which are key factors we consider in evaluating boards for investment and other clients. Eric then goes on to identify three boards as being among the best in America, including Berkshire Hathaway, Amazon.com and Johnson & Johnson. We couldn’t agree more with the first two in his list, but take issue with the last, and in so doing highlight a fourth key indicator of board strength or weakness: CEO compensation. True, Johnson & Johnson has outperformed most of its peers of late, and done significantly better than the market as a whole. But CEO William C. Weldon’s compensation, as reported in the company’s most recent proxy, seems not only excessive in absolute terms but is poorly aligned with sustainable shareholder interests as a matter of policy. In particular Weldon’s ‘long-term incentive compensation’ is based on too short a period to be considered long-term (three years) and is not tied to any performance metrics. For fiscal 2008, total realized compensation for Mr. Weldon was $25,555,543 - enough to pay 5 years of 2008 salaries for all other named executives at Johnson & Johnson combined. Best in class? Not where CEO compensation is concerned – and this is one of the very few measures of a board’s actual decision-making to which we have access.
Ric Marshall — Chief Analyst
Ric: Thanks for your reaction to my article and glad you found a number of points you agreed with.
With respect to your point about CEO compensation being an important indicator to judge a board by, I agree that how the board chooses to pay its top executive -- in good times and bad -- says something about how well they are protecting investors in their roles of fiduciaries.
However, I'd make 3 points:
1. If CEO compensation and its link to performance is a good indicator of a board fulfilling its duties, then how they pay the CEO, plus the senior execs, plus themselves as directors is an even better one. I think too much focus goes to the CEO and not enough to comp structures in general. I find it more shocking when boards pay themselves excessive comp each year, in the face of poor corporate performance (as was the case at Yahoo! for many years), than just how they pay the CEO alone.
2. For me, it's: compensation for what? The answer, I think, is performance. I didn't have a problem with Terry Semel's compensation at Yahoo! in and of itself. I had a problem with it when the company's stock and operational performance drove off a cliff and stayed there for several years; yet the board still paid him as if he was still doing a heck of a job. So, in the case of JNJ, while I think it's fine to point out how Weldon's package should be better structured to drive future performance, you have to assess the historical comp to the historical performance -- leading to my last comment.
3. Although you can make the argument that Weldon is over-paid and perhaps he would have driven the company to even better performance over these last few years if his compensation package was better structured, it's hard to quibble with JNJ's stock performance. Pick any time period between now and 10 years ago and it's difficult to find a stretch where this company under-performed the market (S&P 500). That's certainly not the case for the peers.
In summary, I firmly believe in the link between corporate governance and long-term performance. However, there are many topics/constructs/prescriptions often discussed as implicitly having a link to performance, when the empirical evidence hasn't shown this to be true. I think the 3 constructs I mentioned have that link. I think comp structures are important, but we probably need to do more work to better understand what specific structures actually predict performance.
Posted by: Eric Jackson | July 07, 2009 at 10:34 PM