Sunday, February 21, 2010

The Importance of Shareholder Ire

Earlier this past week, Royal Dutch Shell announced that it was “freezing executive pay and revamping bonus policy.” This choice came in response to a shareholder rebellion at last year’s shareholder meeting over compensation and bonus levels. Shell’s CEO, Peter Voser, and CFO, Simon Henry, will receive less in salary than their predecessors and their salaries will be frozen from July 2009 until January 2011. The performance based stock option plan, which specifically drew the ire of shareholders in 2009, previously required that the company be in the top three of its peers in shareholder return before shares were awarded, but when Shell ended up fourth amongst its peers last year, executives still awarded themselves the shares despite the plan strictures. The stock option plan has now been altered, by tying compensation to specific goals for the company such as ensuring projects are delivered on time and on budget. Shell says that this plan “demonstrate[s] appropriate restraint in the current economic environment” and “increase[s] alignment between executive and shareholder interests.” Some commentators hail this decision as a victory for those who promote greater shareholder democracy in corporations, as a non-binding shareholder vote here has seemingly provided sufficient pressure to affect officer’s positions on compensation levels.

Still, some evidence exists that suggests when shareholders are primarily institutional investors, there is no incentive to pressure executives when a firm’s compensation plan seems entirely disconnected from a “current economic environment.” The case of Lazard Ltd.’s executive compensation for 2009, seems to indicate that when “shareholder ire” is not a consideration for executive’s awarding themselves compensation, that in an environment when profits are down 95%, that it is still fine to increase executive compensation significantly. Lazard’s 2009 profits were way down, but its executives and employees were compensated at a rate that required payout of more than 72% of total annual revenue, up from 56% of annual revenue being earmarked to compensating employees in 2008.

“I don’t think it’s a coincidence that the short-term profit drive of corporate America happened at the same time that mutual funds became the major owners of these companies,” says Russel Kinnel the director of fund research at Morningstar Inc. If institutional investors are content to quietly watch executives increase compensation remarkably in the face of dreadful performance, can we really expect a “bonus based on performance” system to take root on Wall Street?


  1. Still, some evidence exists that suggests when shareholders are primarily institutional investors, there is no incentive to pressure executives when a firm’s compensation plan seems entirely disconnected from a “current economic environment.”

    Actually, I think that the question is whose shareholders the fund's board members are really representing. As the article points out:

    ... a fund firm may be part of an investment bank that wants business from the company. Even for pure asset managers, there might be a fear of alienating a potential 401(k) client.

    It's not about be disconnected from the current economic environment it's about being connected to the company in question as a potential source of business for the parent firm. This sets up an obvious conflict of interest. The shareholders of Barclay's and Bank of America may be well served by having fund managers vote with management as an entree to future business. The answer maybe to prohibit board members whose parent companies have business with the company on whose BoD they sit from voting on issues that may impact that business or, to deny them a board seat all together and to insist that any potential conflict of interest be outlined in all fund literature and correspondence.

  2. I too will hail the empowered shareholders who elect a performance based bonus option for officers of major corporations. I appreciate the necessity for efficiency in the corporation's operation but how does that translate into a benefit for the consumer, especially considering the vote was non-binding? Does that mean our costs at the pump should decrease a certain percentage; therefore, tying it to the performance option? Then, Corporate America should take a bow.

  3. Although U.S. Americans have grown weary of the amount of control businesses have over bonus decisions, we are fortunate that investors and not the government own these businesses. However, in this economy, it is important to keep shareholders up-to-date, and aware of where corporation money is going. Therefore, instead of growing tired of the bonuses that leaders receive, it may be beneficial to hold shareholders responsible for being ignorant when the rest of America depends on them to stay informed. To my knowledge, the UPA and the RUPA place a fiduciary duties and a duty of loyalty on directors and officers. However, shareholders only have such duties within certain states. Without more well-versed shareholders with concrete obligations, I am afraid that inflated bonuses will continue to be status quo.

  4. Lazard’s acceleration of their bonus program and the break from the current industry norm is reported to be strategic for attracting big talent while others like Morgan Stanley are tying bonuses to long term performance. It is easy to understand how competitive industries such as retail have to continue to reward good talent even in a slow economy however in the banking industry I am just wondering what great talent Lazard is trying to attract. It is disturbing to consider that as the ownership of a corporation moves further from the individual shareholder toward the institutional investor the company is gaining an emphasis on short term profits rather than the performance of their executives or the health of the organization. Since so many busy Americans secure their funds in the institutional investment structure how can this bode well for our long term economic recovery?

  5. A bonus based system will never be the driver of "Wall Street" again because the shareholders of most large and profitable corporations generally are not overly concerned with the company's long term performance as they are with its quarterly performance.
    The CEO/CIO/CFOs all know this and therefore on many occasions they may choose to better their own financial interests to get the corporation immediate success some of the larger Shareholders want while risking a stable future that would be best for the corporation in the long run.
    As for Lazard, their rise is mostly due to this type of behavior. They shorted out their company to make a meteoric rise and to fatten their pockets but now when the long term health of the company is in jeopardy it would not surprise me to see many officers cut and run to avoid having to lose time and money picking up the pieces. Whenever you give yourself such a large bonus when the company itself cannot afford to do so and is struggling, that is a sign that the officers in charge aren't placing the corporation's goals ahead of their own.

  6. Shareholders and investors in today's market are no longer committed to purchasing shares of a company and holding their investments to produce long term growth. Instead, short term returns rule the day, as evidenced by the growth in numbers of hedge funds, mutual funds, and day traders. As long as investors continue to seek quick, large gains on their investments, Wall Street executives will continue inflate the worth of their company over the short term by sacrificing the long term economic security of their companies.

  7. I guess the old saying is true, "Out with the old and in with the new." We are now in an era where individuals desire things to be quick, fast, and in a hurry. For shareholders, they simply want their return now and not sometime in the distant future. By giving into the demands of the "quick-tempered" shareholders, it places the company into a further financial crunch and bind. And where in the long run the economy will suffer and business will not be successful in their ability to thrive. I am thoroughly happy that there has been a freeze for the higher officials and now there will at some level be greater attention to the financial responsibilities and obligations of employees. The time frame until 2011 is perfect! It allows the company the opportunity to be able to truly gage financial stability, and it is not a permanent freeze. So now the executives have to tighten their belts like normal American citizens, although the "cut-back" won’t be as drastic as those who have less monetary resources than the executives.
    -David H. Kenton

  8. In all of the conversations that have been taking place about executive compensation and reigning in corporate spending there is one solution I have not heard discussed. The shareholders taking back control of these corporations. Sure most people who own stock own it through a mutual fund or some other holding company, but what about grassroots organization of stockholders to not sign proxy statements or to vote their shares in such a way as to control the governance of these corporations. If stockholders are the "true" owners of these companies why aren't they doing more to stop these executives from lining their pockets from the corporate coffer.

  9. Jamil Davis

    The corporate world has enjoyed the shareholders lack of interest and quick profit mentality for some time now. Finally, it appears as if the shareholders are beginning to wake up. With the continued mentality of get rich quick, no one really seems to care what is going on inside the corporation. Shareholders in the past had more of an active role in the corporation because these were long term investments, not today. I hope that shareholders do understand that they are the "true" owners of these corporations and continue to assert their voice. If they do, and more join, corporations will have to take notice. Shareholders cannot sit around idly trusting the corporation to do what's in the best interest of the company.