planned for Thursday's Verizon (VZ) annual shareholders meeting is
a perfect example of good governance initiatives gone awry. Recently,
partisans on opposite sides of corporate governance battles have been
sending misdirected warning shots that pose no genuine threats to their
actual targeted problems.
Each side has its own concerns --
shareholder activists distress over "excess executive compensation" for
failing performance, and CEOs deal with frustration over the "short-termism"
of investors that erodes longer-term investment plans that are needed to
fortify great global enterprises.
Both are real market
imperfections, but new reform efforts from each camp are missing a chance to
influence each other, let alone correct the legitimate market problems both
sides have identified.
Congress, heeding activist calls
for "say over pay," recently passed HR 1257, idealistically mandating
nonbinding shareholder advisory votes to limit excessive CEO compensation.
Should even the House and Senate gain the votes to override a presidential
veto, this mere advisory vote could be easily ignored by boards. In which
case, its sponsor, Congressman Barney Frank, threatened to consider stronger
legislation in the future.
Unfortunately, the cited cases of
dramatic excess that triggered this concern, such as the outrageous
severance packages of failed former CEOs such as Home Depot's (HD)
Robert Nardelli and Hewlett-Packard's (HPQ) Carly Fiorina, were not
the result of their annual salary reviews but of misguided upfront board
negotiation when first hiring the boss. Such confidential recruitment
negotiations would not be timed to match annual meetings.
The AFL-CIO, the largest U.S.
trade union federation, named Ivan Seidenberg, Verizon's CEO, the "poster
child" for its campaign against excessive executive pay. Next week, at
Verizon's annual shareholder meeting, the union aims to unseat six Verizon
directors in the belief that that will send a signal. At the launch of the
AFL-CIO's 2007 Executive PayWatch Web site, union leader Richard Trumpka
said "working people are fed up with a system that showers CEOs with lavish
rewards with little or no accountability."
Ironically, unlike most CEOs,
Seidenberg has no contract protection and instead serves at the will of the
board, with his compensation 90% performance-based. He is earning only half
what the union claims. Even though Verizon is the 11th-largest U.S. firm in
revenue, 17th in income, 16th in market capitalization and 10th in total
shareholder returns, it is only 26th in CEO compensation.
Furthermore, Seidenberg has just
the profile that shareholders should want at the helm. A former union
member, he has climbed the ranks from his first job as a cable splicer's
assistant to rewiring the whole enterprise. He drove the moves that built
Verizon out of Nynex, Bell Atlantic and GTE, and after each deal the new
board returned him to power on the basis of merit. He guided the effort that
built Verizon Wireless, the premier wireless business, into a $50 billion
giant itself. Now he has led the industry in massive technology investments
such as new fiber-optic lines to our homes that will not pay out overnight
but will give Verizon's future a huge leap.
The vilification of such
visionary leadership by impatient union activists acting as short-term
investors surprisingly resembles the time frame of the union's old
adversaries: greenmailing activists who raided the future of the enterprise.
Speaking of greenmailers of an
earlier era, raiders such as Carl Icahn now drape themselves in the language
of shareholder activism as well. Motorola's (MOT) $11.3 billion of
cash has attracted Icahn's attention, and he is now pushing for a seat on
the board. Ironically, Motorola's stock has roughly tripled since current
CEO Ed Zander took the helm. But now, with a bad last quarter or two and a
need to recreate the Razr phone triumphs, the cash needed for building new
products is endangered by old-fashioned greenmailing in the guise of
Great U.S. firms from Pfizer
(PFE) to Ford (F) take some time for repositioning, but our capital
markets no longer have the patience they had when such mighty enterprises
were built. In fact, Henry Ford failed three times before even launching
Ford Motor Company. As a private company, UPS (UPS) sank billions of
dollars a year investing into new technologies and global expansion for
years before it paid off.
Just last week, we saw that the
long, painful latest turnaround at Ford led by Alan Mulally, Mark Field and
Bill Ford is now starting to pay off, but it is not a six-month project.
Don't expect corporate leaders to
have the answer either. Private-equity titans who benefited from this
syndrome, ranging from Blackstone's Steve Schwarzman to Bain's Josh
Beckenstein, have told me they do not see this corrosive investor impatience
diminishing. Last month, reborn governance reform cynics similarly missed
their target in addressing such "short-termism" when Treasury Secretary
Henry Paulson and former Fed chief Alan Greenspan joined conservative
academics and business leaders attacking the presumed impact of
Ironically, stepping past the
ideology to examine the facts, this legislation had no remote impact on the
"short-termism" that the gathering initially intended to address regarding
the competitiveness of U.S. markets. Paulson and Greenspan failed to
acknowledge the irony that such needed reform would never have happened
without their own bold early endorsements five years ago.
Furthermore, the supposed
consequent drift of IPOs to foreign financial markets turns out to be a
canard as proven in recent studies by Goldman Sachs and Ernst & Young.
Global IPOs have always preferred home listings. It's just a concern now
that those new foreign-listed firms have gotten larger. Meanwhile, there is
no loss of U.S. IPOs to foreign exchanges.
The actual problem solving in
current governance matters is not coming from shrill ideological rants and
misleading data. Yogi Berra once said, "It was impossible to get a
conversation going; everybody was talking too much." Loud grandstanding
makes noise but not necessarily progress.
At the time of
publication, Sonnenfeld held UPS and HD.
Dr. Jeffrey A. Sonnenfeld is the
associate dean of the Yale School of Management and founder of its Chief
Executive Leadership Institute in Atlanta. He has more than 25 years of
experience studying management performance and CEO leadership. His research
has been published in 80 scholarly articles, which have appeared in leading
management academic journals such as The Harvard Business Review,
Administrative Sciences Quarterly, The Academy of Management Journal, The
Academy of Management Review, The Journal of Organizational Behavior, Social
Forces, Human Relations and Human Resource Management. He has also authored
five books; his work is regularly cited in Fortune, Business Week, The Wall
Street Journal, The New York Times, Newsweek, Time, The Washington Post and
the television programs "60 Minutes," "The Today Show," "Nightline," "Good
Morning America," CNN's "Crossfire" and "Talkback Live" and CNBC's "Power
Lunch." He is a member of TheStreet.com's Board of Directors. He received an
A.B. from Harvard College and a M.B.A. and Ph.D. from Harvard University.
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