The excesses of top corporate executives are a lot like the drug trade -- a social ill that is impossible to stamp out no matter how many times we shout, “Just say no!”
A year ago “reform” was all the rage. After the collapse of Enron Corp., WorldCom Inc. and Global Crossing Ltd., as well as scandals arising at Tyco International Ltd., Adelphia Communications Corp. and countless other companies, new laws and regulations were passed quickly to bring oversight and discipline to a system being abused by the very corporate officers entrusted to lead it.
Yet not much seems to have happened as a result of these efforts. On the contrary, in this season when companies hold annual meetings and issue proxy statements, the news has been of secret pension benefit plans that protected senior executives while leaving rank-and-file workers in the lurch.
An outcry from shareholders and labor unions managed to partially reverse such schemes at Delta Air Lines and AMR Corp.'s American Airlines -- where the CEO lost his job. But at many companies, “hidden pensions and retirement benefits for CEOs are a new problem that is hard to detect in normal disclosure,” says Kevin Murphy of USC’s Marshall School of Business, an expert on corporate compensation.
In short, executive pay and perks remain over the top. Last year, while the median pay of all workers in the economy declined 1.5%, CEO compensation at the biggest companies rose 14% -- even as the average stock price in the Standard & Poor’s 500 index fell 22%.
“We see executives coming in with agent-lawyers who are negotiating deals that sports and movies stars get,” says Frank Glassner, head of the Compensation Design Group, a consulting firm. In fact, chief executive pay now is 350 times that of the average worker’s pay -- a disparity in sore need of correction. “Shareholders, individuals as well as the big institutions must take action to redress the balance,” Glassner says.
Skeptics say you can’t legislate morality, but that is sloppy thinking. You can legislate accountability.
If there had been independent directors asking sharp questions at Enron -- including why Chief Financial Officer Andrew Fastow was walking off with tens of millions of dollars from all sorts of shady side deals -- they might have uncovered the schemes that brought down the company. In turn, they might have saved the jobs and life savings of thousands of employees and averted the disgrace of former executives, 11 of whom were indicted last week.
Can nothing be done about the rank odor arising from corporate America?
On one level, the answer is yes. Despite the lousy track record for reform, the next two years will see significant changes as the strictures of the new Sarbanes-Oxley Act and tougher New York Stock Exchange listing requirements kick in.
Corporations will have to staff their boards with independent directors who will bear responsibility for the conduct of management -- including making sure their pay packages are fully disclosed and are in line with honest results. A boardroom shuffle already is underway as old-boy-network directors retire and new blood comes in. Search firm Korn Ferry International estimates that 20% of all directors will be replaced this year, with particular emphasis on adding board members skilled in finance.
In addition to the laws, “the markets will force reform,” predicts Nell Minow, head of Corporate Library, a research firm and watchdog of management practices. The credit agencies, for instance, are taking corporate governance issues into consideration in their ratings, Minow notes, “and that will have a powerful impact because it will affect access to capital and cost of capital.”
Indeed, Enron’s implosion and other debacles have raised questions about U.S. corporations that used to be reserved only for companies in developing countries. Last year, S&P; launched a new effort to rank U.S. companies according to how well they honor investors’ rights and disclose information to shareholders.
But it’s going to take more than just rules and regulations to truly save corporate America’s reputation. It’s going to take a major attitude adjustment by those in power. Too many executives, blinded by avarice, have abandoned the notion that service and leadership are by themselves a meaningful reward.
Because of the “unseemly and self-serving behavior of so many CEOs,” Warren Buffett writes in his latest letter to Berkshire Hathaway Inc. shareholders, the business elite has lost “credibility on issues of significance to society.” Buffett, who is holding his annual meeting in Omaha this weekend, adds that “the job of CEOs now is to regain America’s trust -- and for the country’s sake it’s important that they do so.”
But how can Buffett’s vision be achieved? For starters, corporate leaders might look to an institution that has won increasing respect of late: the U.S. military.
In contrast to the 350-to-1 pay spread between those at the top and bottom of the business ranks, the military has a much more reasonable range: A four-star general’s $10,563 monthly salary is nine times the $1,150 pay for a buck private. What’s more, the military sets special allowances on top of base pay at $2,000 annually for officers and $3,000 for enlisted personnel.
Pay working stiffs more than the brass? Corporate America would, of course, never do that. But if CEOs want to regain the respect of the American people, not to mention their own employees, they might at least start by whittling their 350-to-1 advantage.
James Flanigan can be reached at jim.flanigan@ latimes.com.