Itâ€™s annual report time again when stockholders receive their proxy materials and financial reports for the concluded year. The reports and proxy material are a true testament to the genius of the financial regulators and accountants but are usually unintelligible to the stockholders.
All of the rules and regulations governing full disclosure that are designed to provide â€œtransparencyâ€ appear to only increase the complexity of reporting. It seems that most of the really important stuff is buried in the footnotes rather than highlighted in simple English in the report text. Financial reporting appears to be far beyond the comprehension of the typical individual investor requiring membership in the CPA Club or the financial analystsâ€™ fraternity to understand. Even though directors are required to â€œsign offâ€ on the annual reports and proxy materials it is inconceivable that those without specialized training really understand what they have â€œsigned off onâ€.
Now that many companies are providing shareholders with an â€œadvisory voteâ€ on executive pay, the majority of proxy material (other than votes on directors) is taken up with a discussion of compensation that often is so complex that it is impossible to fully comprehend exactly how the proposals assure alignment of shareholder interests with the interests of the managers (executives). It seems that even when the share prices decline the executive compensation targets are met and the bonuses keep on coming. The performance targets can be designed in such a manner that even if earnings and share prices fall sufficient targets can be met to assure the payment of bonuses and grants of stock options.
There have been a couple of instances where shareholders upset the apple cart and voted NO on the advisory pay proposal. But, resistance to excessive executive compensation has been weak at best. There are possibly a handful of CEOâ€™s that are actually totally responsible for the performance of their corporations but that is most likely not the case with the great majority. There may really be a few CEOâ€™s who are worth annual compensation packages in the 8 figure range but it is doubtful that this is true of the majority. Has anyone ever wondered what would happen if on Monday morning the world woke up to the news that all of the CEOâ€™s of the largest corporations had mysteriously died over the weekend? It is most likely that corporate business would just go on as it was on Friday under the capable leadership of a large cadre of other corporate executives thoroughly trained in the business. While it is possible that in a limited number of instances the loss of a CEO would be devastating to the corporate business such is probably by no means common to all companies. CEOâ€™s have become Americaâ€™s Royalty with all of the perks and trappings of regal life paid for by the shareholders. On the other side of the coin, the shares of corporations are really controlled by large institutional funds (pension funds, mutual funds etc) and not by the individual. Thus, those that control the votes are probably biased in favor of higher executive compensation.
The corporate â€œtrain wrecksâ€ post 2008, in terms of share value didnâ€™t appear to seriously disrupt executive compensation except in some instances where bailouts applied some brakes. The really dumb corporate decisions that caused a significant loss in shareholder value essentially went un-punished by the shareholders and the perpetrators of the dumb decisions kept their lavish bonuses.
Is it time for a new type of financial reporting that discusses the business issues and problems, as well as financial results with the shareholders in simple, intelligible language rather than in CYA language and footnotes that shareholders wonâ€™t comprehend? Is it time for proxy material to discuss exactly what the CEO has done and will be doing that set him or her apart from others in terms of earning the outsized compensation packages? Is it time to vote against the re-election of any director who was on the board at the time material business mistakes were made? Individual shareholders as distinguished from institutional shareholders lack any effective voice in dictating how the companies they invest in are run and report results. Is it time to change that?