Owners of American corporations have rarely spearheaded the kind of landmark reforms the capital markets have needed to ensure public confidence or avoid the club of government regulation. They are reprising their Laodicean roles by failing to force a say on executive compensation.
More than a decade ago, we described the growing trend of inflated CEO pay as the mad cow disease of the North American boardroom. The comment, made at a speech in Toronto, was quickly picked up by the press. The metaphor was used because the trend toward excessive compensation appeared to be galloping from company to company, rendering directors seemingly incapable of applying good judgment and common sense when it came to compensation decisions. We repeated that idea in an interview in BusinessWeek in 2002 and in submissions to committees of the U.S. Congress.
But recent events struck us with the fear that this disease has spread to the shareholder body itself. The telling symptom is the revelation this week that at Merrill Lynch, Citigroup, Morgan Stanley and JPMorgan Chase, four companies that have seen their stock plunge, on average only 37 percent of investors supported recent proxy resolutions for a non-binding say on pay. In the case of Merrill and Citigroup, record multi-billion dollar write-downs and losses have been posted. The compensation of the CEOs who headed these companies during their descent into the world of subprime folly has been a recurring theme on these pages. It, along with the wider concern over soaring executive compensation, has sparked a mounting crescendo of outrage on the part of the public that has found its way into the current U.S. presidential campaign. Even Republican presidential hopeful John McCain has chided the level of greed that is sweeping America’s boardrooms.
The larger issue that draws our attention is the perennial fecklessness of shareholders as a group. After the panic of 1907, it was not investors who demanded the creation of the Federal Reserve System, nor did they rise up and call for such now basic measures as audited financial statements, annual reports and insider trading laws after the market crash of 1929. And when the Enron-era scandals revealed systemic weaknesses in American corporate governance, it was not the mass of shareholders who stood up at annual general meetings and demanded tougher audit committees and fewer boardroom conflicts – or any other provision of Sarbanes-Oxley legislation, for that matter. They are reprising their Laodicean roles by failing to force a say on executive compensation.
For American investors, too harsh is the tether that does not even bind. It is bad enough that directors insist on treating shareholders like children while they convey the idea that a say on pay would be almost the final step in the undoing of capitalism as we know it. But for the owners of American business to act as though they can’t be trusted with such advisory powers in connection with their companies and their money boggles the mind and is a complete abrogation of the responsibilities of ownership. It is our choice for the Outrage of the Week.