Corporate Governance structures

Remove all ads!

I came across a wonderful comment and wanted to share it-but I'm having trouble finding it after I though I had copied and pasted it.... Agree or disagree but I thought it raises some interesting points about the ways a company is headed in the US.

I note the US has CEOs paid far more than Europe and the gap between worker and CEO pay in the US has generally seemed to grow over the last few decades.

I'm sure there are people who are great CEOs and thus exceptions to the rule but this is worth thinking over none the less.

It argued there are CEOs who are overpaid and Board Members as well. The Board members themselves are friends of the CEO, other CEOs, and thus want to keep pay for him high.

The comment also made the point-right or wrong-that a corporate Board spends less time working on that board than a high school student working part time at fast food joint.

In turn the stockholders don't the ability to vote on who should be CEO or on the board effectively because they are given ballots with only names the board has picked listed and only loose bios of those people-not their stances on issues how how a company should move going forwards.

So shareholders don't really have an understanding of the policy of those they would vote on. Also if you have part of a mutual fund investment is your investment but if anyone votes it is the mutual fund manager and not you. And the manager may or may not want to be a CEO himself.

Thus US corporate structure may be littered with old boy networks.

 

That's probably true. But it doesn't mean those companies aren't generating shareholder value.

 

Heresy. Had you pathetic little ignoramus gone to business school you'd have been inoculated with the understanding that US corporate governance is the hottest thing ever since the invention of sliced bread and a model for the world to emulate.

This is amply exemplified by resounding successes like ENRON, Bear Stearns, Lehmann Brothers and the like, where the infinitely superior corporate governance structures operated with almost supernatural brilliance, to the benefit of the shareholders and the society at large.

 

Not only is it true, it's practically inarguable (not just that their pay has been growing so much faster than the typical worker, but that they aren't worth what they are being paid).

No one would argue that the CEO is more important to a company than the typical worker. Far more important. It follows from this that the CEO should be paid more - far more - than the typical worker. A few decades ago, it was not uncommon for the CEO to earn between 20 and 50 times what the typical worker earned. Nowadays, you get workers with salaries in the thousands, with CEO pay in the millions. So CEO pay is now anywhere from a few hundred up to about one thousand times what a typical worker gets paid - and it's hard to argue that the CEO is worth more than a thousand employees.

 

While I am not certain exactly what kind of contracts the CEO:s get in the US, my general understanding of the situation is that their largest income comes from bonuses which often are directly linked to the share value of the company (read: options). So while their pay is still impressive it's the bonuses that really make it soar. Option bonuses is generally a good thing since it gives incentives to expand the company and it keeps the share owners happy.

That said I know little of the US system and the above is just how the system works here. Option bonuses have lately gotten a lot of undeserved criticism around here which is too bad since it's generally a win-win solution.

EDIT: I would like to add that the old boy network is at large in Europe too and I'm not sure if it's any better in that regard. Because large companies often own parts of other large companies they often get to decide who sits in the board which creates a funny situation where CEO:s are board members in other big companies. Luckily the law limits the possibility of companies to have board members that have any ties to rivaling companies, otherwise we'd have a haven for illegal trusts at our hands.

 

There's certainly an element of that. You also have the ractheting effect. Nobody wants an average CEO. So you offer an above average pay package. And so the average pay keeps getting ratcheted up.

Should be right, it's supposed to be that way. There are two types of Directors, executive and non-executive. Executive are involved in the day to day running and are the senior management like the CEO and CFO. These people will probably work crazy hours. Non-executives, who should make up the majority, are not involved in the day to day running. They set the overall strategy of the company and provide oversight. Their working time would be the handful of board meetings a year and also keeping up to date with the affairs of the company. They're deliberately not involved in the day to day running as they wouldn't be providing an independent oversight if they were supervising their own work.

The main problem is the reward you get for the effort you put in. Say you own 5% of a company, which would be a massive share for the likes of Nike. If you spend ages waging a battle against the Board you'll only get 5% of the benefit at the end of it. It's not worth your while. That said, there are definitely improvements to be made in making it easier for voters to go against the Board.

Yep. It's packed with cross-directorships. So is every other country's.

They aren't aligned perfectly with the company's interest though. The average term of the CEO is getting shorter all the time and the options are a short term measure of performance. It encourages actions that have a positive short term effect even if they're bad long term (say increasing profit by scrapping R&D). As long as you're not the one in the hot seat when it all blows up you're laughing all the way to the bank. Also, they can give massive rewards for the company doing well even if the executive isn't responsible. A middling tech company CEO would have made a fortune during the Dotcom bubble.

Whilst I'm all for people getting paid what they're worth the relentless growth in executive pay is unsettling. It's not clear that it's going to result in increased performance. And of course there's a rake of research to suggest that more equal societies are better across a range of criteria.

 

Share prices are derived from the expected future yield of a company, not its current profit or short-term performance. Obviously options aren't perfect but that was not my claim. My point was that it's an incentive generally preferred by the owners since it's in their interest too to see share prices increase, and the fundamental point of any business is to bring value to its owners. There's always a factor of luck involved when dealing with such derivative bonuses but that's just a risk many owners are willing to take in order to give proper incentives to the CEO.

 

I'd also be in favour generally speaking. I'd prefer to see options vesting after much longer time periods. If you know your bonus will be depending on how the company is doing in ten years time rather than last quarter you'll have a different motivation. I'd say we would need regulatory effect to this though as any individual company trying it would just find it hard to attract executives.

 

A slight clarification. Share prices are derived from what most people think the stock will be worth in the future. A company's fundamentals play a role, sure, but a company with good fundamentals but no sex appeal will often be undervalued. A more appealing company with poor fundamentals will often be overvalued, especially when unsuspecting investors buy in to press releases and other hype issued by the company or other fund managers. This is further exacerbated by bull markets, since the difference between a bull market and stock market expertise is often missed by both private investors and professional money managers.