Courts Should Curb Executive Pay

Daniel J. Morrissey
August 15, 2011


Social critics have long pointed out that corporate boards routinely sign blank checks that award lush remuneration to top executives of their companies. But not since the Great Depression have shareholders been able to successfully challenge those munificent pay packages. Courts, rather, have regularly deferred to what they call the business judgment of directors and turned away shareholder claims that such exorbitant and unearned recompense constitutes a waste of corporate assets. Things, however, may be changing.
Business journalists, bloggers and academic commentators are now identifying excessive compensation as the No. 1 problem in corporate governance, using words like "looting" and "theft" to describe those rich rewards. The outrageous nature of this remuneration has become particularly shocking when compared to the pay of most working Americans. While private-sector wages rose only by 2% in 2010 and unemployment remained dismally high, the median compensation for chief executive officers at Standard & Poor's 500 index companies was up by 18% from 2009 to an average of $12 million.

Those income statistics were not always so unequal. In 1965, the typical chief executive made 24 times the salary of the average worker. But from then until 2007, during years when worker productivity in our country continued to grow, that differential in earnings increased by more than tenfold to 275. Commenting on how management grabbed the lion's share of that increase in wealth, labor lawyer Thomas Geoghegan wrote: "In 2005 the real hourly wage for production workers in America was approximately 8% lower than it was in 1973, while our national output was 55% higher. So it's dubious whether most Americans have gained even a penny in purchasing power since 1989."

Recent economic studies also show how most of the income gain during the past decades was reaped by corporate executives and financiers. The headline of a special report in the Washington Post on June 18 summed up those findings: "With Executive Pay, Rich Pull Away from Rest of America." In the same vein, Nobel Prize-winning economist Joseph Stiglitz recently observed that the top 1% of earners now take in about a quarter of our nation's income and own 40% of its wealth. And data from the Federal Reserve show that the wealthiest 1% of Americans has a greater net worth than the bottom 90%.

A large portion of this undue executive pay has come from options granted them to purchase shares in their companies. Those are supposed to incentivize management and align their interests with their stockholders by tying their remuneration to increases in the market capitalization of their companies. But as Judge Richard Posner of the U.S. Court of Appeals for the 7th Circuit, the father of law and economics jurisprudence, remarked in the Duke Law Journal, that rationale is weak because "many things move a company's stock besides the decisions of its CEO."

In addition, compensation from options has been all too easy to game, most notoriously by the widespread practice of backdating their grant dates. But even leaving aside that patently illegal practice, there are other ways that corporate officials can manipulate those awards to get lucrative paydays. They need only, for instance, have their firms issue stock and options to themselves when the price of those financial instruments is depressed.

Just recently, during the market's low point in late 2008 and early 2009, more than 90% of the CEOs at Standard & Poor's 500 companies received large numbers of those repriced grants. When stocks rebounded this spring, the awards netted those officers $3 billion. In addition, that surge gave them billions more in gains on the stock and options they already held. There is injustice and an obvious conflict of interest when a substantial drop in the price of a company's shares gives its executives an opportunity to profit, while its stockholders suffer serious misfortune.

Well-respected scholars of corporate law have also pointed out that CEO remuneration is not geared to rewarding the performance of those top officers. In their book Pay Without Performance, professors Lucian Bebchuk and Jesse Fried of Harvard Law School attacked what they call the "official view" that directors fix executive pay in arm's-length negotiations with corporate leaders to provide them incentives to increase shareholder wealth. In reality, those top executives set their own pay through captured boards that they control.

Corroborating that view, Posner has noted that directors generally come from the ranks of executives at other companies and thus have a vested interest in keeping the compensation of like-situated officials high. He has also pointed out that since CEOs influence the choice and pay of directors, "there is evidence of mutual back scratching — the directors authorizing generous compensation for the CEO and the CEO supporting generous fees for directors."

CHANGING LEGAL STANDARDS

 

Last summer, as part of the Dodd-Frank Wall Street Reform Act, Congress enacted a "say-on-pay" provision that requires public companies to allow their shareholders an advisory vote on the compensation of their top officials. Although Dodd-Frank states that those expressions are not binding and do not alter the fiduciary duties of directors, companies have to promptly report the results and explain whether they will be taken into account by management. In addition, the U.S. Securities and Exchange Commission now requires extensive discussion of the policies that companies use in fixing their executive remuneration.

A recent and telling decision from the Delaware Court of Chancery may also signal a new and more realistic judicial understanding of those dynamics, indicating that corporate officers who have fiduciary duties to their firms are acting disloyally when they extract excessive compensation for themselves. In In re Citigroup Inc. Shareholder Derivative Litigation, 964 A.2d 106 (New Castle Co., Del., Ch., 2009), the court refused to dismiss a claim that more than $60 million awarded as severance to Citigroup's CEO Charles Prince was a waste of corporate assets, particularly in light of allegations that he was responsible for huge losses by the bank during the financial meltdown.

After stating the general authority of boards to set executive remuneration, the chancellor made this salient comment: "It is also well settled in our law…that the discretion in setting executive compensation is not unlimited. Indeed the Delaware Supreme Court was clear when it stated that there is an outer limit to the board's discretion on executive compensation, at which point a decision of directors on executive compensation is so disproportionately large as to be unconscionable and constitute waste."

This renewed judicial willingness to strike down excessive corporate recompense may soon come into play in several suits brought against boards that have declined to rescind generous hikes to their top officials when shareholders stated their disapproval in negative say-on-pay balloting. Although the overwhelming majority of those elections have affirmed compensation decisions, several of the "no" votes came in response to lush raises granted when companies had suffered unprecedented losses. Those increases were particularly egregious because they came in derogation of corporate policy requiring that executive pay be based on performance.

Although those negative shareholder resolutions are not legally binding on boards, they are nevertheless probative evidence that directors have violated their duties to act in the best interest of their companies' stockholders. The cases challenging those decisions could send a much-needed message to boards that they must curb excessive executive awards and roll back some of the outlandish income inequality that is plaguing our society.

Warren Buffet Says Raise Taxes on the Rich

by Eyder Peralta

In an editorial in The New York Times, Warren Buffett, the so called "Oracle of Omaha" and one of the richest men in the world, has a message for Congress: Leave 99.7 percent of Americans alone and raise taxes on those who make more than $1 million and raise them even more for those who make more than $10 million — like him.

Buffett also says entitlement reform is "job one" for a Congress struggling to reduce deficit and debt. But, he adds, that Congress should stop "coddling" the super rich. Here's his bottom line:

"While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as "carried interest," thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they'd been long-term investors.
"These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It's nice to have friends in high places.
"Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that's actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent."

Buffett also argues against the notion that taxes kill jobs, saying that in previous decades, when taxes were higher, that wasn't the case. But, of course, his op-ed has caused some controversy.

Tim Worstall at Forbes says his math is quite simply wrong and Buffett is playing a game of "three card monte." That if you include the effect of corporate income tax on his dividends, the average tax rate is more like 50 percent.

The American Spectator, a conservative publication, simply asks, "... [W]hy do Buffett and the other rich people so ready to pay more have to be told to pay more? Why don't they just pay more on their own?"

America needs FDR

           Franklin Roosevelt was the 32^nd American president and a true leader. He took the Great Depression, flipped it upside down and created an era of prosperity that has never been mirrored. He was the leader of the New Deal, which produced millions of “Government Jobs” for the unemployed, economic growth and reform on Wallstreet, banks and transportation. He was a man with a plan and he made sure his plan succeeded.

            FDR was the founder of the Securities and Exchange Commission, Federal Deposit Insurance Commission and Social Security. He was loved by all because he represented all Americans. He made sure that everyone, young and old, would be taken care of, have a job, and help their country move forward.

            Today, the road ahead looks oddly similar to the one back in 1933. America needs a leader that will provide and protect its people. Corporate America has no interest in the well being of American citizens and the reliance on their leadership is misplaced. Corporations only interests are 2^nd Quarter Profits, and how happy shareholders are. Our leaders must fight for our rights to fair pay and equal right to hold jobs. Instead of fighting these pointless deficit debates, the orientation needs to be aligned towards jobs. Make government jobs, construction jobs, whatever they may be, Americans need to work.

            Big Corporations have proved once again that they are incapable of providing the support needed for Americans during recessions. Although most of them are relaying that they are making record profits, still no jobs are being created. It is time for the real leaders to step up to the table. If Corporate America won’t make the jobs, then government has too. Our leaders must support the people plain and simple. History tends to repeat itself many say, so why not take notes from the president who’s done this before, Franklin Delano Roosevelt.  

The Curse at the Capital

          Unfortunately we have been disappointed again. After all the propaganda surrounding the deficit deal, none of the legislation actually accounts for much. There will be no new revenue, no cuts on any entitlements(which isn’t necessarily a bad thing right now). And again it has reinforced the fact that congress is gridlocked and will continue to be as long as this session continues. There are many reasons why this is occurring and believe it or not its not the Democrats or Republicans who are to blame. At least not the Democrats or the Respectable Republicans “RR”. The “Tea Partiers” have really been throwing the wrench in the governments engine since many of them took office. The are making the “RR” look weak and not conservative enough. This has led to many “RR” aligning themselves with the extreme right just so they can preserve their own livelihoods.

            Many people wonder how House politicians can afford to run for re-election every 2 years and the answer is, their respective parties. The Democratic and Republican parties have a lot to do with the funding of campaigns and whether their candidates will make it through primaries. The fact of the matter is that many elections are predetermined. Sure you will have a few surprises here or there but these races are highly calculated. The biggest reason why incumbents lose is because they have strayed from party lines. If you stray from party lines, the less popular you will be with the party and less the funding you will receive.

            Now what does this have to do with the deficit deal. Well about 3 weeks before the deadline, our political leaders primarily President Obama, Speaker Boehner and Leader Reid had a plan to increase revenue and cut spending. The plan was a truly bipartisan plan that would have made real progress and all three leaders thought it dealt reasonably with the options at the table. But once Leader Boehner took the proposal to the House “Tea Partiers” wouldn’t have any of it. They wanted no increase in taxes for the wealthy, deeper cuts in programs that help those who are less fortunate and a balanced budget amendment. What is astonishing is that “Tea Partiers” say they represent the average American, a bogus claim. Most Americans, lets face it are either lower or middle class and these proposals brought forth by the Tea Party again only favor the wealthy.  

            Not only do the “Tea Partiers” favor the wealthy, they have adopted the most inefficient and annoying negotiation tactic. “Its my way or the highway”. The problem with this tactic is that it involves almost no negotiation at all. And Democrats and “RR” have not yet figured out that they can cancel out the involvement of the “Tea Partiers” if they simply work together and somewhat exile the extremist. Currently both parties are too proud to cross the line in the sand but this political nonsense is doing more harm than good. There are good ideas that both sides can typically articulate and Democrats and Republicans have found ways to work together in the past.  What needs to occur is the line in the sand needs to be undrawn  and  a bipartisan coalition House of Democrats and “RR” created until this current session is over. Do what is best for the country and exile these Tea Party extremist that are not any good for America.  

The Greed of Corporate America and the failure of Capitalism

            Can anyone explain why the unemployment rate has continued to rise while companies continue to yield record profits. It was a common story among newspapers last week, company after company was making record profits. Not only that, today it came out that CEO salaries have risen again, this time by a 13 percent average. How are CEO’s taking 13 percent pay increase while the average American cannot even pay their bills? How has the fight for class equality not gained any traction?  How have we the people become so repressed and inactive?

            First the reason why companies are making such a big profit is because they have less staff on bored yet being as productive or more productive than they were before. This is great right… Well not so much for the working man, instead of hiring more people to accomplish their needs, companies are silently threatening employees. If they do not work harder or more hours then they will be fired. With the economy in this dismal of condition, it is working. Employees that are paid on salary are especially vulnerable to the effect. Instead of working 40 hours a week and making their pay they are now required to work 60-70 hours a week. Companies are getting more work from individuals for the same pay they did for 40 hours.

            How has it come to this and why are companies allowed to get away with it? Forget what the extreme right is telling the public that more taxes will bankrupt these companies and destroy jobs. That is not true. If they are not creating jobs under these current conditions when will they ever? These companies are FILTHY RICH.  They barely pay any taxes to begin with, remember GE, they did not pay any taxes in 2010 and they are not the only ones. Americans must fight for what is rightly theirs; fair jobs at fair wages, and a right to work must be granted to every American.

            Outsourcing jobs is modern day slavery, and companies must be punished for these acts. Currently, people in Mexico, the Philippines, China and many others are doing jobs that once used to be American jobs for 50 cents an hour. Has anyone read any US history?  What happened in the United States during the 20’s and 30’s? The people fought for fair wages and to stop child labor. Yet we endorse it in other countries! How are we letting these criminal acts go unpunished. America wake up, our livelihood is slipping through our hands. These jobs that helped mold America are leaving with stark repercussions. Once they leave they most likely will never come back.

            It is our job as Americans to fight for our liberties. The wealth divide is inherently growing at an astonishing pace and as we continue to grant the wealthiest of Americans more breaks the wider it grows. It is time to stop this! How can a CEO of a coffee company make 21 million dollars a year, take a pay increase and keep laying off employees? It is because we the people let him get away with it. It is time for all Americans to benefit from this countries infinite wealth once more. People make this revolution come, think of your children, and their children to come. What we do today is what will make for a better tomorrow. We cannot believe that our inaction will lead to just cause. We must create just cause. It is our future, lets take it into our hands, for the better of the America people.    

Have Tea Party Newbie’s lost it or did they ever have IT?

           Tea Party members of congress have been a royal pain during the negotiation process of the debt limit. Many of these new congressmen are impeding the process of the country and even some Republicans are starting to question their motives. They have relied heavily on demonizing Democrats for trying to save public programs which help out many of the less fortunate in our country. When will constituents realize that these representatives are not out for the better of the American people or the United States. The only legislation that they are interested in pushing involve; permanent no increase in taxes for the wealthy, revoking Medicare and Medicaid, reduction in social security, stopping gay marriage from legalization and revoking abortion rights.  

            First of all, the permanent no increase in taxes is a fantasy, how could such legislation even be considered a rational thought. Who knows what the future holds, as the wealth divide continues to increase the only way to create an even playing field is to tax those who make the most money. The classic argument from the right as well as many of the wealthy is: “increasing taxes on the wealthy will destroy jobs for others.” Well why is it then that while corporations are making record profits and paying little taxes that unemployment is so high? Another classic argument from many of the wealthy is: “I’ve worked hard all my life for my money, why should I share, if they want money tell them to go work for it.” Comments like this are common, these people never consider the people that have worked 2 or 3 jobs their whole life to support a family. Not everyone is born with the same opportunities and in the land of opportunity, everyone should have the right to education, healthcare and the necessities to live life. The more competitive our public education and healthcare become the better off the United States society will be.

            Second, revoking Medicare and Medicaid and reducing social security would drastically effect the elderly and many others in the United States many of whom cannot pay for their illnesses and daily life without these programs. This would also affect Americans with disabilities, low-income families and veterans. I for one do not want to subject fellow Americans to unproper care and degrading lifestyles. It is the responsibility of a nation and its people  to take care of those within its boundaries who are less fortunate and give them the opportunity to succeed. Unfortunately our society has always been geared towards degrading a section of society while the others prosper. During the 1800’s and until about 1975 it was African-Americans, during the 1940’s it was Japanese-Americans, the Cold War it was the communist and now it is the poor. We must not alienate these people but encourage them to succeed.  

            Thirdly, gay marriage and abortion. Honestly these are both personal issues and this lifestyle and choice should be defended in our civil liberties. Already 53% of the American public approve gay marriage. This, much like religion is a personal choice and government should not be able to decide for the people. What is amazing about the matter is that right wing conservatives vouch for less government but want to control both of these issues, this seems contradictory.

            Have Tea Partiers lost it or did they ever have it? That is the question tonight as you reflect from these pointed arguments. Are these representatives in fact looking out for their constituents well being or are they simply trying to further divide America. You are the decision makers, make your decision count.

The Path to the Future; Education Reform

        Why is it that the youth of America are under educated? Why is it that 3rd and 4th graders can’t identify President Lincoln, arguably the most recognizable president other than George Washington. It is a travesty when students from America are no longer the first choices for the most challenging of jobs. What used to be an American market is no more. And what has America done as a response to this? It has cut school funding, cut teacher employment, and demonized the industry as lazy and unresponsive.
        So lets recap, student educations are far worse than they used to be, our elementary students cannot identify presidents and the United States is barley competing internationally. Yet, we cut school funding, cut teacher employment and simply call the industry lazy. That’s so counter intuitive that its irresponsible. In the last 20 years for example spending on higher education has only increased 21 percent, that’s just over 1 percent a year and does not even closely equal inflation. While in comparison spending on corrections has increased by 127 percent over the past 20 years and already 5 states spend more on corrections currently than they do on education. So what in fact is the United States promoting, education or jail time. The numbers seem to indicate the latter.
        Education should be at the forefront of every political agenda, because education is what drives this country and its future. While our children are becoming less educated the rest of the world is becoming more educated. And this has a direct correlation with the increasing wealth divide seen in the United States
       Wealth divide in the United States is the highest among industrialized countries. In fact the United States has the 39th highest wealth divide in the world. For a country who preaches equality and opportunity for all, that is hardly the case. This is seen everyday across our nation, schools where the rich reside are always equipped with the newest text books and the best teachers. While the inner city schools are subjected to books which are outdated and typically receive teachers who are either just graduated or cannot perform within the circumstances. Those who continue and attend college and universities are typically those out of the rich neighborhoods and they are also those that will receive the best jobs. There are outliers in every community but that is exactly what they are outliers.
       Education must be readily available for all who live in the United States. And we cannot pretend that political stunts such as “No Child Left Behind” actually benefit the situation. What needs to occur is more investment and more time. Encouragement to those who want to educate the next generation and not resentment. Change must come, education must once again reign supreme and lead to the “American Dream”. It is the responsibility of the American people to lead this change. The question is will you be part of it?