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Over a dozen large banks have been implicated in the Libor scandal. And the harm created by the manipulations has impacted communities across the US in the billions of dollars.

Boards at the companies involved in Libor manipulation have already paid out bonuses based on inflated earnings. Will these bonuses be clawed back?

At the same time, there are those who continue to advocate the use of bonds or interest rate swaps as a way to pay bankers. It doesn’t make sense.  The prices of those instruments can be altered by manipulating interest rates. Should we provide additional incentive for manipulations given the Libor mess?

Clearly, large banks are not fully disclosing the risks in their compensation schemes.

It’s also difficult to see how paying for fraud and harm comports with reasonable business judgment.

Here’s the article. 

http://management.fortune.cnn.com/2012/12/13/libor-and-banker-pay-an-unfortunate-marriage/

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Is looking behind the numbers a lost art? M&A transactions might be more accretive if the reviews were more rigorous. So too, it’s easy to accept earnings as is when paying CEOs. But boards need to look beyond that. We need incentives that work to increase the size of the pie and make our country more prosperous.

Here’s an article on the fiscal cliff based on a recent Institute for Policy Studies report. Should CEOs be paid bonuses for changes in the tax code?

http://management.fortune.cnn.com/2012/11/26/fiscal-cliff-ceo-pay/

If you have comments on this blog post, please ignore the comments are closed notice below and just email me directly at ebloxham@thevaluealliance.com

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The JP Morgan trading issues reflected a lapse in governance. But beyond risk oversight, they also called into question the way in which top executives at the largest banks are paid. Here’s a link to my article on Fortune.com.

http://management.fortune.cnn.com/2012/06/14/j-p-morgans-debacle-its-time-to-talk-exec-pay/

I had the opportunity to design incentive programs using risk based measures in the mid-90s. Implemented properly, these kinds of pay programs can work very effectively to focus executives and managers on the right measures of success. I have written on this topic over the last 15 years, including further information on the regulatory requirements of the sound compensation guidance.  (See http://www.thevaluealliance.com/publications.htm.)

Related to the New York Fed Staff report, the issues raised in the article today include issues on pay I have elaborated on in more detail in these recent articles.

http://management.fortune.cnn.com/2012/04/16/the-terrible-cost-the-u-s-pays-for-derivatives/

http://management.fortune.cnn.com/2012/01/30/ceo-pay-us-economy/

The implications for our economy are clear. The solutions may not come easily, but it is important that we work together to find them.

If you have comments on this blog post, please ignore the comments are closed notice below and just email me directly at ebloxham@thevaluealliance.com

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Privacy issues. Directors need to understand the privacy concerns of consumers and potential long term hits to reputation. How is management weighing the risks of aggressive short term access to consumer information?
Wired (Ryan Singel): Researchers Expose Cunning Online Tracking Service That Can’t Be Dodged
“Researchers at U.C. Berkeley have discovered that some of the net’s most popular sites are using a tracking service that can’t be evaded — even when users block cookies, turn off storage in Flash, or use browsers’ “incognito” functions.”
http://www.wired.com/epicenter/2011/07/undeletable-cookie/

The economy.
MarketWatch (Steve Goldstein): ISM manufacturing gauge falls to two-year low
“U.S. manufacturing activity barely grew in July, according to a key index released Monday in a demonstration of an economy struggling to expand.”
http://www.marketwatch.com/story/ism-manufacturing-gauge-falls-to-two-year-low-2011-08-01?link=MW_latest_news

The economics of directorship. At the largest companies, directors get paid over $1,000 per hour.
WSJ (Joann Lublin): Directors see Uptick in Compensation
http://online.wsj.com/article/SB10001424053111903635604576476514268460994.html?mod=googlenews_wsj

Steep decline in the market today. Are market prices indicative of CEO value creation?  (No.)

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 Eleanor Bloxham www.eleanorbloxham.com
 
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Time to eliminate stock based compensation?
FT (Diane Coyle): A couple of remedies for pay excess
 ”I would … like to see investors call time on share incentive schemes altogether.” http://www.ft.com/intl/cms/s/0/18c572e6-b973-11e0-89ee-00144feabdc0.html#axzz1TV6Z7nO5

NYT (Floyd Norris): Usual Growth Leaders Absent From Recovery
“WHY has the job picture been so bleak in the current recovery? A large part of the problem can be traced to unusual weakness in two categories: construction jobs and government jobs.”

NYT (Paul Krugman): The Centrist Cop-Out
“I joked long ago that if one party declared that the earth was flat, the headlines would read ‘Views Differ on Shape of Planet.’”
http://www.nytimes.com/2011/07/29/opinion/krugman-the-centrist-cop-out.html?src=ISMR_AP_LO_MST_FB

Krugman’s commentary is a commentary on the practice of journalism. Of course, what should happen is for the reporter, whenever possible, to go the extra step — get a picture of the earth taken from above the earth and use it in the article too or put it in front of the leaders of the flat earth party and ask the flat earth party to explain why in the face of the picture they say the earth is flat.                Of course many reporters do this – analyze the statements of respondents not just take them down. This takes time and requires the reporter to eschew the short-sightedness and/or pressures of his/her “bosses” (i.e. whoever they are trying to please or follow).

Psych Today (Nassir Ghaemi): Where are the new ideas?
“One of my Harvard teachers …Leston Havens… used to say: ‘Be careful about institutions. Between your boss’s needs and your eagerness to please, you can create a prison stronger than Alcatraz.’”
http://www.psychologytoday.com/blog/mood-swings/201011/where-are-the-new-ideas

When the focus is on satisfing one institution or one person rather than a larger purpose and higher values, neither ethics nor true innovation will flourish.

The “Where are the new ideas?” article discusses the weaknesses in the current state of academic research.  So does Paul Smalera’s article which focuses on economists.

Reuters (Paul Smalera) Krugman says Thoma’s right, except when he’s wrong
“Thoma rightly argues that too many of their academic colleagues don’t risk engaging at all — they are the ones that need to be coaxed out into the conversation, to shed some light on the dark corners of the economy before some other solid-seeming sector (technology, anyone?) implodes and nearly sinks the ship, yet again.”
http://blogs.reuters.com/paulsmalera/2011/07/26/krugman-says-thomas-right-except-when-hes-wrong/

I was invited early last decade as the only non-academic and non-FDIC executive to an FDIC conference to speak on market signals that might provide warnings of a run up in default at banking institutions. In my speech, I offered/encouraged the pure academics to reach out to practioners (like me) to select their research topics and make them relevant. (After all, that was part of the reason I was invited to speak.) No one called.

Regarding techology – technology is one of the only sectors looking to create jobs http://thevaluealliance.com/Blog/?p=47 which makes technology an even more important sector to watch.

Reuters (Felix Salmon): Chart of the day:Techs vs Industrials, Why Tech Stocks Deserve to be Cheaper than Industrials     “in an area where change is unlikely to massively disrupt your business, income streams are more predictable and therefore more valuable.”            http://blogs.reuters.com/felix-salmon/2011/07/22/chart-of-the-day-techs-vs-industrials/ http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/

Besides the obvious difference in business models between industrials and tech companies, another explanation of lower P/Es at tech firms may be the governance at tech vs industrial firms. Good governance can act as a buffer and prevent issues spiraling out of control. The market places a premium on this stability. (The issue of governance which Buffett doesn’t mention is something he faced earlier this year.) http://management.fortune.cnn.com/tag/warren-buffett/ http://finance.yahoo.com/echarts?s=BRK-A+Interactive#chart1:symbol=brk-a;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

WSJ (Nassir Ghaemi):Depression in Command
“the sanest of CEOs may be just right during prosperous times, allowing the past to predict the future. But during a period of change, a different kind of leader—quirky, odd, even mentally ill—is more likely to see business opportunities that others cannot imagine.”                “As for Churchill, during his severely depressed years in the political wilderness, he saw the Nazi menace long before others did.”              “Depression … has been found to correlate with high degrees of empathy, a greater concern for how others think and feel.”
http://online.wsj.com/article/SB10001424053111904800304576474451102761640.html?mod=djemITP_h#articleTabs%3Dcomments

I highly recommend this novel in which Churchill (and the black dog of depression) are featured protoganists. Mr. Chartwell : a novel by Rebecca Hunt. http://www.amazon.com/Mr-Chartwell-Novel-Rebecca-Hunt/dp/140006940

 
The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
 Eleanor Bloxham www.eleanorbloxham.com
 
 Copyright 2010 The Value Alliance Company. All rights reserved.

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Does  CEO compensation in the form of stock and stock options create alignment with company value creation? No.

Current case: The debt ceiling gymnastics.
As the stock market drops, is that reflective of less value creation by a particular CEO? (No.)
Should a CEO receive less income because the stock market is being held hostage by certain members of Congress? (No.)
Conclusion: CEO compensation in the form of stock and stock options does not create alignment with company value creation.

Does enforcement matter? Regarding highway speeds, it does, and one attorney says yes it does matter with companies too.
FT (Richard Waters): Google faces fresh fire over web reviews         “Without proper sanctions, ‘no big company would ever obey the laws, they would do whatever they could get away with until they were caught’, said” Gary Reback, a Silicon Valley lawyer. http://www.ft.com/intl/cms/s/2/561dcd98-b61f-11e0-8bed-00144feabdc0.html#axzz1TP7KiEVv

Just like they predicted in the Weekly Reader in elementary school, fewer work hours are needed today …but then it was just supposed to mean more leisure time not millions unemployed.
FT (John Gapper): America’s turbulent jobs flight           “US manufacturing has a good story to tell but that story is about technology and productivity rather than jobs for the millions of people out of work” http://www.ft.com/intl/cms/s/0/1d467a7c-b883-11e0-8206-0144feabdc0.html#axzz1TP7KiEVv

Civility in America 2011 (See link)http://www.webershandwick.com/resources/ws/flash/CivilityinAmerica2011.PDF
The economics of incivility.
The percentage of people who didn’t buy from a company because of incivility rose 13 percentage points over last year to 69%. The percentage who changed their opinion about a company due to incivility rose 14% (also to 69%). 1 in 5 employees have quit a company due to incivility in the workplace. Company leadership and employees themselves are primarily to blame for incivility according to those surveyed.

 
The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
 Eleanor Bloxham www.eleanorbloxham.com
 
 Copyright 2010 The Value Alliance Company. All rights reserved.

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On the debt ceiling crisis: Don’t we have enough crises to deal with without manufacturing one?

Reading (July 27):
NYT (Steven Davidoff): Proxy Access in Limbo after Court Rules Against It        “How do you quantify the costs and benefits of democracy?”   http://dealbook.nytimes.com/2011/07/27/proxy-access-in-limbo-after-court-rules-against-it/?nl=business&emc=dlbkpma21

WSJ (David Wessel): What’s Wrong With America’s Job Engine?          “Over the past 10 years..The labor force has grown by 10.1 million.But the number of private-sector jobs has fallen by nearly two million.”
http://online.wsj.com/article/SB10001424053111904772304576468820582615858.html?mod=ITP_marketplace_0

WSJ (Willa Plank): CEOs in Their Own Words: Don’t Plan on Much Hiring          ”Outside of rail and technology companies, almost none of them discussed long-term plans to significantly expand their work force.” http://online.wsj.com/article/SB10001424053111904772304576470484142293112.html

Writing (July Fortune):
U.S. jobs crisis: It’s time for corporate leaders to step up          “So the real question is what, without government assistance, can the overseers of U.S. corporations do to help solve the national demand for jobs?” http://management.fortune.cnn.com/2011/07/27/us-jobs-crisis-corporate-leadership/?section=magazines_fortune

Apple’s no-win CEO succession efforts          “Taking the work of the board offline means there is a working problem with the board online — signaling that a problem with process, power, or personalities at the board level needs to be resolved. It behooves any board in such circumstances to try to address the real source of the difficulty, rather than use alternate means to accomplish a goal.”
http://management.fortune.cnn.com/2011/07/25/apple%e2%80%99s-no-win-ceo-succession-efforts/

News Corp directors: Half way out the door?      ”Only time will tell whether support of the stock and support of the management go hand in hand. The company used to have “equity ownership requirements” for directors, according to the company’s 2008 proxy. Those requirements were not included in the company’s 2009 or 2010 proxy reports.”
http://management.fortune.cnn.com/2011/07/19/news-corp-directors-half-way-out-the-door/

What’s in store for Rupert Murdoch?         John M.”Nash thinks that CEOs should not sit on any board, including their own company’s board. The CEO can attend board meetings, but ‘shouldn’t have a vote,’ Nash says.”
http://management.fortune.cnn.com/2011/07/19/what%e2%80%99s-in-store-for-rupert-murdoch/

Who can right the ship at News Corp?         The right tone at the top, good governance. None of those words sound so sweet – or powerful – as in the midst of crisis. In the helter and skelter of the every day, they can be brushed off as meaningless. In the midst of an engulfing crisis, though, it is no longer possible to simply repair them, to put lipstick on the pig  – they must be made again whole cloth.     http://management.fortune.cnn.com/2011/07/18/who-can-right-the-ship-at-news-corp/

How to get paid like a U.S. CEO          “The research shows that U.S. CEO pay is higher primarily because U.S. CEOs are awarded high levels of equity compensation, which includes pay in the form of company stock and stock options…When companies have U.S. institutional owners, boards are more likely to offer high levels of equity compensation (and, in turn, total compensation), the research shows.”
http://management.fortune.cnn.com/2011/07/05/how-to-get-paid-like-a-u-s-ceo/

Will Bank of America execs get to keep their bonuses?             “Implement bonus deferrals — so executives have to wait to be paid the full amount of their bonuses. Bonus deferrals help ensure that pay is made on an accurate performance assessment and that there aren’t any billion dollar ‘oops’ moments lurking in the background.” http://management.fortune.cnn.com/2011/07/01/will-bank-of-america-execs-get-to-keep-their-bonuses/

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The comment period for a multi-agency proposal on compensation at financial institutions ended yesterday, leaving a gaping hole in the rules proposal. http://www.sec.gov/rules/proposed/2011/34-64140.pdf

Although a large portion of CEO compensation is paid in stock or options, the impact of incentive pay which is paid in equity, rather than cash, is entirely missing in the proposal.

But research by Professors Rüdiger Fahlenbrach and René M. Stulz in 2010, following the crisis, demonstrated why equity as its own component should not be ignored. While the knee jerk reaction is that if equity is held by executives, it will create alignment with shareholders, the research didn’t demonstrate any such benefits.

According to the research, “banks where CEOs had better incentives in terms of the dollar value of their stake [in the company] performed significantly worse than banks where CEOs had poorer incentives.” “The top … equity positions at the end of fiscal year 2006 [were] held by James Cayne (Bear Stearns, $1,062 million), Richard Fuld (Lehman Brothers, $911.5 million), Stan O’Neal (Merrill Lynch, $349 million)[and] Angelo Mozilo (Countrywide Financial, $320.9 million).”   All of those firms fared poorly in the crisis: sold in distress or in the case of Lehman, went bankrupt. http://www4.gsb.columbia.edu/rt/null?&exclusive=filemgr.download&file_id=7214553&rtcontentdisposition=filename%3DStultz_Bank%20CEO%20Incentives%20and%20the%20Credit%20Crisis%2020100508%20RMS.pdf

This finding indicates that the banks of CEOs with poorer equity ownership stakes did better — and that perhaps equity ownership exacerbates rather than ameliorates risk taking on the part of CEOs. Certainly, it is well recognized that high equity stakes would logically tend to dampen full negative disclosures.

A strong negative correlation between equity stakes and bank performance such as the research finds would seem to be a compensation mechanism that the regulators should be curious to understand in setting policy, given the apparent risk to bank performance and the huge consequences to stakeholders.

So why don’t the regulators examine the issue more closely or address it in their rules proposal?

This isn’t the first time I’ve written on the topic. Here’s what I wrote to the SEC on this in September 2009 http://www.sec.gov/comments/s7-13-09/s71309-107.pdf and to the Federal Reserve on this in November 2009 http://www.federalreserve.gov/SECRS/2009/December/20091214/OP-1374/OP-1374_112709_25335_596100224676_1.pdf.

And it’s not as if equity is a miniscule part of CEO pay. A quick review of the summary compensation tables in the latest proxies shows that the current CEOs of JP Morgan, Bank of America, Citigroup and Wells Fargo, through the crisis (over the last three years) received $127 million in equity and option awards, on average 80% of their total pay. It would appear the 80/20 rule would clearly apply warranting a look at the impact of equity.

To address compensation at financial institutions, regulators need to re-examine all the reasons equity may create these perverse effects including the fact that payments in equity may exacerbate the tendency to overpay (because of the false notion that equity and options are funny money and not real cash to the corporation). It may also encourage managers to take risks, increase the volatility of returns, extract potential windfall benefits from timed sales, and manipulate stock prices. And equity pay may do all this while diluting other shareholders and diminishing accountability to them and distracting managers from the real business of managing the business.

If regulators examine the issue carefully and reflect the impact in the rules proposal, maybe history won’t repeat itself. If they don’t, there is no reason to expect we won’t see the same movie once more.

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

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Gary Strauss shone a spotlight on executive and worker health programs in an article for USA Today published today. (Please read and comment on it here. http://www.usatoday.com/news/washington/2010-12-10-rw_ceohealthplan10_ST_N.htm)

With say on pay universal for public companies in the US for the upcoming proxy season, perks will be in the spotlight — including health care packages for top executives which differ from the rank and file.

Clearly, as the board considers corporate compensation programs, health care is an issue that should be part of the boardroom conversation. 

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Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

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I remember I gave the opening talk/keynote at a conference in 2004 in which I discussed the important role of the board with respect to corporate culture.

Here David Nadler and I very much disagreed — as on a later panel at the conference he said that corporate culture while critical was not the board’s responsiibility.  He also said that the largest influence on the culture is company leadership. http://www.allbusiness.com/corporate-governance/222157-1.html

But who is responsbile for the largest influence on culture i.e.company leadership? 

Who hires and fires the CEO? The board is responsible, of course.

Who decides if the CEO has done a good job with respect to the culture of the firm and in the choice of the top management team? The board.

How much can boards really do about this influence and thus culture? I think they can actually do a lot.

It’s very easy for boards to turn aside and hope for the best in the face of a CEO turning in results shareholders admire or seemingly turning around a company’s fortunes. In the HP case, the subsequent commentary by HP staffers about the culture is worthy of note.http://blogs.wsj.com/digits/2010/08/06/live-blogging-h-ps-announcement-to-investors/tab/comments/

Can boards be proactive in understanding the culture of the organization and the way in which the CEO views and uses his/her power?  I think a board can do a lot by evaluating the CEO’s context, interactions with staff, etc.

It isn’t that difficult to pick up on issues if you are socially aware. Addressing those issues is what is much more difficult.

CEOs need the board to oversee – and boards need to to ensure the power of the position is not corrupting  the individual in it. They need to also ensure that their own actions do not make it more difficult for the CEO to create a culture that mirrors the values of the firm, as many unwittingly do when they set short-sighted objectives and focus on the short term.

Boards need to provide independent, objective counsel and help the CEO stay grounded and able to make wise choices. Failure to address personality and cultual issues in the executive ranks create huge risks for the entire firm.

Who else but the board can address this?

This is another reason boards must control the agenda. Some of these are issues the CEO is likely not to put on the board agenda. But the board must in strategy sessions, executive session with and without the CEO and in performance review updates with the CEO ensure these issues are addressed.

To do this well requires directors with insight, dipomacy, tact and courage. Sometimes directors have the first three but the fourth is lacking.

Holding executive sessions at every board meeting that are more than perfunctory and cover these topics including ”what could our CEO use coaching on?” and “what is the culture of the organization and how is it evolving?”  and “have we provided the right goal and performance structure including the importance of how?” provide ways for the board to handle these issues early on.

Shared values such as HP espouses at its company including “We work together to create a culture of inclusion built on trust, respect and dignity for all” “each person’s contribution is key to our success” and “We effectively collaborate” if they are to be written must be lived.

It’s the board’s job to determine if these are the right values.

If they are, they must ensure the CEO’s actions reflect them. They do that through oversight of the human resource practices of the firm (including compensation) and oversight of the manner in which the CEO and his/her team go about reaching their goals and objectives.

If it’s not the board’s responsiblity that sees to the CEO’s behavior — and by extension to his management of the culture — whose job would that be?

Footnote: Fortune invitied me to write about HP. You can read the article here. http://money.cnn.com/2010/08/10/technology/HP_post_Hurd_board.fortune/index.htm

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.