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Is Aligning Executive Pay with Stock Performance A Good Thing?

According to a recent article in the Wall Street Journal, “CEO pay during 2011 was more firmly correlated to how well companies fared in the stock market, a change from 2010, when pay and performance were not directly related.”

New York Stock Exchange

The New York Stock Exchange, the world’s largest stock exchange by market capitalization (Photo credit: wikipedia.com)

 
Indeed, the 2010 Dodd-Frank financial-reform law, which gave shareholders an advisory vote on executive-pay plans, caused many companies to alter how, and how much, they pay CEOs.  One would think this is good news to investors, who have long clamored for the interests of senior management to be aligned with shareholders.
 
However, Lynn A. Stout, a Cornell Law School professor and author of “The Shareholder Value Myth,” believes this has inadvertently empowered hedge funds that push for short term solutions. She notes that the average holding period of stock was eight years in 1960; today, it is four months.  Ms. Stout argues that the directive to “Maximize Shareholder Value” has led to an epidemic of accounting fraud, short term thinking by management and myopic trading strategies by investors.
 
Because of the pressure exerted by hedge funds to push stock prices higher, which often comes at the expense of the organization’s long term value, Ms. Stout advocates limiting the role of investors so that executives and boards of directors are freed up to think about customers and employees, allowing them to invest in the company’s future and act socially responsible.
 
Ms. Stout and corporate governance advocates appear to have diametrically opposed beliefs on how corporations are best managed.  Perhaps a blending of the two views is appropriate: empower shareholders to safeguard their investments by actively preventing manager conflicts of interest and self-dealing, and lock investors into their investments so they do not push for short-term strategies.

 

PondelWilkinson, investor@pondel.com
 
 

Is Executive Compensation a New Marketing Ploy by Law Firms?

While the days of being “Lerached” are thankfully long gone, a new potentially litigious trend in the public company world seems to be emerging.

CEO Pay

 
This time the subject is executive compensation.  And unlike
those days prior to the infamous class-action lawyer William Lerach getting “Lerached”
himself, this time more than one law firm may be joining the fray.
 
I’m not one for being an alarmist, so don’t start worrying yet.  But one never knows, and perhaps PW Insight will be breaking this story first.  Just be aware that after two years of Say-on-Pay being part of the proxy lexicon, it seems that suddenly a number of law firms are launching “investigations” into potential breaches of fiduciary duties by boards of directors, seeking executive compensation approval.
 
Funny thing is that while the law firms are writing directly to these companies, they also are issuing press releases over the national wire services.  So far that we can tell, no company has publicly responded to the allegations.  And they shouldn’t.
 
All of the press releases we have reviewed thus far appear to use the same copycat language. They also have embedded links for interested shareholders to contact these law firms with words like “protect your investments, free of charge,” not to mention “Attorney Advertising” posted on the bottom of each release. Kind of a sick way of soliciting business, don’t you think?
 
While the 2013 proxy season is still far away, and perhaps nothing will come of this, public companies nevertheless must pay attention.
 
According to a recently published paper by law firm Paul Hastings titled, “Staying in Front of Shareholder Litigation Challenges to Executive Compensation,” nearly 80 companies failed to receive majority support on executive compensation since the Say-on-Pay rule was enacted.  The paper concluded that executive comp issues are “poised to escalate” and advised that companies should consider strengthening reliance upon the advice of independent, outside consultants by adapting “new corporate best practices” and engaging separate, independent compensation consultants for both the compensation committee and the board.
 
Everyone’s trying to be innovative in making a buck these days. Hopefully, however, we will not see the return of Lerach-style tactics as part of the marketing process.

 

Roger Pondel, rpondel@pondel.com
 
 

CEO Semantics

On my way to work several weeks ago, I was listening to a special on NPR about “How Can You Tell When a CEO is Lying.” According to the piece, two researchers from Stanford University took it upon themselves to study thousands of corporate earnings calls and come up with a way to tell when executives are lying.
 
The researchers found that when CEOs and CFOs take questions from analysts after an earnings call, a few key indicators of dishonesty include words such as “we,” “us,” or “the team” when talking about the company. The word “I” is rarely used, as executives try to deflect any ownership of what is being said so they personally are not held responsible for anything. Additionally, the overuse of words that express positivity can be a form of overcompensation. Words such as “excellent,” “fantastic,” and “outstanding” also portray more hype than fact.
 
In this day and age, there’s no exact science to interpreting a CEO’s semantics, but there are certainly key terms to be cognizant of.  In our line of business, it is important to get to the point of important topics without using fluffy adjectives.  Credibility is key when it comes to communicating with investors and that starts with avoiding hyperbole.

 

PondelWilkinson, investor@pondel.com
 
 

The New Normal: CEO Tips You Don’t Often Hear

  1. For private companies contemplating an IPO, be certain you want to be public for a long time. Don’t look to the IPO as an “exit,” rather as a “partnership” with public investors.
     

  2. While it takes guts for CEOs to commit to long-term planning, it is crucial to do so, since public investors are more short-term oriented than ever. You have to give them reasons to stay.
     

  3. Shareholders are quite a diverse lot, although they often like to present themselves as uniform. In order to secure their confidence and their votes, you must know more about your investors than they know about you.
     

  4. Public company CEOs have gotten fat and lazy in terms of compensation, helped by so-called professional comp consultants. But compensation in the public company today, ever the topic of cocktail banter, is much more like the private equity approach with its specific metrics and goals—at least it should be.
     

  5. There are two kinds of board members, those who “get it” and do the work, and those who don’t, instead keeping their hands clean and hiding behind not wanting to “meddle” as an excuse to stick their nose into things. The time required to properly serve on a board today is at least five times what it used to be.  Meddling required.

 

Roger Pondel, rpondel@pondel.com
 
 

WPM

Executive bios are a dime a dozen. Like instant cake mix, you add a couple of ingredients, some water, and stir until the lumps (or time lapses between jobs) fade into a silky smooth consistency. But I recently stumbled upon an ingredient I haven’t seen for a long time called “WPM.”
 
No, I’m not talking about weapons of plausible meaningless. I’m talking about words per minute. When was the last time you saw a resume with “50+ WPM” listed as a special skill? I reckon it’s been a long time.
 
I’m pretty sure that most corporate executives can type at a clip of at least 50+ WPM. But does it really matter? Should the C-suite disclose special skills like WPM in their bios? Perhaps, but only if they’re typing at Guinness-book levels.
&Nbsp;
I do think it’s OK to disclose interesting factoids.  For example, if a CEO plays cello, has a knack for fine art, or is a connoisseur of kishke, I say go ahead, add a little color to perk up those staid, old bios. But WPM is a different story. Unless you’re measuring the Width of your Profit Margins.

 

Evan Pondel, Senior Associate, epondel@pondel.com