[Corp. Watch] Systemic change, not feel-good gestures, needed to end corporate impunity

[Corporation Watch]

Obama's Pay Plan Doesn't Go Far Enough

  Observers say Obama's new rules to limit executive
  compensation won't put a stop to corporate excess

By Colin Barr

(Fortune magazine, Feb. 4) -- President Obama's plan to limit  
executive pay at firms getting government funds may calm some angry  
voices on Capitol Hill, but pay caps alone won't fill the  
accountability deficit that has fueled runaway executive compensation  
and other corporate excesses.

	Obama unveiled the plan -- which would prohibit firms getting  
emergency aid from paying top execs more than $500,000 annually in  
cash -- at the White House Wednesday morning.

	He did so as legislators, incensed by reports of rich pay and  
outlandish perks at firms that would have collapsed without taxpayer  
help, have been demanding action.

	"In order to restore our financial system, we've got to restore  
trust," Obama said. "And in order to restore trust, we've got to make  
certain that taxpayer funds are not subsidizing excessive compensation  
packages on Wall Street."

	But while the Obama approach may bring some financial industry  
salaries down from the stratosphere, skeptics say it doesn't go far  
enough. What's more, they say, compensation limits don't address the  
festering accountability problem behind surging executive pay and the  
recent collapse of the financial sector.

	"This plan doesn't look very meaningful," said Simon Johnson, a  
former chief economist at the International Monetary Fund who is now a  
professor at MIT's Sloan School of Management. "The issue at these  
companies is the lack of effective owners, and things like pay limits  
don't change that."

	A common problem at companies that have received emergency aid from  
the government -- from financial firms like AIG, Bank of America, and  
Citigroup, or automakers such as GM -- is that corporate boards failed  
to guide or rein in management, Johnson said.

	That's the case because the boards were more responsive to management  
than to their true masters, the shareholders -- which now include  
taxpayers.

	"Executive pay has been a symptom of a much broader problem," said  
Richard Ferlauto, the director of corporate governance and pension  
investment at AFSCME, the biggest union for public employees and  
healthcare workers in the U.S.

	"You've had weak boards and out-of-touch leaders", Ferlauto said,  
"and what you've gotten for it is a banking business model that  
imploded."

	Ferlauto's union has been among the most forceful advocates of "say  
on pay," the non-binding shareholder votes that give investors a voice  
on whether companies are paying their execs too much.

	The Obama plan would force firms receiving emergency aid to conduct  
such votes, and would permit some recipients of other funds to skirt  
the $500,000 annual cash pay cap by holding such a vote.

	But if the idea is to pressure CEOs into cutting their own salaries,  
count Ferlauto as a skeptic. "I don't think you can rely on shame," he  
said. Ferlauto stresses that attaching strings to federal funds are  
only the beginning of what must be far-reaching corporate governance  
reform.

	"You can't do reform in a piecemeal process," he said. "Shareholders  
should be treated no differently from taxpayers. The perverse pay  
incentives we have in this country need to be turned on their head."

Some of the new rules lack teeth

	There are also those who question whether the government's good  
intentions will translate into useful policy.

	For instance, the Obama plan expands the number of executives subject  
to so-called "clawback" restrictions, which would force them to repay  
the company if they're found to have knowingly engaged in financial  
misstatements, from five to 25.

	But Gary Lutin, a former investment banker who runs the Shareholder  
Forum investor advocacy group in New York, said this provision is  
rendered largely moot by the need to prove an executive guilty of  
criminal conduct before recovering any funds.

	He also questions the wisdom of a provision that would force  
corporate boards to define a company policy "relating to approval of  
luxury expenditures."

	The clause likely came into existence thanks to the freewheeling  
office redecorating of former Merrill Lynch chief John Thain -- who  
spent $87,000 on a rug and $35,000 on a toilet when joining Merrill at  
the end of 2007 -- but Lutin said the act of piling on restriction  
after restriction only feeds the lawyerly mentality that has made many  
corporate directors so ineffectual.

	"Putting a cap on pay or requiring board approval of luxury  
wastebaskets may help get a politician elected," said Lutin. "But what  
really matters is basic responsibility -- so it doesn't do any good if  
executives can simply re-label their bonuses as 'retention incentives'  
or persuade the board that the wastebasket will enhance corporate  
prestige."

	Johnson, the MIT professor who writes on the financial crisis at his  
Baseline Scenario blog, said a better approach for Obama would have  
been to set pay at firms receiving emergency aid even lower -- say, on  
par with the civil service pay scale.

	That way, he said, skilled employees would leave to work elsewhere in  
finance, or hang out their own shingles, and less skilled workers  
would find a new vocation. The ultimate goal, he said, should be to  
create incentives that lead to the orderly break-up of the  
dysfunctional giant financial firms.

	"They don't get restricted stock in the civil service," said Johnson.  
"Why should they get it at these failing banks?"