Last in a three-part series on executive compensation, in conjunction with IBJ’s special report on the same topic,
which appeared June 22.
On June 22, IBJ printed a list of top CEOs and how much compensation they received. Although
each company is owned by public shareholders, compensation was determined in secret.
While transparency is a stated goal of many
corporations, deliberations regarding distribution of shareholder property to executives are not subject to light of day or
to review. Instead, decision-making is camouflaged by thousands of words that appear substantial but
the 2009 proxy statement of locally based WellPoint Inc. devotes at least 35 pages to compensation of executives
and directors. WellPoint mentions its compensation consultant, standards for compensation, the marketplace for talent, forms
of incentive bonuses, retirement plan balances, ownership of WellPoint shares, perquisites, and options held and/or exercised.
The quantity of information is enough to discourage reading, but the system fails in more important respects:
• Information is after-the-fact. By the time
shareholders receive proxies, more than one year after decisions were made, executives
have received and possibly spent their compensation. No active observer or shareholder can influence decisions already taken.
• Statistical references and standards are not
specific. One proxy statement proclaims that CEO pay is "in the broad middle ground" of comparable
companies, but does not document or quantify the generality. Many proxy statements mention performance
targets, but do not precisely quantify. No effort is made to publicize targets for the current year so that shareholders,
independently, can evaluate whether targets are challenging, and whether the CEO and his company are meeting the targets.
• Extensive deliberations are cited, but minutes
are not provided. Nowhere in proxies do we have a record of board debate, and comments and opinions of
each director. Votes are recorded as unanimous, although consistent unanimity is rare inside most decision-making
committees. Consultants’ reports are not printed.
• No disclosure is made regarding how directors approve their personal board fees and benefits.
WellPoint directors paid themselves roughly $300,000 each. (Warren Buffett’s company,
Berkshire Hathaway, pays annual board fees of $7,000 or less.) Companies commonly purchase insurance
to protect directors and officers from lawsuits. This perk further distances directors from shareholders;
it makes directors personally immune from the consequences of their decisions.
• In part, executive compensation is based on level of responsibility, but levels are not quantified,
and I wonder whether a CEO has more responsibility than a pilot, ship captain, surgeon or manufacturing
safety personnel. Quantifying "responsibility" is impossible.
• While directors are required to own company stock, they appear to purchase
few shares with their own money, but instead are granted shares by the company. An assumption is made, but never proved, that
owning shares improves director performance. The assumption is easily challenged because directors have little control over
events. No positive correlation is known between insider share ownership and stock performance.
A strong corporate board, confident in itself and
its decision-making, would publish agendas and allow shareholders to comment on pending decisions. It
would defend its actions by reference to specific comparisons and performance targets, and allow shareholders
to witness disagreements on the board, either by observing meetings or through detailed minutes. It would facilitate
modification of decisions made in the context of shareholder or public protest.
Browbeating, shareholder protests or governmental action will not change this system. Change must
come from boards, from the hearts and minds of directors who compare their societal roles to contributions
made by others, such as teachers, scientists and ministers.
The public is ready to reward accomplishment. It has little reticence to pay for outstanding athletic
and artistic performances. It is happy to pay researchers and inventors who make lives more comfortable,
to reward entrepreneurs who take personal financial risks to fund new ventures.
However, the public does rail against individuals
who determine their own compensation, behind closed doors, with other people’s money.
Guy is an Indianapolis money manager, certified financial planner and president of Wealth Planning & Management