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Notions of Equity and Fairness
How serious is the perception of excessive CEO compensation? We asked, and you answered.

In the highest response to date since we kicked off the e-Briefing “Question of the Month” earlier this year, our readers hit their keyboards last month to answer the question, “how seriously do you regard the public’s perception of excessive CEO compensation?” Here is the overall response:
 
• It's a very serious issue: 71.4%
• It's a moderately serious issue: 19%
• It's an overblown issue: 4.8%
• It's not an issue at all: 4.8%
 
Rather than comment further on our deep concerns at how divisive this issue is becoming, as you seem to agree, we’ll turn the forum over to you this month. Here are selected observations that came in with your survey responses:

“Is it a very serious issue to affected stakeholders? Absolutely. However, the majority of the public either doesn't care or is too lazy to take corrective action. Most Americans are too far removed from the CEO's office and the boardroom to get informed, motivated, and engaged to correct the very real problem of executives' excessive compensation.”

“What the public's perception is or is not really has little bearing on the issue. In point of fact the public has almost no ability to do anything about the subject. Now if you begin to define the public as powerful institutional investors, or the likes of Warren Buffett, that could be a different matter. Even then I am skeptical … just like the hurricane season, it may be bad for a while but it always seems to blow over.”

“Directors tend to think their executive deserves his/her compensation. Directors who are also CEOs themselves are even more inclined to think this way. CEO compensation needs to be tied closer to the long range performance of the company.”
 
“Excessive compensation is seen by the typical shareholder and/or observer as unfair and likely unethical, while extreme excesses are seen as unethical and abusive. With our society's sense of fair play, extreme abuses should and generally do get corrected. Is corporate America ready for Congress to help with this problem? On another level, extreme pay practices distract the recipient who must now manage this great wealth as well as the corporation he has pledged to manage. Why dilute his attention and energies from the corporation's needs?”

“The [pay] gap between senior management and CEOs and between rank and file and top management has increased to historic and obscene levels.”

“In an age when notions of equity and fairness are quite rightly being applied to more and more of what we do, is it any wonder that members of the public, not to mention the vast majority of workers at all levels in our corporations, are unable to accept that leaders of industry, whether successful or not, are recompensed with ‘riches beyond the dreams of avarice’ "?   

“The public often has little understanding of the challenges faced by and the value that can be created by the CEO. If I were to say that an excellent CEO should get 0.5% of the wealth that he creates for the shareholders, a lot of people might say, ‘That seems fair’ (and, believe me, a CEO really can make a significant difference in the success of an organization; we only need to look at Warren Buffett or Jack Welch to see that). However, if it is presented as ‘The CEO just earned a million dollars,’ many people would complain bitterly, primarily out of lack of knowledge, but also out of jealousy.”

For more insights, look for our next Boardroom Briefing on CEO and Executive Compensation, which will be published later this month.

Question:  The Role of the CEO
Thank you for responding in such a thoughtful way to this red flag we raised last month. Let’s switch gears a bit for this month’s question. We recognize that the CEO’s job is complex. The Directors & Boards archives are filled with distinctive insights into the role of the CEO, with such articles as:

• “Probing the Mind and Life of Today’s CEO”
• “The CEO as ‘Captain of Industry’: A Dying Breed?”
• “Ed Woolard: A Life in Governance” (the retired DuPont CEO’s very public critique of egregious pay helped instigate some of the recent heat)
• “A Formula for Prosperity: 10 Principles of CEO Leadership”

We keep hearing when we’re out and about that the relationship between the CEO and board is changing. Let’s hear from you on this:

“As we come to the end of 2005, has the CEO/board relationship strengthened, weakened, or stayed about the same this year?”

Click here to take the survey.

Jim Kristie is the editor and associate publisher of  Directors & Boards.

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The 2005 Bankruptcy Reform Act: Impact on Directors

By Jay D. Adkisson

The Sarbanes-Oxley Act dramatically expanded the duties and responsibilities–and thus the potential liabilities–of corporate officers and directors. There were no shortages of securities class-action lawsuits even prior to SOX, but after its passage that litigation became much more personal, especially for outside directors.

To settle their liability on the accounting fraud claims alone, ten outside directors of WorldCom agreed to pay $18 million from their personal assets, which represented an estimated 20% of their net worth, with another $36 million to be paid from their D&O insurance. Similarly, 10 former Enron directors agreed to personally pay $13 million as part of a $168 million settlement for fraudulent accounting practices.

Stung by large claims against the D&O policies issued to these unfortunate directors, the insurance carriers have tightened up their policies and expanded their exclusions. Future corporate officers and directors who are caught up in similar circumstances may have to litigate with their own insurance carriers to provide defense and coverage. Also, a sustained series of financial collapses, such as occurred during the savings & loan crisis of the 1980s, might challenge the solvency of a particular insurance carrier and its ability to timely pay claims.

Officers and directors now face the specter of personal liability unrecompensed by their company or its insurance carrier for shareholder losses, whistleblower claims, and similar types of liabilities. Such liability in the past would have been met with personal bankruptcy--or, with little foresight or strategy, one suspecting difficulties could simply move to Texas or Florida where the creditor exemption for homestead was unlimited. It was also easy for corporate officers to load millions into their ERISA-protected pension plans knowing that those would be protected from any future creditors as well.

Not any more.
  
[Click Here to Read the Entire Article]

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Editor's note:  Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today.  If you'd like to participate in this section in the future, please email Scott Chase. 

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