Newsletter: Executive Compensation

Council of Institutional Investors


Supreme Court spouse and tax superstar Martin Ginsburg once asked a client a now-legendary question. The client, knowing that Marty's brilliant tax advice had made billions for Ross Perot and others, outlined to him an asset-parking scheme where he would give his money to some "guys" in Switzerland, who would, at some point, decide to give it back. To achieve the desired tax windfalls, it was critical that the money actually be given, and that no agreements be entered into to insure its return. After describing his plan in great detail, the client turned to Marty and asked if there was anything else he needed to know before giving his advice. Marty's response, after a quiet pause:

"How well do you know these guys?"

This question has now become the fashionable one in governance circles. Shareholders say individual directors are critical players and that more attention needs to be paid to them. (The short slate rule may, at Chrysler and elsewhere, be making this more possible.)

A lovely thought. Flawed only by the fact that in large companies shareholders are not permitted to view or learn about what the directors do in their meetings. Not to mention the fact that shareholders virtually never select, meet, or speak to directors, and have no wish to micro manage.

Some shareholders are now tracking director-specific data (like board attendance records) to help remedy this information gap. But this kind of information is limited in quantity and usefulness.

There is other information, however, that shareholders can track to help make judgements about directors. They can taste the directors' cooking.

If you eat at a restaurant and keep getting bad food you might begin to guess, even without being in the kitchen, that the cook cannot (or will not) cook. Some shareholders (like New York City's pension funds and CalPERS) are similarly beginning to hold directors responsible for unacceptable corporate performance and practices. Indeed, Business Week just published a list of ten directors who sit on unusually large numbers of troubled-company boards.

Assuming that few directors should be dismissed on the basis of single events, the goal should be to look for patterns. (A friend of mine says that he believes in patterns more than Virginia believes in Santa Claus.) What kinds of patterns?

How about, just as an example, a "corporate confetti" pattern: a tendency to treat corporate assets like fodder for ticker-tape-confetti parades. Surely there are few more important patterns for shareholders trying to determine if boards are taking their oversight responsibility seriously.

Consider, for example, the following pattern of expenditures and events at one evolving corporation. Some of these may be troubling but no one of them may be heart stopping on its own. Some of these are rather old. But some are rather new--that is what patterns are. All are from published sources, but none has been independently verified by the Council.

  • From the pending Time Warner/Turner deal: for becoming the manager of a division of Time Warner, it is predicted that Ted Turner will receive $111 million for five years' work, as compared to $7 million for the previous five years' work. Turner has publicly announced that being vice chairman of Time Warner is "not much of a job."