"Say On Pay"? Tell It To The Source – The Bendable Directors
When I was a kid, there was a toy called Gumby and Pokey. They were rubber figures that you could bend and shape any way you want.
That’s the way me and Jake, that’s Jake Zamansky, see it when talking about the Compensation Committees of the Boards of most public companies. The Directors bend over backward for their buddies because their buddies will bend over backward for them later. As Jake points out, most Directors are still fellow CEOs, and the Boards of Directors of most public companies are still an old, and I mean old like 70+, boys’ club of plain vanilla white guys who grease each other’s palms in a corporate circle jerk that borders on the obscene.
“By any measure, paying these men hundreds of millions of dollars for their recent performance is not justified – which is exactly why Mr. Waxman is calling in the wrong people. It should instead be the corporate board members overseeing the compensation committees that should explain the payouts. Maybe executive compensation consultants hired by corporate boards should face questioning too, such as Hewitt Associates of Lincolnshire, Illinois, and Mercer Human Resources, which were involved in the decision to give Dick Grasso over $100 million. The ones who accepted authorized pay shouldn’t be flogged.”
I’ve mentioned some of the cases Jake mentions, like Grasso, and pointed out the willingness of the compensation consultants to enable the addiction to pornographic amounts of money that have become the norm, good performance or not.
And who stands by and lets everyone get punch trunk at the corporate trough, with nary a mention of independence issues and quid pro quos?
You guessed it, our friends the auditors (and their regulator, the PCAOB).
As I’ve said before, the Big 4 (and their regulator) are lap dogs, not watch dogs, drooling at the money their clients are taking home even though their companies are going to the dogs. Maybe that’s the reason they’re not feeling the least bit guilty about the racket they’re pulling on shareholders.
After all, no one is calling them out on their gluttony in the face of incompetence either.
No one? Am I not sufficiently critical of the PCAOB and Big Four? I guess I’ll have to become even more strident!
Laugh!
Correction made George. You’ve been added to the rogues gallery of critics of the Big 4/PCAOB.
Francine, I am missing something. How are the auditors to blame for this? This is not their remit. It is also nothing to do with the PCAOB.
All the SEC can do is make sure investors know what is happening, and require the directors on the comp committees to be “independent”. But it is the investors and the firms who hold the stock that are letting it go on.
@Norman Marks
This post is primarily about “Say on Pay” and the responsibility of the Directors on the Compensation Committee to monitor executive compensation. The Auditors are advisors, hired by the Board to attest to the fairness presentation of the company’s financial statements. As we have seen, much of what passed for earned incentive compensation during the financial crisis was based on financial results that were either fraudulent, exaggerated, or misstated (and therefore required to be restated.) The auditors, in my mind are supposed to be the best lines of defense for shareholders against compensation schemes and the resultant senior executive manipulation of results to meet those compensation objectives. Auditors were also implicated and sued in several of the stock option backdating scandals. So far none have gone to trial and many have been settled without exposing the auditors’ full role in advising on these schemes. Most of them occurred prior to Sarbanes-Oxley when auditors were often the 100% advisor to companies, with no prohibitions regarding advising on compensation and tax matters as well as M&A, accounting strategy and technology consulting.
You may want to also look at a recent post about proposed changes to governance over Compensation Committees of Board of Directors given the outrage over practices in some companies. The model includes many of the reform made to Audit Committees post-Sarbanes-Oxley to make them more independent, etc. I express doubt that these changes will have any more effect then they have had on getting to truly independent, effective Audit Committees in most companies. https://francinemckenna.com/2009/07/31/compensation-committees-to-be-more-like-audit-committees-okie-dokie/
Francine