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CEO pay, court rulings indicate corporate governance standards
New York, July 13: With a bewildering array of experts now offering different ways of measuring how well a company is run, it can be difficult for investors to separate what really matters from the background noise.
New York, July 13: With a bewildering array of experts now offering different ways of measuring how well a company is run, it can be difficult for investors to separate what really matters from the background noise.
But talk to one of the gurus of corporate governance, 76-year-old Ira Millstein, and you soon get a far from onerous checklist for how well any publicly traded business is likely to measure up over the next year or two.
The powerful Wall Street attorney argues that we should forget about complicated formulas for judging board structure and behavior, or numbing seminars on best practice in the boardroom. Only three questions really count: how much executive compensation is reined in, how the courts force boards to answer for their decisions and how much the chief executive is allowed to control the board, Millstein says.
Investors should make a "gut reaction check" on whether a CEO is paid too much, said Millstein.
"When I see $20 million to $25 million a year, I really wonder, 'Is 500 times the factory floor wage a good number? Is 400 times?'" said Millstein, perhaps still best known for his role as counsel to General Motors Corp. in 1992 when its board forced the departure of CEO Robert Stempel in what was seen as a watershed event in corporate governance.
"At what point in your gut does it tell you that something is out of control? Does any one human being account that much for the success of the company?" said Millstein, who in the past year has advised companies such as Tyco International Ltd. and Vivendi Universal on how to reform their boards after they had become poster boys for corporate excess.
While Millstein says auditors and members of board audit committees are now much more rigorous amid concern about their potential liability, the same cannot yet be said for board compensation committees, and certainly not for their advisers, the outside pay consultants. The consultants help to ratchet up executive pay by advising boards they have to beat the average or risk not being able to hire or retain a CEO, he said.
Certainly, recent surveys show little sign that executive compensation is being reined in. Last month, the Corporate Library said that once all rewards were measured (including bonuses, stock awards and long-term benefits such as insurance), the median compensation for CEOs of Standard & Poor's 500 companies rose 11.5 percent in 2002.
However, in one sign that some excesses may be on the way out, Tyco on Friday adopted limits on executive severance pay.
Millstein says the second critical area to monitor is the way the courts interpret recent reforms by Congress and regulators such as the New York Stock Exchange.
He says there are already signs the courts in Delaware, where many US companies are incorporated, are beginning to ensure that directors act in "good faith" when they serve on boards or risk liability in shareholder lawsuits.
Millstein noted such signals have emerged in recent rulings involving software company Oracle Corp. and media and entertainment group Walt Disney Co., though he declined specific comment as he is an adviser to the latter.
Boards will have to show they were not only diligent but acted in good faith when taking major decisions, and they didn't just take the CEO's word for it, he argues.
"The state courts are going to be important in seeing to it that the stock exchange rules are enforced," he said.
Millstein's third big signpost to watch is whether steps are taken to prevent CEOs from dominating their boards. That means either splitting the role of CEO from that of chairman or having a lead director who really has the power to act and can help control the flow of information to the board.
"Think of how unreasonable it is that the CEO can decide today what goes to the board," he said.
Again Millstein, who is senior partner at the law firm Weil, Gotshal & Manges, says he thinks the courts could ensure that lead directors get some teeth, rather than preside over a few directors' meetings without the CEO being present -- which is the only requirement under NYSE proposals.
"In due course some court is going to look at a board decision and say, 'You didn't have a lead director, how did this get done, how did you organize it?'" he said.
Millstein's biggest immediate fear is that a new bull market forms and governance issues once again takes a back seat to money-making until excesses lead to another crisis. "The better the market gets the more likely it is that everybody is going to go to sleep," he said.
Definition of the Week: springloading
With a spate of takeovers announced in recent weeks this is a timely one to look at. Springloading occurs when a company completes an acquisition after ensuring the target has delayed reporting revenue or brought forward the reporting of expenses, or both. This will hurt the pre-takeover results of the target company while improving post-acquisition figures. Result: the acquirer's CEO looks like a great dealmaker as his company's performance and share price are likely to look better.
Bureau Report
The powerful Wall Street attorney argues that we should forget about complicated formulas for judging board structure and behavior, or numbing seminars on best practice in the boardroom. Only three questions really count: how much executive compensation is reined in, how the courts force boards to answer for their decisions and how much the chief executive is allowed to control the board, Millstein says.
Investors should make a "gut reaction check" on whether a CEO is paid too much, said Millstein.
"When I see $20 million to $25 million a year, I really wonder, 'Is 500 times the factory floor wage a good number? Is 400 times?'" said Millstein, perhaps still best known for his role as counsel to General Motors Corp. in 1992 when its board forced the departure of CEO Robert Stempel in what was seen as a watershed event in corporate governance.
"At what point in your gut does it tell you that something is out of control? Does any one human being account that much for the success of the company?" said Millstein, who in the past year has advised companies such as Tyco International Ltd. and Vivendi Universal on how to reform their boards after they had become poster boys for corporate excess.
While Millstein says auditors and members of board audit committees are now much more rigorous amid concern about their potential liability, the same cannot yet be said for board compensation committees, and certainly not for their advisers, the outside pay consultants. The consultants help to ratchet up executive pay by advising boards they have to beat the average or risk not being able to hire or retain a CEO, he said.
Certainly, recent surveys show little sign that executive compensation is being reined in. Last month, the Corporate Library said that once all rewards were measured (including bonuses, stock awards and long-term benefits such as insurance), the median compensation for CEOs of Standard & Poor's 500 companies rose 11.5 percent in 2002.
However, in one sign that some excesses may be on the way out, Tyco on Friday adopted limits on executive severance pay.
Millstein says the second critical area to monitor is the way the courts interpret recent reforms by Congress and regulators such as the New York Stock Exchange.
He says there are already signs the courts in Delaware, where many US companies are incorporated, are beginning to ensure that directors act in "good faith" when they serve on boards or risk liability in shareholder lawsuits.
Millstein noted such signals have emerged in recent rulings involving software company Oracle Corp. and media and entertainment group Walt Disney Co., though he declined specific comment as he is an adviser to the latter.
Boards will have to show they were not only diligent but acted in good faith when taking major decisions, and they didn't just take the CEO's word for it, he argues.
"The state courts are going to be important in seeing to it that the stock exchange rules are enforced," he said.
Millstein's third big signpost to watch is whether steps are taken to prevent CEOs from dominating their boards. That means either splitting the role of CEO from that of chairman or having a lead director who really has the power to act and can help control the flow of information to the board.
"Think of how unreasonable it is that the CEO can decide today what goes to the board," he said.
Again Millstein, who is senior partner at the law firm Weil, Gotshal & Manges, says he thinks the courts could ensure that lead directors get some teeth, rather than preside over a few directors' meetings without the CEO being present -- which is the only requirement under NYSE proposals.
"In due course some court is going to look at a board decision and say, 'You didn't have a lead director, how did this get done, how did you organize it?'" he said.
Millstein's biggest immediate fear is that a new bull market forms and governance issues once again takes a back seat to money-making until excesses lead to another crisis. "The better the market gets the more likely it is that everybody is going to go to sleep," he said.
Definition of the Week: springloading
With a spate of takeovers announced in recent weeks this is a timely one to look at. Springloading occurs when a company completes an acquisition after ensuring the target has delayed reporting revenue or brought forward the reporting of expenses, or both. This will hurt the pre-takeover results of the target company while improving post-acquisition figures. Result: the acquirer's CEO looks like a great dealmaker as his company's performance and share price are likely to look better.
Bureau Report