Is it safe to sound the all-clear on the financial meltdown front yet?
Surely by now we’ve eliminated, or at least significantly reduced, boardroom chicanery, speculative investment shenanigans and executive compensation packages that promote greed and high-risk corporate behaviour.
No such luck, I’m afraid.
The casual observer need look no further than the recent firestorms around JPMorgan Chase’s multi-billions in trading losses and investigations into interest rate manipulation at Barclays.
The good news is that, according to some specialists in the field of executive compensation, the boardroom landscape is improving.
Luis Navas is vice-chairman at Global Governance Advisors, a consultancy for major publicly traded companies and pension funds advice on executive board competence and other complex governance issues.
Having moved from Toronto to Miami about a year and a half ago to head up the company’s U.S. practice, he’s also a fair hand at evaluating executive compensation packages in Canada and the United States.
As Navas pointed out to Public Offerings, in the recent cases of big-league investment banking running off the rails frontier justice was far swifter and fiscally meaningful than it would have been five years ago.
Individual investors left penniless with the fall of Lehman Brothers might recall that former Lehman CEO Richard Fuld received a US$34.4 million bonus in 2007 and bailed out with a US$22 million golden parachute in the wake of the investment bank’s filing for bankruptcy protection.
Navas said that while the JPMorgan derivatives mess involved billions of dollars in losses, it was exposed far quicker than it would have been prior to the global economy veering off the cliff. Also, rather than walking away with rich pensions or other severance payouts, the executives involved resigned or were sacked and had all the money they made from ill-advised market bets and any bonuses paid clawed back.
The bad news, however, is that many compensation packages for executives in the private and public sectors remain divorced from any reality the man on the street inhabits. Recent revelations over ICBC executive pay are but one local example.
The root causes of how extravagant top-end pay is determined and how compensation packages are crafted to reward reckless market gambles have yet to be addressed. Navas points to his own industry as a prime example. North America’s executive compensation consulting sector, which many corporate boards use to determine salary and compensation packages for company executives, remains unregulated.
“It’s harder to become a real estate broker in Canada than it is to become an executive compensation adviser for boards of directors,” Navas said, “and that is wrong.”
Warren Buffett goes Navas one better. The legendary investment guru and Berkshire Hathaway boss deems only one profession to be below executive compensation consultant: prostitution. Those adept at the executive compensation consultancy dance can earn upward of $500,000 a year in a sector that has grown to around $800 million annually in Canada and the United States.
Executive compensation consultants often get paid by the people they’re hired to recommend compensation packages for. That sounds disturbingly similar to companies paying ratings agencies to provide them with ratings for those same companies.
Addressing the culture of greed at the top of the corporate pyramid has to be a priority for banking and investment companies and the public sector. Without meaningful changes there, nothing at ground level will ever improve. •
