Executive pay and corporate governance

[KrazyHorse]

continued from

http://apolyton.net/forums/showthread.php?postid=5491482#post5491482

[DanS]

This is a complicated issue because executives often have way too much influence over boards. Many executives are not only executives, but stockholders as well.

[KrazyHorse]

Jon, if the big stockholders only own a small proportion of the company then they should NOT be able to band together to always get elected to the board.

The smaller stockholders should be able to vote for people who are not so obviously corrupt. And if they don't do that, then why (as somebody who is impacted even less by CEO pay than stockholders) should I give a damn?

[KrazyHorse]

Originally posted by DanS
This is a complicated issue because executives often have way too much influence over boards. Many executives are not only executives, but stockholders as well.

Again, I do not argue with the fact that corporate control by stockholders is often weaker than it would be in an ideal world. There are all sorts of agency problems here. But the fact is that the major stakeholders in the pay of CEOs are the owners of the company's equity. And if they don't care enough to more directly control CEO pay then why should anybody else care either?

[TCO]

To really get into this, it seems like agency effects and incentives and the like need to be discussed.

Also, there are some real issues with fluid transfer of control with companies nowadays. Perhaps not even so much an issue of evolution tending to favor the current situation, but of there not being adequate legal structures to allow stockholders (even if they want to) to make entities that allow what they want.

[DanS]

In some European countries, they have employee representatives on boards in order to balance the executive members on boards. Also, some have government board reps.

I think this is a ridiculous balancing of stakeholders. Why aren't bondholders then represented? Major corporate partners? But there you are.

[Jon Miller]

What percentage of people vote in elections in the US? What percentage know who their congressman is/etc.

Additionally, considering how little stock most of the people owning stock have, and how little their vote will be counted, how many people would decide not to vote in such situations?

And there are people like Buffet and people from watch dog groups (of shareholders) who get elected, however they have been getting voted down.

On the linked page, it contained median amount of stock held by CEO, which was between 5 and 35% in all industries at all times studied.

JM

[KrazyHorse]

Originally posted by TCO
but of there not being adequate legal structures to allow stockholders (even if they want to) to make entities that allow what they want.

Explain.

[KrazyHorse]

Originally posted by DanS
In some European countries, they have employee representatives on boards in order to balance the executive members on boards. Also, some have government board reps.

I think this is a ridiculous balancing of stakeholders. Why aren't bondholders then represented? Major corporate partners? But there you are.

In a normal company (normal meaning only a small chance of going deep into red) the equity holders bear almost all the risk. It's only when you start talking about ****holes like GM or airlines that bondholders, employees etc bear much of the risk. Therefore the division between equity holders and everybody else makes sense.

[KrazyHorse]

Originally posted by Jon Miller
What percentage of people vote in elections in the US? What percentage know who their congressman is/etc.

Additionally, considering how little stock most of the people owning stock have, and how little their vote will be counted, how many people would decide not to vote in such situations?

And there are people like Buffet and people from watch dog groups (of shareholders) who get elected, however they have been getting voted down.

On the linked page, it contained median amount of stock held by CEO, which was between 5 and 35% in all industries at all times studied.

JM

There are two separate issues here:

1) As I understand it, stockholders can give their votes to proxies, so they do not need to directly fly to meeting and vote

2) CEOs own some part of a company, which makes you worried that they'll funnel out pay to themselves at the expense of other stockholders. 51% of company would be nightmare scenario. What is the suggestion? That people drawing salary don't get to vote in board elections?

I honestly don't know very much about this issue. I do know that the numbers suggest executive pay is a very very small percentage of a company's business, and that it is therefore obvious why it is not a huge deal to stockholders (and shouldn't be to anybody else either!). The real problem is when incentive structures for executives lead them to sacrifice well-being of company for meaningless metrics (for instance short term stock price versus long-term health). I think that a lot of performance pay is going to be changed because of this problem.

[TCO]

Originally posted by KrazyHorse


Explain.

I can't "explain" in the sense of knowing the story and details and having an argument. This is more something like cartel efficacy and expectation of said, where I'm thinking about something and want it considered.

1. Disperate small shareholders have issues of cost (even attention, but communication too) in "banding together" to do anything.

2. The real "gun" that shareholders have over agency effect management is corporate raiding. However the advent of the poison pill and the legal allowance of this mechanism (which may be questionable even on legal grounds. For instance, why are tiered takeovers not allowed and poison pills are?)

3. Also management/bpoard has the (effective) and often spelled out power to make changes in the control structure of the company. for instance, even if they don't have a poison pill, if they have the power to put one in without approval of all shareholders, this gives them a chilling restraint on raiders.

4. Let's say that we did want to create companies (with the appropriate bylaws and such) that would allow more shareholder control (for example preventing poison pills), COULD WE? Do the appropriate legal strutures exist to allow this? Remember, there are some things in the law which even try to hinder shareholders from running companies (this is why so many shareholder resolutions are non-binding).


Note: I am certainly not an expert here. But as with most corp fin stuff, I suspect the nut of things is often in legal structures. That's one reason why I would rather have Skadden Arps at my side than Goldman in a heartbeat.

[KrazyHorse]

However the advent of the poison pill and the legal allowance of this mechanism (which may be questionable even on legal grounds. For instance, why are tiered takeovers not allowed and poison pills are?)

Yeah, I hate ****ing poison pills.

This might be the single best thing to change in law. But public has terrible conception of takeovers and corporate breakups. I blame Oliver Stone.

[DanS]

Related to proxies, you have the big issue of institutional investors. Pension funds can be activists, but I wonder whether this is a back door to a board structure much like Europe's -- they will be the agents of the employees or government (see, e.g., CalPers).

Mutual funds can be activists. This is more straightforward. If people don't like what their fund is advocating, they can go with other funds.

Index funds are starting to have some heft, which as yet they have not exercised. I'm not sure how I feel as to whether they should assume a more activist role.

All told, I believe that stockholders are not being aggressive enough in controlling the boards and hence management. Even if executive pay is a small %-age of the total, the excessive pay demonstrates that there is a problem.

[Ramo]

The dependence of executive compensation on social norms is something that doesn't get emphasized enough. If it were common for shareholders to even get a nonbinding vote, I think there would be a significant shift.

[KrazyHorse]

All told, I believe that stockholders are not being aggressive enough in controlling the boards and hence management. Even if executive pay is a small %-age of the total, the excessive pay demonstrates that there is a problem.

Now, the real question becomes: on issues OTHER than exec pay, where are stockholder and executive interests not aligned? Incentive structures which prioritize near-term stock value are an obvious no-no. What about those that encourage M&A activities? Discourage dividends?