Little of the ire against outsize CEO paychecks has been aimed at the people who signed off on them: corporate directors.
Instead, the anger has been concentrated on the executives themselves, particularly those running companies at the heart of the financial crisis. And boards — thrust into the limelight only rarely, as when the directors of the New York Stock Exchange were in a legal battle over the pay collected by former chairman and CEO Richard Grasso — have managed to stay in the background.
The exchange’s board “really took a lot of heat for that controversy,” said Sarah Anderson, an analyst on executive pay at the Institute for Policy Studies in Washington. “But so far, with this crisis, I don’t feel like boards have been getting as much attention as they should be.”
Last spring, the House Committee on Oversight and Government Reform examined pay practices at Countrywide Financial, Merrill Lynch and Citigroup, but those issues eventually took a back seat to broader concerns about the viability of the country’s financial system. As investors frustrated by the continuing crisis start seeking ways to avoid the next one, advocates of change in corporate governance expect boards to come under renewed scrutiny that could yield big changes.
Emboldened shareholder activists are pressing more companies to hold annual nonbinding votes on executive pay packages. They’re also pursuing, and appear increasingly likely to win, rules to make it easier for investors to nominate or replace board members.
And as more people start connecting the dots between pay incentives that boards laid out for executives and the risk-taking at the heart of the financial crisis, some lawmakers have been eager to step in and many directors themselves are re-examining their approach to compensation.
“When you look at cases where compensation of senior management was out of line, or where people arguably were overpaid, it’s definitely the fault of the compensation committee of the board,” said Thomas Cooley, dean of the Stern School of Business at New York University and a director of Thornburg Mortgage. “Congress has gotten into the business of dictating executive pay now and they shouldn’t be in that business. What they should be doing is turning the light on the committees.”
Activist shareholders have been criticizing executive pay practices for well over a decade, accusing directors of being too cozy with CEOs, too eager to lavish pay on them and too ambiguous about the formulas they use for setting compensation.
Improved standards for determining director independence and disclosing the procedures of board compensation committees were supposed to help solve those problems. And activist shareholders played a major role in spreading the notion of pay-for-performance, by which executives would be compensated based on their ability to meet board-devised financial targets.
But amid all the changes, a crucial piece of the equation — the unintended risks that could arise from these pay-for-performance incentives — went unnoticed, said James Hawley, co-director of the Elfenworks Center for the Study of Fiduciary Capitalism at St Mary’s College of California.
“The problem isn’t just when people in a particular firm are getting rewarded in ways that take away from the shareholder. That’s been well recognized,” Hawley said. “What’s not been recognized is that the misalignment of incentives has resulted in firm, sector and systemic risks. None of the corporate governance activists ever made the connection.”