Corporate reform activists, including those who have long campaigned against outrageously inflated executive compensation packages, have seen reason for optimism this year, with three veteran CEOs facing their denouements.
In New York, Maurice Greenberg agreed to step down after nearly 40 years at the helm of insurance giant American International Group Inc., which is facing state and federal probes of its business and accounting practices. As with Eisner, Greenberg has been widely accused of operating his company like a private fiefdom and snubbing shareholder concerns.
Bernard J. Ebbers, the former chief of WorldCom Inc. and an icon of 1990s-style executive greed, suffered a much more spectacular fall: He was convicted by a New York jury on accounting fraud charges related to WorldCom's 2002 bankruptcy.
To their critics, all three men and their companies are textbook cases of what can go wrong when corporate directors fail to live up to their stewardship obligations.
It's too late for WorldCom and its investors, of course. The departures of Eisner and Greenberg, however, were hailed as fresh signs that directors are taking to heart the tighter corporate oversight that shareholders, regulators and Congress have been demanding over the last three years.
The typical investor probably cares little about the details of much of that oversight. Executive pay is the glaring exception. People are interested in what CEOs and other top corporate officers make; the shock value of the numbers has simply become too great to turn away.
Are directors ready to seriously address what the public views as outsize executive compensation?
"When you see CEOs being removed who you never thought would be removed, compensation is next," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.
The "madness" continues
Skeptics will say they've heard this before, and they're right. "The Madness of Executive Compensation" was a Fortune magazine cover story in 1982. As it turned out, the madness was just beginning. Base salary, cash bonuses, stock options, long-term incentive plans, deferred compensation, golden parachutes--the pay fountain has since runneth over and then some, critics say.
Some frustrated shareholder activists have suggested that corporate boards or the government should impose outright caps on executive pay. That clearly isn't going to happen in our free-market society.
If compensation is going to be rethought, it will be because the stars finally are aligned for it. For example, WorldCom and other high-profile corporate fraud cases have left investors sensitized to executives' conduct. Also, a generally sober outlook for stock returns means the market probably won't help paper over CEO piggishness, as it did in the late 1990s.
Add in these factors as well: the looming requirement that companies begin formally counting stock options as expenses; the ease with which shareholder activists can spread the message about egregious pay over the Internet; and, possibly most important, changes in laws and regulations since 2002 that have left directors much more vulnerable to lawsuits if they fail in their responsibilities as fiduciaries.
Justifying pay levels
Securities and Exchange Commission Chairman William H. Donaldson says the burden today is squarely on company directors to decide how to measure a CEO's performance and to show investors how those measurements justify a particular level of pay.
"Company boards must show greater discipline and judgment in carrying out their fiduciary duties ... to award pay packages that are linked to long-term performance," Donaldson said in a speech in March to the Directors Education Institute at Duke University.
Now, read almost any company proxy statement and you'll find language to the effect that executive pay is performance-based, often according to formulas that boards develop with the help of outside compensation consulting firms.