The Beat Goes On: Proxies and Probing

We are now in the midst of proxy season, and companies are disclosing (as required in their proxy statements) the pay packages awarded to their officers and directors, raising questions about the size of such packages (a news story that gets air time every year at this time, by the way). And this past week, the Financial Crisis Inquiry Commission looking into the reasons for the Crisis of 2008 grilled a few of the titans of Wall Street about the size of their pay in the face of their failure to foresee the crisis - when it's now clear that there were plenty of signs that could have been heeded along the way. (See "Who's Not Sorry Now," NY Times, 4/11/10)

[We started talking about the executive compensation issue on our blog back in December, when bonus season arrived for Wall Street firms (See "Money Talks" 12/23/09). Additional related thoughts on excessive compensation were shared here in January ("Conventional Thinking" 1/12/10, and "Shareholder Interests" 1/31/10) and February ("Money Talks (2)" 2/25/10).]

The drubbing that Robert Rubin got from the Commission was the disrobing of an emperor, from my point of view. The questions he got from the Commissioners were straightforward, asking him why, when he was paid multimilions of dollars as a Citicorp Director and Chairman of the Executive Committee, he was not culpable for the near downfall of the bank. From a governance point of view, one would think that the Executive Committee of the board would have been the group responsible for talking about critical issues facing the bank. But signs of the impending credit crisis never made it upstairs to the agenda of the ExCo. And Chuck Prince, former Chairman and CEO of Citicorp, defended Rubin's lack of culpability. In fact, the ExCo only met a few times a year. Apparently risk evaluations were made in different parts of the bank.

But we pay chief executives to be responsible for everything that goes on in their company. And we pay them royally. Shareholders should have the expectation that the CEO and Directors will be informed about rising risks in the firm. That's what a good governance framework should impel in the institution.

The financial industry and its regulators are saying now that there was no way to know about systemic risk across the financial world. Indeed, we agree, understanding what was happening across the global financial institutions (and all the companies and governments that relied on them) was nearly impossible. But company C-level officers cannot use as a defense that the lack of transparency across firms prevented them from employing good risk management in their own institutions.

Risk management is a key element of any business concern. A company that does not manage its risk; does not plan for contingencies and insure against improbabilities, allows for the unexpected to seriously impact its existence as a going concern. September 11th was a enormous wake up call for the financial industry, in terms of the magnitude of that event and its impact on the financial markets and the operation of many of those businesses on that day and in the weeks afterward. But like so many of the lessons that have been learned, that one was quickly forgotten - or at least the possible relevance of that lesson was not applied to future events.

Demanding accountability from chief executives is the responsibility of shareholders. The number of shareholder proposals this year (a movement that began last year) that would allow for review of executive pay packages is a reminder to company directors that shareholders care. If we are going to give our CEOs and Directors millions of dollars, we should get something for it. In this case, the SEC is helping provide transparency for us, through the proxy process, so that we know what they are getting; and it's well within our government's right, especially in the aftermath of the worst financial crisis since 1929, to ask why we shouldn't keep those executives accountable for the pay they are receiving.