The GMI Blog

Clawing Back Wall Street Pay

By Paul Hodgson - CCO and Senior Research Associate

It is comforting that the New York City Comptroller is calling for tougher clawbacks to be applied to Wall Street pay. The Press Release gives a great deal of detail about the resolutions that have been filed at Goldman Sachs, JPMorgan and Morgan Stanley, including the full text of one of the proposals itself. In short, the Comptroller, John Liu, is calling for changes to existing clawback arrangements as follows:

Increase executives’ accountability
Goldman Sachs’ and JPMorgan’s current clawback policies only hold executives responsible for “material” losses, creating unrealistically high legal and financial standards for clawback actions.  The proposal asks the word “material” be stricken from the two firms’ clawback policies in order to lower this barrier that protects executives from being held accountable. Morgan Stanley's existing clawback policy does not include the “material” hurdle so this request is not part of the proposal filed at that firm.

Hold supervisors responsible for bad behavior
Current policies at the three firms limit clawbacks to employees who take excessive risks or engage in improper or unethical conduct.   Under the current system, a senior executive can benefit when a subordinate engages in improper conduct that generates profits in the short-term, but that ultimately causes financial or reputational harm to the firm.  The proposal seeks to eliminate this perverse incentive.

Disclose clawback actions
The proposal asks that the three firms’ clawback policies be amended to require disclosure of any decision by their boards on whether or not to recoup executive compensation. Currently, they do not have to make clawbacks decisions public.

GMI has been collecting data on clawback policies at all companies since 2006 when firms began to adopt these policies voluntarily. Since then, of course, they have been mandated by the Dodd-Frank bill, though the SEC has not implemented the rule as yet. In addition, all the banks had to implement clawback arrangements under TARP regulations, though some, like JPMorgan, already had policies in place. For example, according to GMI almost two-thirds of the S&P 500 have some form of clawback policy, though few, if any, will be as strict and wide-ranging as those put forward by Mr. Liu.

As I said, it is comforting to see these proposals being put forward at the banks, and the immediate cause of the proposals – the fact that the three banks have recently paid out more than $100 million in fines to settle charges in connection with their engaging in fraudulent practices surrounding mortgage securities investments.

$100 million between the three banks?

About the size of a decent bonus for any of the CEOs prior to 2008, so hardly much of a dent in each of the banks’ finances.

“No one should profit or be rewarded with bonuses when engaged in improper or unethical behavior,” Comptroller Liu said.

But the fact is, they already have done, and, while laudable, this initiative is – if you’ll forgive the resort to the proverb – closing the barn door after the horse has bolted. Hardly more than a handful of individuals, really, despite the mountains of evidence collected by the feds, have got into any kind of serious trouble and, as far as I know, none have had to pay much of their bonuses back. Yet every single one of the executives at these banks have received stock and cash as incentives that were based, at least in part, on earnings and income that turned out to be illusory. Never mind clawing back the bonuses, these executives should be trampling over each other to voluntarily return at least a portion, if not all, of the incentives they earned for a fair number of years prior to the debacle in 2008. So should every individual that was involved in packaging and selling CDOs and credit default swaps or who was responsible for anyone that was involved, so, basically, every single executive. If they just got on with it then, apart from the money it would save the authorities not having to prosecute them, the goodwill (my middle name by the way) it would generate would go a long way to restoring trust in the financial system.

Zuccotti Park is not too far from Mr. Liu’s office.

Corporate Political Spending After Citizens United

It has been almost a year since the Supreme Court issued its decision in the Citizens United case, finding that attempts to impose legal restrictions on corporate political speech were inconsistent with the First Amendment.  A new paper by John C. Coates IV, John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School examines the effect of this decision on the quantity and quality of corporate political activity (CPA) in an exceptionally thoughtful analysis.  

He finds that in non-regulated industries, personal political ambitions can be a more significant factor in determining and directing corporate political contributions than benefiting the company and its shareholders.  

The paper finds that before and after Citizens United the data are consistent with companies engaging in a mix of shareholder-oriented and non-shareholder-oriented political activity. In regulated industries (e.g., banking, telecommunications) and in government-dependent industries (e.g., defense), political activity is nearly universal, and does not strongly correlate with measures of shareholder power, managerial agency costs, or value. In these industries, at least, where business strategy or revenues are directly linked to political decisions, it seems hard to imagine that shareholders of any given firm would benefit from unilateral political disarmament.

But the same intuition does not extend to most large public companies. A review of the career paths of a sample of CEOs in 2000 points to another possible motivation for CPA: more than one in ten ex-CEOs later obtain political positions, including Cabinet-level appointments. This finding suggests that the extent or nature of the political activity of firms managed by those CEOs – as well as by other CEOs who have not yet left their CEO positions, or who died while CEO, or left under a cloud of scandal – could have at least partly been influenced by personal ambitions. In the majority of industries (e.g., apparel, retail, equipment), political activity is common but varied, and it correlates negatively with measures of shareholder power (shareholder concentration and shareholder rights), positively with signs of managerial agency costs (corporate jet use by CEOs), and negatively with shareholder value (industry-relative Tobin’s q). The negative value-politics relationship is particularly strong for firms making large capital expenditures, and is stronger in firm fixed-effects regressions than in cross- sectional regressions.

He notes that "The causal relationships between political activity and value likely run in both directions: politics may be one route for a troubled or stumbling firm to pursue to regain profitability, even as politics may distract senior managers and result in business investments that lack focus or are poorly fitted to a firm’s core business strategy."   Unfortunately, regaining profitability via political maneuvering rather than focusing on improving operations, product mixes, and sustainable cash flow.

I like Coates' indicators for evaluating the alignment of political expenditures with shareholder interests, with one example use of corporate jets (relying in part on data provided by GMI).   The most significant findings include:

• CPA correlates negatively with two different measures of shareholder power, which are themselves uncorrelated – ownership concentration and greater shareholder rights – and CPA correlates positively with measures of managerial agency costs – greater use by CEOs of corporate jets.
• CPA correlates positively with the significant fraction (11%) of large firm CEOs who gain post-CEO political office.
• CPA’s relationships with shareholder power and managerial agency costs are weakest (or even reversed) in heavily regulated or government-dependent industries, and strongest in other industries.
• CPA correlates negatively with measures of corporate value – industry-adjusted Tobin’s Q – and that relationship, too, is weakest (or even positive) in heavily regulated or government-dependent industries, and is stronger in other industries, even after controlling for other factors in various ways, including with firm fixed effects.

This is important work and I hope it will inspire further study by Coates and others.

 

 

 

 

On the fourth day of Enron my comp committee gave to me: four straight years of $30 million or more in a discretionary bonus

By Scott Patterson - Compensation Analyst Manager

What do you do when the CEO is awarded too many equity awards?  If you are XTO Energy you provide a $31 million cash bonus with no set targets in place of equity awards. Then the following three years you provide at least $30 million in cash bonuses and bring back the equity awards. XTO’s CEO, Bob Simpson, was the beneficiary of this practice.

After receiving four million options and 1.2 million performance shares in 2004, the committee decided to weigh compensation “more toward current bonus compensation” by doubling Mr. Simpson’s bonus to $31 million for the “continued record-setting performance” during fiscal 2005, and not grant any equity awards. For fiscal 2006 the committee went back to equity awards, granting over two million options, along with another $31 million cash bonus. During 2006 Mr. Simpson exercised nearly two million options for a profit of close to $40 million resulting in about $72 million in realized compensation for the year. For fiscal 2007 the number of options granted dropped to 1.27 million, but the cash bonus went up to $35.5 million. Add nearly $26 million more in option profits and XTO’s CEO took in over $63 million in realized compensation for fiscal 2007. Of note is that over 1.2 million of the options granted in 2006 and 2007 were to vest on meeting stock price targets during a time of record setting price growth.

Fiscal 2008 provided Mr. Simpson with $103,485,972 in realized compensation. Although the exercising of options for a profit of $68 million played a key role in his attaining gthat level of pay, it may be more alarming that Mr. Simpson was awarded another discretionary cash bonus; this time worth $30 million despite the decline in stock price from a record high earlier in the year.

The idea of portraying the $31 million bonus as a replacement for equity awards in 2005 may have sounded logical to shareholders at the time, but to then grant thoser numbers of options, even performance options, during a time when the stock price growth was setting records should have been a flag for investors. Mr. Simpson was rewarded for the growth in price twice; a cash award for an increase in share price and then profiting from options. Perhaps it was a good thing Rex Tillerson’s Exxon Mobil came along and swept up XTO in a merger, it certainly prevented shareholder scrutiny of these compensation practices.

Is Massachusetts the U.S.'s Leader in Board Diversity? New Study Finds Conflicting Results

By Nathaniel Parish Flannery, Research Analyst

The latest report from ION, the professional women network, singled out Massachusetts, for having “the highest percentage of women directors.” ION’s report found that 20.6% of the directors of the Fortune
500 companies based in that state are women. By contrast, according to ION’s report, only 10% of the directors at Fortune 500 companies in Texas are women. Still, people wishing to celebrate Massachusetts’ commitment to board diversity might not want to make a toast over a few bottles of Sam
Adams beer. After all, The Boston Beer Company, which brews Sam Adams, has ZERO women on its board.

More broadly, ION’s research shows that although a select group of high-profile Massachusetts companies has appointed multiple female board directors, a large group of other companies in the state is lagging behind when comes to board diversity.

One of the state’s leaders, office supply giant Staples, has three women on its board, including Mary Elizabeth Burton, the former CEO of Zale Corporation, a company that currently has zero women on its board.

All three of Staples’s female directors are current or former CEOs of major companies.

When it comes to board diversity, Staples can say, “We’ve got that.”

More broadly, according to research from GMI, one out of five of the largest 73 publicly-listed companies in Massachusetts have board rooms in which women hold 20% or more of the seats.

Boston Scientific, Biogen, and iRobot are notable examples in this area. These companies have all appointed at least two female directors to their boards.

Overall, according to data from GMI, Akamai Technology, the Cambridge based info-tech company, and Hologic, the women’s health company, lead Massachusetts in terms of board diversity.

They both have four women on their boards.

Still, the strong presence of women this select group of Massachusetts’ biggest companies is overshadowed by the absence of women in many boardrooms at smaller companies throughout the state.

According to ION’s report, although Massachusetts’s Fortune 500 Companies have appointed a relatively high number of women to their boards, “the low percentage of women on the boards of the other 90 companies in Massachusetts cuts the overall percentage to little more than half that figure.”

More broadly, GMI research finds that the largest 73 publicly listed companies in Massachusetts have an average level of female participation of only 11%.

The Boston Beer Company, Safety Insurance and First Marblehead Corporation do not have any women on their boards.

Overall, according to data from GMI, 38% of the 73 largest publicly listed companies in Massachusetts have not appointed any women to their boards.

Even Raytheon, one of Massachusetts’s best known companies, has only appointed one female director to its board.

ION’s report argues that “Over the past five years, virtually every leading proponent of good corporate governance practices has weighed in with calls for greater diversity among corporate directors, and in
particular for more women and people of color.”

Clearly, although many companies in Massachusetts are leading the way when it comes to board diversity, a large group of other companies in the state is lagging behind.

No News is Bad News: WOB No Significant Change in Six Years

By Michelle Lamb, Research Associate

Yesterday two powerhouses in the promotion of female equality in the workplace, ION and Catalyst, released their annual studies on women directors and executive officers in the US. ION’s “Gender Imbalance in the Boardroom: Opportunities to Change Course” includes data on Fortune 500 companies in 14 geographic areas as well as hundreds of small and mid-cap businesses, supplementing the research of Catalyst (which focuses on the F500 in their reports – see findings here and here) with additional S&P 1500 and Russell 3000 benchmarks from us here at GMI.

Their findings certainly confirm the perennial saw, that women’s share of leadership positions is stalled in corporate America and that female representation is still misaligned with the percentages of females in leadership roles outside of the corporate boardrooms and C-suites.  Specifically, they give evidence of no significant gains in the last year and claim that women are no further up the corporate ladder than they were six years ago.

Key takeaways from the Catalyst reports:

• In 2011, women held 16.1 percent of board seats at Fortune 500 companies. In both 2010 and 2011, less than one-fifth of companies had 25 percent or more women directors, while about one-tenth had no women serving on their boards. In both 2010 and 2011, women of color held 3.0 percent of all board seats.

• In 2011, women held 14.1 percent of Executive Officer positions at Fortune 500 companies and 7.5 percent of Executive Officer top earner positions. In both 2010 and 2011, nearly one-fifth of companies had 25 percent or more women Executive Officers, yet more than one-quarter had no women.

Perhaps most importantly, the ION report highlights the extent of missed opportunities to address the situation; that despite new, independent board members accounting for about 10 percent of boards, with 542 individuals having joined a board last year, only 87 of them (or 16 percent) are women. This year’s report focuses its “Calls to Action” section on the roles involved in this director selection process – board chairs and nominating committee chairs, all sitting directors, and executive recruiters – concluding:

“All over the world, from Norway to the United Kingdom to Malaysia to Australia, the pace of change in the gender composition of boards has markedly increased in response to a range of efforts by governments, stock exchanges and the business community. U.S. companies that compete in a global marketplace cannot afford to be left behind. They and their boards need to challenge and change the assumptions and practices that continue to produce the landscape described in this report. Their stakeholders deserve no less.”

CEO Pay Survey shows 36.5% increase in pay for CEOs in the S&P 500

By Paul Hodgson – CCO and Senior Research Associate

Along with the exclusive coverage of our CEO Pay Survey, I realized a lifelong ambition (my father never read any other daily paper) yesterday when I was invited to write some commentary for the UK newspaper The Guardian. Check out the link above for what I said in more detail, and watch out for the photograph of that Occupy protester! Press release for the survey is here, and contains a hyperlink to download the full survey.

Remember What should I do now I'm not President anymore?

By Paul Hodgson - CCO and Senior Research Asscociate

I expanded this GMI blog post, adding in new commentary and some extra research on your friend and mine Dan Quayle who is on the board of Heckmann Corporation, well-known for its investments in Chinese soft drink companies and waste water treatment systems... don't ask. So I expanded it and posted it on my new Forbes.com blog Governance Matters. Check it out.

On the third day of Enron my comp committee gave to me: 3 years of over $100 million in total realized compensation

By Scott Patterson - Compensation Analyst Manager

Not only has he gone from the helm of the company he founded, the company’s gone too, but we have not forgotten Angelo Mozilo.  The famed celebrity of the subprime mortgage crisis, although not spending a day in jail, may be the post-Enron face of corporate fraud.  A good reason for this reputation is the great wealth Mr. Mozilo amassed while the company he ran was going down in financial ruin.  For the fiscal years covering 2005-2007 Countrywide Financial served as a vehicle of wealth for Mr. Mozilo while investors and pension holders saw their investment crumble.  Seeing the $126,842,290 in total realized compensation that the Chairman and CEO made during fiscal 2007, I had to extend my view of previous years’ earnings and, lo and behold, the $100 million mark was surpassed for the previous two years as well.

A contract signed in 2004 that instituted the excessive pay practices he benefited from must have been his crowning achievement.  You won’t be surprised to hear that Mr. Mozilo featured heavily in the top 10 highest paid CEOs section of our CEO pay surveys for those years. Exercising over 4 million options in fiscal 2005 for a profit of nearly $119 million along with a bonus of $19.5 million, Mr. Mozilo attained total realized compensation of over $140 million for the year.  This was followed by total realized compensation of $102.85 million for fiscal 2006. A salary just shy of $2.9 million, a $20 million cash award and 1.4 million options awarded in fiscal 2006, in addition to being the nation’s number one mortgage loaner must have made the CEO feel like a king who was not subject to his shareholders.  With $370 million in actual compensation in three years, Mr. Mozilo may have been too busy counting his “options” to inform his subjects of the impending doom ahead.

On the second day of Enron my comp committee gave to me: two awards for a total of $109,688,700

By Scott Patterson - Compensation Analyst Manager

For fiscal 2008 Chesapeake Energy Corporation’s Aubrey McClendon received a bonus of nearly $77 million and a stock award with a grant date value of over $32.7 million.  The bulk of the bonus comes from the Founder Well Participation Program (FWPP) that allows Mr. McClendon “the opportunity to participate and invest as a working interest owner in the company’s wells.”  The $75 million FWPP bonus is based on a business expense of $15 million per year with a 5-year vesting period.  So, in order to align the CEO’s interests with the company, they provide him with $75 million of play money.  Wouldn’t it be nice if we all had our employer incentivize us by providing investment money over the entities we were responsible for in the first place?  It almost seems socialist.  One may question why the company provides him with investment money when he could use some of the money he earns in the vesting of stock awards.  Mr. McClendon realized more than $34.5 million in vested stock for fiscal 2008 and, as mentioned above, was granted another $32 million plus the same year.  The vesting of stock pushed his total realized compensation to over $114 million for the year.  If the company really wanted to provide Mr. McClendon with an incentive, why not try performance-based equity awards?

By the way, the 2011 proxy says:

Mr. McClendon believes the present value of the future net revenue (pre-tax) of the estimated proved developed producing reserves attributable to his FWPP interests in Company wells at December 31, 2010, discounted at 10% per year and based on prices and costs under existing conditions at such date, was approximately $308 million.

And another point of interest from the 2009 proxy:

In December 2008, the Company purchased an extensive collection of historical maps of the American Southwest from Mr. McClendon for $12.1 million, which represented his cost.

Chesapeake not only has their CEO’s work at heart but also his hobbies.  It appears that Mr. McClendon has all his bases covered thanks to the company he helped found.

(Perhaps we may be seeing some signs of shareholder muscle in response to the compensation package Mr. McClendon received in fiscal 2008.  A court hearing is set for January 30, 2012 to confirm a settlement reached between the Louisiana Municipal Police Employees’ Retirement System and Chesapeake this past November. The first matter of the settlement is that Mr. McLendon must buy back his maps for $12.1 million plus interest.  Other terms include the hiring of an independent compensation consultant and restricting executives from hedging their company stock.  Turns out that Mr. McClendon had some personal financial problems where he used stock as collateral and, because the stock plummeted in value, he had to sell most of his holdings to meet margin calls.  It’s a story worth keeping an eye on to see if this case brings Chesapeake’s compensation practices more in line with their peers.)

Small Print

By Paul Hodgson - CCO and Senior Research Associate

This week's winner in our CEO Quotation of the Week Competition

No competition here with this web release that Events Team Leader Mark Magee found.

"It can do certain things and not other things," Time Warner CEO Jeff Bewkes said of Netflix. "It can fly, it's not a submarine. Don't turn a hamburger into a cow."

That is a staggeringly quotation. You can just imagine the faces of the people in the audience. First the polite laugh and then the dawning realization that you didn’t really understand what he just said, then a little cock of the head as you try to figure it out, then the head shakes followed by the final realization that he doesn’t know what he just said either because if he did then he would, well….

Who needs an LTIP with a contract like this?

Compensation Analyst Manager Scott Patterson spotted this in Signet Jewelers' proxy statement. It’s a nice little story of, fundamentally, a jewel heist. Terry Burman, the CEO, received:

a retention bonus (the "Retention Bonus") equal to $6,547,709, in lieu of the grant of any award under the Signet Jewelers Limited Long-Term Incentive Plan 2008 (the "LTIP 2008") and the Signet Jewelers Limited US Stock Option Plan 2008 (the "SOP 2008") in fiscal years ending in 2010 and 2011. The Retention Bonus shall be paid, subject to Section 21, in a cash lump sum on January 31, 2011, subject to the Executive’s continued employment hereunder through January 29, 2011;

Now you might think, well, OK, people get retention bonuses, and, OK, this one is not exactly retaining him for that long, but, you know…. The thing is, Scott has a sneaking suspicion that they ditched the LTIP because it kept not paying out. That 2008 award, for example, didn’t pay out. That can get annoying. Oh, I know he failed all the targets and all that but since when has that been a reason not to pay out a bonus? And one last thing, Mr. Burman left the company right after the 2011 fiscal year ended on 1/29/2011 with $6.5 million in severance.

Who needs to worry about foreclosure with a contract like this?

The second of our two new entries in the “who needs a “blank” with a contract like this?" series. As Scott tells the story: “Costas Miranthis, PartnerRe Limited’s CEO who started in fiscal year 2011, will cost shareholders $300,000 a year for putting a roof over his head.  Even if terminated without cause Mr. Miranthis won’t have to worry about moving out for half a year.  Perhaps Bermuda’s cost of living is just too high for someone with a $1 million salary.”

From September 1, 2010 the Company will pay a Housing Allowance of up to $25,000/month based on actual rent. If the Executive’s employment is terminated (for any reason other than for Cause) he will be entitled to six (6) months housing allowance in Bermuda, if housing is paid for by any other sources this benefit will cease.

Bermuda. It’s tough.

But what exactly is it?

Events Analyst Dovid Muyderman found this 8-K on November 30^th, and many thanks to him. It’s not often you get the opportunity to use the word pentachloronitrobenzene in polite conversation. American Vanguard Corporation (NYSE:AVD) today announced that the United States Environmental Protection Agency (USEPA) has approved certain registrations for the Company’s pentachloronitrobenzene (PCNB) product line for all major commercial uses. As a result, with today’s action the Company’s wholly-owned subsidiary, Amvac Chemical Corporation (Amvac) is once again permitted to sell PCNB into the golf course turf, potato, cotton, ornamental bulb and cole crop markets domestically. Amvac continues to work with the EPA on labeling for other uses.

PCNB, a fungicide manufactured, marketed and sold by Amvac, was the subject of a Stop Sale, Use or Removal Order (SSURO) issued by USEPA in August 2010. On August 17, 2011, the Chief Judge of the U.S. District Court granted the Company’s motion for summary judgment and vacated the SSURO. Since the court’s order was issued, the Company has worked with the Agency to amend product registrations to ensure they continue to meet EPA requirements.

Eric Wintemute, Chairman and Chief Executive Officer of the Company commented: “Our technical, legal and customer service teams have worked tirelessly for over a year to ensure our PCNB product line meets EPA’s standards to re-enter the market. We are pleased by today’s actions as it restores this highly effective product to a marketplace that truly values its importance.”

Mr. Wintemute concluded, “American Vanguard always has and always will place great importance on assuring product safety, quality manufacturing and responsible application stewardship for all the offerings in its portfolio. Once again, we thank our customers for their support and patience throughout this process and now are happy to announce that we are ready, willing and able to meet the needs of PCNB customers.”

I can just imagine their marketing slogan: “Pentachloronitrobenzene, just one more reason to eat organic!”