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Program Reference, May 1, 2007 commentary

News & Analysis: Investing


Pay-Fight Foes Blow Hot Air

By Jeffrey Sonnenfeld
Special to

5/1/2007 7:35 AM EDT



The showdown 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 shareholder activism.


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 Sarbanes-Oxley reforms.


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'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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