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The Harvard Corporate Governance Blog, October 25, 2008 posting


The Trust Has Left the Building: $23,000 on Spa Treatments

Posted by Broc Romanek,, on Saturday October 25, 2008 at 1:32 pm

The Trust Has Left the Building: $23,000 on Spa Treatments

It looks like the folks at AIG have taken “tone at the top” to heart. Unfortunately, their tone isn’t of the type that is good news for taxpayers, who now own 80% of AIG. As this Washington Post article describes, two former AIG CEOs were grilled during a House Committee on Oversight and Government Reform hearing this week (one of whom received a $5 million performance bonus just before he left - in addition to a $15 million golden parachute - and another AIG executive was fired still receives $1 million per month for consulting services). The former CEOs expressed no remorse for their actions that drove AIG into the arms of the government and didn’t acknowledge making any mistakes. Rather, they blamed the accounting. The House committee members were visibly disturbed by the sheer audacity of these so-called corporate leaders. Given the long list of troubling practices at AIG described in this front-page WSJ article, we may well see these two in pinstripes someday.

The topper is the fact that AIG is now getting an additional $37.8 billion loan from the taxpayers, which is lumped on top of the $80 billion load the government provided last month. This came a day after it was revealed that the company held a junket for sales reps at a resort, spending unbelievable amounts of the taxpayer’s money. How exactly does one spend $23,000 on spa treatments or $5,000 at the bar? The story is outrageous and listening to the radio, it’s fair to say that AIG already has become the posterchild of all that is broken in Corporate America. If this doesn’t get you mad, nothing will.

Reflecting on a True Corporate Leader

Kevin LaCroix does a masterful job reviewing the new uncensored - and authorized - biography of Warren Buffett in his “The D&O Diary Blog. In my opinion, Warren is one of the few leaders in Corporate America deserving of the title “leader.” Reading Kevin’s description, you can see that Warren values his reputation more than money. How many CEOs can you say that about?

It’s worth noting that Warren’s annual letter to shareholders is one of the only “straight talk” pieces out there when it comes to disclosure documents for shareholders. I’ve never understood why other CEOs haven’t followed his lead. Just like few have followed his lead in the face of today’s crisis to speak up, take actions to show they are accountable and try to produce calm.

So What Now? Does Board-Centric Oversight Really Work?

Given the events leading up to this crisis (and continuing today, see the AIG story above), there certainly will be a rash of regulatory reforms. It’s clear that there are numerous practices that need fixing and right now, Corporate America doesn’t seem capable of doing it on its own.

Exhibit A is excessive executive compensation. As I often state when debating defenders of today’s pay packages, would you be motivated to work to 100% of your abilities if you made $10 million per year? If the answer is “yes,” what purpose does paying you $20 million serve?

Apologists then trot out the argument that another company may pay you that $20 million - thus, your current employer should pony up. That may well be true in relatively rare circumstances - but the reality is that their are very few CEO superstars that could easily move from one company to another (just like their are few superstars in sports that could command top dollar from another team).

Boards continue the status quo of handing out oversized pay packages because it’s the easy thing to do. Having that hard negotiation with a sitting CEO is tough to do - most directors have day jobs where they face tough situations every day and I imagine that is would be rough to go to a board meeting and continue fighting the good fight. But that is their job and they need to do it - or they need to drop off the board. As I blogged recently, I hear that the few companies that really make responsible changes are the ones where the CEO speaks up and voluntarily asks for the change. Sadly, boards and compensation committees are not the ones driving responsible change.

In the wake of the ongoing crisis, there may well be a push to dramatically alter the board-centric oversight model that exists today. In his most recent column, Jim Kristie of “Directors and Boards” looks at this topic, first noting Marty Lipton’s speech defending the board-centric model from a few months ago, then pointing out that growing evidence of a lack of confidence in the board-centric model today and ending with the thought that “shareholder-centric governance may be one of the ways out of this financial crisis, widely thought to be the worst since the Great Depression.”

Powerful food for thought. Are boards listening - and acting - to stave off this possibility? Like most others, I’m cynical at this point. My guess is that most would rather blame the accounting or short sellers than take responsiblity for their own oversight failures. True leadership is a rare commodity these days.

The Bottom Line: We Need Trust

I believe the reason that the government’s daily solutions to the credit crunch are not working is because the trust within our system has evaporated. It is widely reported that banks refuse to lend to each other. The approval rating of our politicians are at historical lows.

And I wouldn’t be surprised if many of the retail investors now leaving the stock market never return, particularly the older baby boomers who don’t have the time to wait this out. And even though our markets are now dominated by institutional investors, their size often is attributable to participation by the masses. Look for their sizes to shrink as coffee cans are buried in the backyard. Without true leadership - setting the proper tone at the top and taking responsibility - I don’t think this market will turn around. To start down the path to true leadership, CEOs can start by voluntarily reining in their excessive pay packages.



© 2008 The President and Fellows of Harvard College




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