Yearly Archives: 2007

Just Who is Creating This Value, and at What Cost?

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, March 20, 2007
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This post is by J. Richard Finlay of the Centre for Corporate & Public Governance.

It has recently been suggested by some commentators on these pages that CEOs add great value and are entirely deserving of the substantial compensation they have been paid.  The example of Jim Kilts–who, it is claimed, created some $20 billion in share value at Gillette and received total compensation of $150 million for his work–was cited with approval.

I have been observing with considerable skepticism the course of CEO remuneration over a number of years, having dubbed excessive CEO pay the “mad cow disease of the North American boardroom.”  Empirically–as many who have spent much time in and around the boardroom will acknowledge–there is a point where additional tens of millions become marginal as an inducement to higher performance.  In my view, that point occurs very early in the compensation tally.

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Comments on the SEC’s Mutual Fund Governance Rules

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, March 16, 2007
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Editor’s Note: This post is by John Coates of Harvard Law School.

An article in today’s Wall Street Journal describes the continuing debate on the Securities and Exchange Commission‘s rulemaking on mutual fund governance.  In 2004, the SEC adopted rules (by a split vote of 3-2) that would have required mutual funds to have a 75% independent board and would have required that the chairman of the board be independent.  The D.C. Circuit struck down that rule (for the second time) last June.  In December, the SEC released for comment two papers on mutual fund governance prepared by the Office of Economic Analysis.

At Fidelity‘s request, I reviewed and commented on the OEA’s papers in this report filed with the SEC.  The report, which draws on a recent paper I coauthored with R. Glenn Hubbard, Competition and Shareholder Fees in the Mutual Fund Industry, notes that the OEA’s analysis contributes significantly to the debate on the desirability of the mutual fund governance rules.  The report also points out, however, that the OEA papers:

–Acknowledge (although underemphasize) that no empirical data supports the need for the 75% independence rule or the independent chair mandate;

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Blogging the Nacchio Trial

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, March 16, 2007
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Editor’s Note: This post is by J. Robert Brown, Jr. of the University of Denver Sturm College of Law.

The trial of former Qwest CEO Joe Nacchio begins next Monday, March 19, in the federal district courthouse in downtown Denver.  It is the last significant criminal case arising out of the corporate scandals that led to the adoption of Sarbanes-Oxley.  The SEC case against Nacchio is pending.  Qwest has already settled with the Commission in an agreement that included a $250 million civil penalty. 

The 42-count criminal indictment (a mere six pages long) does not revolve around financial fraud but insider trading.  It alleges that Nacchio sold shares worth more than $100 million while aware of material non-public information, with the indictment alleging that he was “specifically and repeatedly warned about the material, non-public financial risks facing Qwest and about Qwest’s ability to achieve its aggressive publicly stated financial targets.”   

TheRacetotheBottom.org will provide daily coverage of the trial.  The blog is a collaboration of students and faculty on corporate governance issues.  Faculty and students will rotate through the eight-week trial with the expectation that there will be at least two posts each day the trial is in session (the trial will not be conducted on Fridays).  Primary materials on the case can be found at the University of Denver Corporate Governance web site. 

Executive Pay Players

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, March 13, 2007
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The Wall Street Journal ran an article on the front page of today’s paper entitled How Five New Players Aid Movement to Limit CEO Pay.  The article profiles five individuals, each representing a different type of player in what the Journal calls “an unusual movement that has turned executive-pay activism into a potent mainstream force.”

The five players include Lucian Bebchuk (who the article describes as “The Professor”); Jesse Brill (“The Networker”), who brought about the use of “tally sheets” in calculating the amount of compensation a company will owe if an executive leaves the firm; pension fund activist and assistant treasurer for the State of Connecticut Meredith Miller (“The Bureaucrat”); John Hill (“The Mutual-Fund Trustee”), who is credited with the assertive stance that Putnam Investments has been taking towards executive pay; and union fund official Edward Durkin (“The Union Leader”).

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Warren Buffett on CEO Pay

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, March 12, 2007
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Editor’s Note: This post is by Steven Kaplan of the University of Chicago.

I thought I’d mention two items on Warren Buffett’s views on executive pay.  (Broc Romanek posted here on Buffett’s 2007 letter to shareholders.  In that letter Buffett described current pay practices as “[i]rrational and excessive.”)

First, Berkshire Hathaway does not disclose what it pays its operating executives.  I would be curious to know how much Buffett pays them.  Second, Buffett was a strong supporter of Jim Kilts at Gillette.  Kilts was paid highly for performance, created some $20 billion in value, yet was criticized in some circles for being overpaid because he received over $150 million.  I happen to agree with Buffett that Kilts should have been congratulated rather than criticized.

The Hearing on Say on Pay

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, March 12, 2007
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Editor’s Note: This post is by Lucian Bebchuk of Harvard Law School.

Steve Kaplan posted below on the hearing that the Financial Services Committee of the House of Representatives held last week on proposed legislation that would require public companies to hold each year an advisory shareholder vote on the company’s executive compensation in the preceding year.

In my written testimony, I explained: (1) the significant concerns that investors still have about existing executive pay arrangements; (2) the way in which advisory votes by shareholders could help address these concerns; (3) why the weakness of existing shareholder rights in the US makes the need for additional tools for investors greater in the US than it was in the UK (which now mandates shareholder advisory votes on compensation).  I also examined and responded to several possible objections to shareholder advisory votes.  Because I am considering developing my written statement into a piece on the subject, any comments or reactions either on the blog or directly to me would be most welcome.

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Congressional Hearings on CEO Pay

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, March 12, 2007
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Editor’s Note: This post is by Steven Kaplan of the University of Chicago.

Chairman Barney Frank and the House Committee on Financial Services held hearings last week on CEO pay.  Lucian Bebchuk, Nell Minow and I were among those who testified.  My testimony is available here.  The testimony argues and presents evidence that the typical CEO is not overpaid. 

Two points are worth emphasizing.  First, the top 25 hedge fund managers earned more in 2004 than all 500 S&P 500 CEOs combined.  The same was true in 2005.  Second, when pay is measured by the amount of money CEOs actually receive (which includes exercised options), the typical CEO is highly paid for performance.

Bristol-Myers Squibb Adopts My CEO Pay Proposal

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Sunday, March 11, 2007
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Editor’s Note: This post is by Lucian Bebchuk of Harvard Law School.

Last week, Bristol-Myers Squibb followed Home Depot to become the second company to reform its pay-setting process on the basis of shareholder proposals I submitted.  Last fall I submitted to Bristol-Myers Squibb a shareholder proposal to adopt a bylaw provision requiring that decisions about the CEO’s compensation be ratified by three-quarters of the company’s independent directors.  The text of the proposal and an accompanying supporting statement are available here. 

The company initially sought to exclude the proposal from the ballot, and I filed with the SEC a letter opposing the company’s request for a no-action letter.  Subsequently, however, the company and I reached an understanding under which the company agreed to adopt the proposed arrangement as a corporate governance guideline and I agreed to withdraw the proposal.

Last week the company’s Board of Directors approved the revision of the company’s corporate governance guidelines, which now state the following: “The Chief Executive Officer’s compensation must be approved by at least three-fourths of all the independent directors of the Board.”  In addition, the Board approved corresponding language changes in the charter of the Compensation and Management Development Committee.  Both the Corporate Governance Guidelines and the Compensation and Management Development Committee Charter are available on the company’s website here.

Earlier on, following my submission of a proposal to Home Depot, Home Depot and I reached an understanding under which the company amended its bylaws to implement the proposed arrangement and I withdrew my proposal.

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Pill Bylaw Proposal Gets 57% of Votes Cast at Disney

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, March 9, 2007
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Editor’s Note: This post is by Lucian Bebchuk of Harvard Law School.

At their annual meeting today, the shareholders of the Walt Disney Company voted a proposal I submitted to adopt a bylaw provision concerning board adoption of poison pills that I submitted. With 879,028,289 FOR and 626,587,117 AGAINST, and 25,884,804 abstentions, the proposal won about 57% of the votes cast.

Although the proposal failed to get the majority necessary for amending the bylaws, the majority vote in its favor reflected strong shareholder support, and Disney’s chair John Pepper announced at the meeting that the board will give the proposal a “prompt and serious consideration.”

The Disney proposal is of a similar type to the one that I submitted to CA last spring. CA had to place the proposal on the ballot following litigation in the Delaware Chancery Court. An article about this type of bylaw is available here. At the CA annual meeting, the proposal got 41% of the votes, which induced CA to adopt a new pill whose terms enable shareholders to redeem it when a qualified offer is made.

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“Whiny” Shareholders and Access to Management’s Proxy Statement

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, March 8, 2007
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Editor’s Note: This post is by J. Robert Brown, Jr. of the University of Denver Sturm College of Law.

Lynn Stout (Paul Hastings Professor of Corporate and Securities Law at UCLA School of Law) today in the Wall Street Journal argues against allowing shareholder access to management’s proxy statement to elect directors, something under consideration by the Securities and Exchange Commission.  

There are plenty of pros and cons to this approach (the pros far outweighing the cons) but Professor Stout comes up with a new one: Reacting to “whiny” and “shrill” investors, more companies will eliminate public shareholders altogether and sell out to private equity firms.

There are many many problems with the editorial, but mostly Professor Stout is wrong to attribute private equity buyouts to fatigue over shareholder demands.  In fact, management engages in these transactions for the same reason as anyone else: financial gain.  As Professor Stout herself notes, managers typically get a piece of the company and annual returns averaging 20-25% a year.  That these transactions are more common is attributable to the extraordinarily high degree of liquidity and the large number of private equity firms chasing deals.

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