Monday, April 23, 2012

“Shareholder Revolt?”

Sydney M. Williams

Thought of the Day
“Shareholder Revolt?”
April 20, 2012

“When do the directors cut a CEO’s salary? When disaster strikes, when the ground heaves, the walls buckle, and the roof caves in, when the wreckage is all around. Then the board, if it survives, sits up and takes action.”

Harold Geneen (1910-1997), President and CEO of ITT from 1959-1977 and board member of numerous companies, uttered those words in 1987. And directors today often seem less responsive than they did twenty-five years ago. It is an irony of the investment world that as institutions came to dominate the world of equity holdings, boards appear to have become less responsive to the needs of shareholders. A legitimate question is, why? One answer that I have offered before lies with the increasing focus of institutional investors on the short term; for many money managers companies are not businesses; they are chips in a casino.

Shareholders may be getting fed up. At Citigroup’s annual meeting in Dallas last Monday, 55% of shareholders voted against the pay packages awarded to its top executives, including CEO Vikram Pandit’s $15 million pay package and $10 million retention pay – seemingly excessive given that shareholders lost 44.4% of their investments in 2011. (The vote, required by Dodd-Frank, is not binding.) Shares of Citigroup are 93% below the highs reached in December 2006 and 88% below where they were when Mr. Pandit took the reins in December 2007. Mr. Pandit cannot be held responsible for the terrible damage previous management inflicted on shareholders (and taxpayers), but the sale of his hedge fund, Old Lane LLC, to Citigroup for $800 million certainly benefitted him more than shareholders. And, as CEO for the last four years, he does bear some of the responsibility.

As CEO pay has risen over the past dozen years, hapless shareholders have been left in the dust. Stocks today are lower than they were a dozen years ago. Last year, four of the highest paid CEOs of S&P 500 companies saw their stocks decline, on average 19%. Granted, dividends have increased for some companies, but the intent of the President is to raise taxes on this form of income as much as 153%, regardless that, given the number of people reaching retirement age and the underfunded nature of most retirement funds, saving and investing should be encouraged, not discouraged.

Just as many government employees act as though they are entitled to our money – something term limits would address for members of Congress – so it seems that some CEOs see the public companies they run as private piggy banks, ignoring the owners of the business. (Obviously my comments are not directed at companies managed by founders who maintain a large ownership position.) And too often we see boards of directors, supposedly there to represent the shareholders, instead acting as puppets of the CEO.

An equity investment, by definition, is risky; something that at times is forgotten. Nevertheless, that is no excuse for managements to ignore their owners, or for boards of directors to reward managers at the expense of shareholders. While my comments apply to all public companies – wherever managements have been allowed to trivialize shareholders – financial institutions have been especially susceptible. Over the past few years managements have risked shareholders’ and, in the case of MF Global, depositor’s money. The rewards have gone almost exclusively to themselves. The risk, however, has been borne by shareholders. What got these financial institutions into trouble in 2008 was greed, hubris and a sense their institutions were “too big to fail.” What saved them were taxpayers and long suffering shareholders. It was good to see a shareholder revolt, as we did on Monday. Let’s hope it is more than a one time event.

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