February 13, 2014
Director Watch: Putting an End to Blank Checks for CEOs
It is standard for the chief executives of major corporations to pocket tens or even hundreds of millions of dollars a year for their work. This is not just the case for the extraordinary executives who turn around a failing company or bring an important new product to the market. Even CEOs of failing companies can count on paychecks that are several hundred times as large as the paychecks of their typical worker.
CEOs like to tell us that this is just the way the market works and we don’t want to tamper with the market. But this is nonsense on its face.
There is nothing like a normal market for CEOs. The pay of CEOs is determined by the corporate board of directors. In most companies, the members of this board largely owe their positions to the CEO. In effect, the directors are friends of the CEOs. The directors themselves tend to be very well-paid for their work, typically getting several hundred thousand dollars a year for attending 4-10 meetings. This basically means that the directors are paid off by the CEOs to look the other way as they pilfer the company.
If this were just a case of CEOs ripping off rich shareholders, the rest of us could treat the matter as simply another spectator sport. But the public at large actually has a substantial interest in the behavior at the top echelons of corporate America. For one reason, public pension funds own over $2 trillion in corporate stock. The money that CEOs rip off from the companies they run is money that is not going to these pension funds.
There is a similar story with private pension funds, which are ensured by the federal government. These pensions hold more than $1 trillion in corporate stock. And most middle income people now have a 401(k) type plan which is invested at least partly in stock. For these people too, the money taken by the CEOs is money that they will not have to support their retirement.
There also is a broader issue. When CEOs can get tens or even hundreds of millions of dollars a year, it affects pay scales everywhere. As a result the heads of other institutions like universities, non-profits, even charities, demand large salaries, pointing out how much more they could earn if they were in the corporate sector.
The boards of directors play a key role in this story. They are supposed to hold down the pay of CEOs. They should constantly be asking whether they can get a top executive who would perform the same job for less money. Just as corporate CEOs are always looking to find sources of cheap labor by outsourcing or shipping jobs overseas, directors should be asking whether there are potential CEOs in Europe, Japan, or China who would do as good a job for less money.
It doesn’t seem as though this conversation often takes place in corporate boardrooms. That is because the directors tend to see the CEO as a friend rather than a cost.
This is where Director Watch and Pay Pals, it’s partner site at the Huffington Post, comes in.
Corporate directors tend to be people with considerable accomplishments in government, academia, business or other areas. Their status adds prestige to a company. The directors should also have an obligation to minimize the pay going to CEOs and other top executives. However a director that is just pocketing hundreds of thousands of dollars and not actively working in the interest of shareholders to restrain executive compensation is effectively ripping off the company. And, insofar as the public has a stake in the company, they are victims as well.
These people deserve the public’s scrutiny however accomplished they may be in other areas. Director Watch is an effort to provide this scrutiny.
Data for Director Watch comes from each company’s required document filings with the U.S. Securities and Exchange Commission (SEC). This includes all compensation figures for directors and CEOs, as well as biographical data such as age, career history and portrait photographs wherever they are available. Most data is found in each company’s proxy statement, a report released to shareholders ahead of their annual meeting. Other documents have provided such information as the specific date of a director’s election or retirement from a company’s board.
All of these documents should be available in the investor relations section of each company’s website. However, they are also conveniently available through the SEC’s EDGAR database, which boasts free access to over 20 million corporate documents. By searching the database using a company’s name or ticker symbol, researchers can find the figures collected in Director Watch. Most of the data can be found by looking for a given year’s proxy statement, which often has the filing code “DEF 14A.”