Steven Castello, a maintenance worker in Salinas, Calif., says he believes in accountability.
After running up thousands of dollars in debt on nine credit cards, he didn’t file bankruptcy. He didn’t try to dodge his obligations. Instead, Castello, 57, went to a credit counseling service and, patiently, painfully, paid his bills.
“This was my foolish mistake,” he told me. “I had to take responsibility.”
Compare Castello’s situation with that of Angelo Mozilo, the well-tanned chief exec of mortgage lender Countrywide Financial Corp.
After driving his company to the brink of bankruptcy (or so the rumor mill had it last week), Mozilo now stands to make as much as $115 million in severance-related compensation if an acquisition of Countrywide by Bank of America goes through, which it almost certainly will.
Accountability? We should all be so lucky.
“What’s particularly egregious is that he’s walking away with millions of dollars as people are being forced out of their homes because they can’t make their mortgage payments,” said Dan Pedrotty, director of the AFL-CIO’s office of investment.
Mozilo, 69, made enormous amounts of money running Countrywide during the boom times. He pocketed $160 million in 2005 and $120 million in 2006, mostly in stock option gains.
Countrywide and other financial firms have faced tougher sledding in recent months with the bottom falling out of the mortgage market amid a tightening of credit for higher-risk loans.
In August, Countrywide was forced to draw down its entire $11.5-billion credit line. Weeks later, the company said it would hand pink slips to as many as 12,000 workers, or about 20% of its workforce.
Countrywide’s stock lost 79% of its value last year.
Amid rumors of a possible bankruptcy filing, Mozilo and Countrywide finally turned to BofA to rescue their behinds from the fire. The bank, which had already invested $2 billion in the company, will pony up an additional $4 billion in stock to become the nation’s top mortgage lender.
So what sort of consequences will Mozilo face for his managerial failure?
Aside from nearly $88 million in cash, he’ll have to make do with not one but two pensions, accelerated payment of stock options, free rides on the company jet and his country club bills being paid until 2011.
Man, that has to sting.
“This is another clear example of pay for failure,” said Fred Whittlesey, principal consultant with Compensation Venture Group in Seattle. “How many more examples of this will we have to see before this gets fixed?”
That’s not because ordinary shareholders aren’t cheesed with these who’s-your-daddy pay packages. It’s because many boards of directors lack either the spine or the inclination to stand up to their CEOs and deny them the fat contracts that contain such ludicrous severance terms.
“Every year, there’s more talk about boards getting tough,” said Whittlesey, who is a Countrywide shareholder. “But every year, they keep saying yes to these contracts.”
One problem is that big companies’ boards are frequently dominated by senior execs from other companies, who have little interest in drawing the line on runaway pay. Another problem is that each board that agrees to some make-my-day CEO contract sets a precedent for other boards.
The situation is only exacerbated by compensation experts ostensibly brought in to be neutral parties in pay matters but who are in fact conflicted by their desire for continued business and thus readily sign off on hypergenerous terms.
“I don’t think you’re going to see any dramatic changes in this in the near future,” said Paul Dorf, managing director of Compensation Resources Inc., a New Jersey consulting firm.
One irony, he said, is that transparency rules for CEO contracts required by the Securities and Exchange Commission have given execs a better sense of how much their rivals are making. This has spurred demands for equally sweet pay packages.
So what do we do? The experts say that, sooner or later, shareholders will demand greater accountability from corporate boards. But people have been saying that since Enron imploded, and where has it gotten us?
The extreme solution is some sort of legislative remedy. But I don’t think we really want politicians -- who aren’t exactly models of fiscal probity -- micromanaging people’s paychecks.
Perhaps a more practical fix is a regulatory requirement that any publicly held company with, say, more than 1,000 employees must give shareholders a voice in how much the CEO pulls down.
This is known as “say on pay” in business circles and is gradually gaining traction at some companies. For example, Verizon Communications passed a measure last year that gives shareholders an advisory vote on compensation for top execs.
But advisory votes are just that, advisory. A board can ignore such a vote if it chooses.
To address that, I propose that the members of board compensation committees be required to defend their decisions at shareholder meetings (in plain English, please) and that committee members routinely be subject to confidence votes.
This may not give shareholders a direct say over how much the CEO gets paid, but it would make boards more accountable for their actions. That in turn would, hopefully, make CEOs more accountable for theirs.
But I’m not holding my breath.
Castello, the maintenance man, learned his lesson the hard way. “I know that I can’t handle credit cards,” he said.
Too bad Countrywide’s Mozilo lacks the same humility.
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