It is good to see that the House has passed some new, far reaching financial regulation legislation. The bill will move to the Senate now. One element of the pending legislation is providing shareholders with an advisory vote on executive compensation. While that provision recognizes shareholder concerns over runaway compensation packages, it should not be expected to work any miracles because the vote is absolutely not binding on the officers and directors. It is advisory only. The only real control that can be expected must come from the compensation committee of the Board made up of “independent directors”. There is the rub. Most often, under the present methods of selecting “independent” director candidates and electing them, achieving a Board with a majority of truly independent directors is more of a myth than a reality (see the Post on this subject on this site). Unfortunately, no one has ever satisfactorily defined what level of total compensation is reasonable and what level becomes excessive. But, logic should dictate that instances of total compensation reaching eight figures (as in $10,000,000). It is very hard to imagine that, on a relative worth scale, one, two or three top executives in a large corporation can individually contribute enough to the corporation to be worth that level of compensation.. Stated differently, with all of the brilliant people being graduated each year from prestigious business schools, it is hard to imagine that there would be a lack of qualified candidates if a top job only paid $3,000,000 in total compensation. It would be interesting to speculate about what might really happen to the business of a corporation if its CEO suddenly died. Would the business suffer or would the team in place be able to carry on as if nothing happened? Any company totally dependent on a small cadre of top executives for its success may not represent a very safe investment.

Shareholders, particularly those owning large blocks of stock like pension funds and mutual funds, should become very pro-active in riding herd on executive compensation and making sure that executive performance is demonstrably worth the level of compensation granted.

At least for the moment, it would seem that Goldman Sachs understands the sentiment of investors and the public by foregoing top executive bonuses for 2009. But, what is sad is that the Republicans in Congress appear to oppose this new financial legislation in the misguided belief (or, maybe just stubborn opposition to any Democratic sponsored bill) that the country doesn’t need financial regulation. It is difficult to understand how fiscal conservatism is somehow inconsistent with financial regulation designed to prevent any repeat of the financial collapse of 2008.


Is this going to be a story of “Here We Go Again”? Bank of America and Citi will be (are) paying back the billions in TARP money to the U S Government through funds raised by the sale of stock to the public. It is good news that the public has enough confidence in these institutions to invest fresh capital in them. It is good news for the public that the taxpayers are being repaid so quickly. But, the payback raises a question as to how this move will benefit the current stockholders. Is this an action that has a very identifiable and primary benefit to the shareholders or is it an action motivated only by the desire of the corporate executives to get out from under governmental control of their salaries and benefits? Once free of TARP one must suspect that these institutions will quickly return to their previous policy of lavish salaries, bonuses and benefits and the shareholders will be left holding the proverbial bag. This suggests that shareholders should carefully scrutinize all proxy material containing any information about compensation and then, if a lack of restraint is demonstrated, vigorous action to oppose the pay packages should commence.



On December 3, 2009 Peter De Fazio (D-OR) introduced H R 4191 in the House of Representatives. This legislation entitled “Let Wall Street Pay For The Restoration Of Main Street” seeks to impose a tax on all stock trades in excess of an aggregate of $100,000 in a year. On first glance, this legislation conveys the image of Wall Street paying. But, that is a giant illusion.

This proposed legislation, like so much legislation that comes out of Congress, starts out with a noble purpose but ends up hurting those it is trying to help. Think about it – all mutual funds, where many investors have at least a portion of their investments and maybe all of their pension fund investments, would be especially hard hit. Also hit would be managed fiduciary accounts where many pension funds and individual accounts are invested. A threshold of $100,000 in trades is very small and would hit small investors and not just the wealthy investment banks. Finally, the low threshold would hit estates liquidating portfolios before distribution to heirs. None of this sounds like Wall Street paying for the Restoration of Main Street. It is the individual investor paying.

If the proposed legislation were confined to a tax on trades in the trading accounts of banks, investment banks and professional traders only and clearly exempted the trades that would directly impact individual investors, then the legislation might have some merit. Everyone has noticed the recent, monumental trading profits earned by major banks and investment banks that will result in gigantic bonus payouts to employees. Yes, those trading accounts will be taxed along with the mutual funds and managed accounts but it is doubtful that anyone would pay much attention or even care if it were truly a tax impacting only banks and investment banks provided the definition of a “professional trader” was someone transacting greater than $1,000,000 in trades in a year. But, even that would have to have an exemption for estates liquidating its assets.

Let your Congressman know what you think.


The term “corporate governance” may be an oxymoron. The Boards of public companies are supposed to be composed of a majority of “independent directors”. Independent directors are supposed to represent the best interests of the shareholders only and not the interests of management. However, in practice this may not work out.

The method of selecting independent directors, in many cases, does not result in the selection of a “truly independent director”. Comapnies genrally have a nominating committee composed of independent directors who are charged with “nominating” new directors when a vacancy occurs. That is good. But, too often the names presented to the nominating committee for consideration are furnished by management. That is understandable because no CEO wants a director who might be “unfriendly” in any way. However, the process does not lead to the selection of a truly independent director.

Once a director has been elected, regardless of how independent he or she may have been, management has subtile methods of manipulating them to see things managements way. Those subtile methods include directors compensation packages, directors retreats, a list of perks like rides on the company jet etc. Directors, being human, begin to like the package and see management, not the shareholder, as their benfactor.

Altogether too often, people elected as directors have either business or social relationships with other directors and/or management and may serve on boards with other co-directors. This tends to make things cozy like an old boys club. What is often missing in elected directors is any real knowledge or experience in the business of the corporation. That experience often comes from on the job training.

Shareholders deserve better. But, the method of achieving better is not presently developed. For starters, corporations should be required to use an idependent search firm to identify potential directors to fill vacancies and there should be a strict set of criteria as to who is qualified to serve. Top among the criteria should be a requirement that the person have some special skill sets that will contribute to the enterprise backed up by a knowledge of the business that the company is engaged in. Next, shareholders should be given more choices than just the number of directors to be elected. The proxy material should disclose all relationships, social and business, that the nominated directors may have with other directors and management including other boards served on with other directors. Finally, the proxy material should detail he specific skills posessed by each nomineee and disclose how each nominee is expected to contribute to the future good of the company. Perhaps then shareholders would have an informed basis for voting and will be able to make sure that election of directors is not just the perperuation of an “old boys club”.


There has been continuing talk about limiting executive compensation including the possibility of appointing a “pay czar”. In response the pundits are crying “chicken little, the sky is falling”. All kinds of warnings have been issued as to why the government should not be involved in legislating or limiting executive compensation. But, the bottom line is that these warnings seem to come from the people who would be most effected – the bankers and executives. The warnings are not coming from the shareholders who are the real stakeholders. The warnings are, for the most part self serving.

If the bankers, boards of directors and corporate executives had taken to heart the frustration of shareholders over overly generous executive compensation they would have taken their own action to correct the situation. But, for most of them it is still business as usual and it is this lack of action that forces the government to try to protect the shareholders against the abuses of management.

Once corporate management gets into the program and takes thair own actions, governmental action will not be needed. But, as of now, the executives are still robbing the shareholders blind with their self rewards ratified by boards who like the perks of being directors.

How much compensation is enough? Can any executive make an objective case as to why he or she is worth $20 to over $100 million in total annual compensation? Has anyone made any definitive study of what an executive does to justify that level of pay? If an executive possesed some absolutely unique skill, perhaps arguments could be made to justify pay levels. But, management skills are not unique. Graduate schools of Business turn out new, bright managers every year. Managers are not like basketball players scoring 30 points a game or golfers consistently shooting 66 in tournaments.

The notion that high pay packages are necessary to attract talent seem questionable. If someone is a commission salesperson and is a super salesman, then obviously, their pay will exceed that of other salesmen. But, corporate managers are not commissioned salespersons.

We can only hope that the Boards of Directors across America get the message that the dhareholders are angry and frustrated with high compensation levels particularly when performance has been mediocre to abysmal at best.

The Wall Street Journal of December 15, 2009 contained an artcle reporting that executives at many companies experienced increases in the value of their retirement savings plans while employees lost between 18% and 31% of the value in their 401 K plans in the recent market downturn. Further, in many companies, the value of the stock had also declined. The fact that the employees lose and the shareholders lose while the executives win is just another example of how far out of whack executive compensation plans have become. This discrepancy arises out of the availability to executives of guaranteed returns on their savings plans (in some cases 6.6% or better). The companies maintain that these guaranteed returns are necessary to attract top quality executives. But, the bottom line appears to be that these executives want the shareholders and employees to be at risk while they have no risk. Their interests are certainly not aligned with those of the shareholders or employees. In this day and age when most people eran less than 3% on their savings or T Bills how is it that executives can be guaranteed over 6% returns?

All of this suggests the need for some form of regulation to protect shareholders and company employees from the executives lining their own pockets while everyone else is facing a struggle. Perhaps the only way to curb the abuses would be to impose an income tax of 55% on all executive compensation (salary, bonus, all perks, unrestricted stock options) above $3,000,000 per year with the sole execption of restricted stock options that can not be exercised or sold for 7 years from issue or 2 years after full retirement, whichever comes sooner. In this way, the interests of the executives and shareholders might be more aligned.


Yesterday’s Wall Street Journal had a good article on the response of Ken Lewis to questions relative to the Bank’s failure to disclose certain Merill losses to shareholders before the vote.

It seems that before the vote to acquire Merrill the Bank learned that the Merrill’s losses would be $2 Billion more than originaly believed. Ken Lewis aparently responded that this loss was not disclosed because they did not think that it was “material”. Their lawyers apparently “blessed” the non disclosure.

Who’s kidding who? If $2 Billion is not material, what is. It is particularly significant that this added loss indicated a very adverse trend which, in and of itself, should have been disclosed.

Ken Lewis only lost part of his job and, yes, several directors are being replaced. The decision to acquire Merrill was probably ego driven and turned out to be very irresponsible to the great detriment of the shareholders. But, there is no mention of further action. The Board should fire Mr. Lewis. The attorney or law firm that “blessed” the withholdong of disclosure should be dismissed and more responsible legal advice should be sought.

10/10/09 – This post is old news now, but it is being left on the site because the story is still unfolding. Investigations are ongoing and lawsuits are in progress. This information will be updated as new information comes out.


Ken Lewis is no longer Chariman and CEO at B of A. He now holds only one title. New Directors are beginning to replace former Directors and people with banking experience seem to be the focus of new appointments. That is, at least, some progress.

Corporations generally appear to be more sensitive to the excesses of executive compensation and there is some indication that a roll back is beginning to take place. But, shareholders still have a long way to go in obtaining management dedicated only to their best interests.

When proxy statements arrive, the first place to go is to the explanation of executive compensation. The first column usually provides “salary” but there are many columns following showing more indirect forms of compensation including bonuses, stock options, life insurance, security services, investment services etc. The last column is usully the sum total of all compensation and that is the really important figure, most particularly when the companies are not growing in earnings and value.

It was a shock to read the proxy statements of several companies where earnings dropped significantly and the market cap declined substantially, yet the executives still received “performance” bonuses.

Shareholders need to bombard management and directors of these companies with e-mails expressing indignity over ongoing rewards for failure. Despite the changes that are taking place and the increased regulation, shareholders are still a long way from having the kind of influence necessary to assure good corporate governance.

10/10/09 – Well, Ken Lewis is now history and Board members are being replaced. So, we’ll just have to watch for the appointment of a new permanant CEO. Stay tuned.

Bank of America’s Ken Lewis Should Resign

Ken Lewis should be so ashamed of himself that he should resign immediately. He must really think that the stockholders are stupid if he believes that we will buy the allegation that the Secretary of the Treasury and the head of the Federal Reserve had any role in his failure to make adequate disclosures relative to the Merrill acquisition. Even if one wants to believe that he was pressured, the fact remains that his first and only obligation was to the shareholders. He and his lawyer’s knew that by failing to disclose material information, the law was being broken. If someone told him to break the law such is no defense for doing so.

It is very clear that the Bank of America shareholders, not the U. S. Government, are paying for the “bailout” of Merrill. If the U.S. Government, by it’s action, forced that result, then all shareholders should be reimbursed for thair losses by the U. S. government. However, it is very doubtful that the government mandated a withholding of critical information from shareholders that would have resulted in a no vote on the acquisition. The fact is that Ken Lewis and the Board should have walked away from the deal once they learned how bad the financial situation was or they should have insisted that a deal be structured where the shareholders of Merrill got nothing for their stock and the Treasury guaranteed the B of A against loss, if it was in the best interests of the financial system to have B of A take over Merrill.

10/10/09 – Our wishes have been answered. He has resigned. Now, lets hope that a more sane, newly constituted Board of Directors can guide the Bank back to the lofty position it once had and restore shareholder faith.

Executive Compensation

The Wall Street Journal today noted that an increase in shareholder sponsored resoultions limiting executive cokmpensation should be anticipatd. However, the mentioned target was banks and financial firms. Obviously, their failures have attracted attention. But, the problem is not confned to the financial sector. It cuts across a wide section of corporate America.

As the 10 K’s begin to arrive, look at the compensation disclosures carefully and take steps to protest the excesses that will be obvious. Either become a sponsor of shareholder resolutions or take on an e-mail campaign to force these greedy CEO’s to recognize that they are employees of the shareholders and not vice versa. And, if you live nearby, attend the annual meeting and ask embarrasing questions about executive compensation.

Particular attention must be paid to companies where the stock price has substantially declined over the past 12 months. Sure, the decline may not be the fault of corporate executives but the decline doesn’t justify the same levels of executive compensation as when the stock prices and/or earnings were much higher. With declining earnings and declining stock prices all executive level compensation should be ratcheted down by the same percentage as the shareholders value decline.

If executives want to be specially rewarded for good results they should be happy to take a hit for bad results. Most importantly, there should be no reward for failure and the “golden parachuttes” should be changed to “tissue paper parachuttes”.

Finally, there must be limits to executive compensation. No one person, working for a publically held company, is really worth a compensation package in excess of seven figures except under the most unusual of circumstances..

Executive Waste

This is the season for release of Annual Reports. For a change, everyone should read their reports carefully with particular focus on Executive Compensation and Auditing/Accounting fees.

Salary alone is only a small part of the compensation that executives reward themselves with. Add to salary, bonuses, stock options, retirement account funding, health insurance, personal use of the corporate jet, deferred compensation, home security systems, financial planning services and other miscallaneous perks. In the case of Hewlett Packard (not a unique example), what starts out as a relatively modest salary ends up at over $40 million total compensation, in the aggregate. Reading the annual report fails to provide information to explain the precise contribution of the CEO that would justify such a generous pay package. If the present CEO died tomorrow, or were replaced, would there be a measurable downward shift in earnings? It is doubtful. A CEO is supported by a large team of talented people who would continue to function without his or her existence and whatever they are doing right would go on.

It is time for shareholders to rise up in anger at the outrageously generous pay packages. It is not just the bankers taking federal bailout money who should be reigned in. All CEO’s should be forced to stop using the public corporatons as their personal and private “candy jar”. If the CEO founded the company with his or her own money and owns a majority of the outstanding shares, then what might seem to be excessive rewards may be justified. But, not when the CEO is a hired manager/employee of the shareholders.

Based on the current systems in place, it is pretty hard for individual shareholders to implement change but, with the weapon of e-mail and the internet, individual shareholders can mount a campaign of protest through e-mails and postings. Maybe a groundswell will develop. Who knows?

Another area to examine is the cost of Auditing/Acconting. While the aggregae fees paid are a drop in the bucket, one must question milllions of dollars in fees and ask if the majority those fees represent the cost of better informaing the shareholders or if they represent the cost of compliance with highly complicated regulartions. It is almost impossible for a very well educated shareholder to understand and analyze the typical K-1 unless the shareholder is also a CPA, and even then it is questionable. It is time to push for more straight forward reporting that can be understood by the majority, not just a handfull of security analysts. Hiding all of the important information in footnotes is not helpful.