This articles is inspired by Warren Buffett of Berkshire Hathaway Inc (BRK-A) (BRK-B) who in the past has said that directors should not be excessively compensated. By minimizing director pay, directors are more apt to be shareholder friendly and be more willing to logically control executive compensation. From the May 2, 2009 14-A filing by Berkshire Hathaway the following can be read:
Directors of the Corporation (Berkshire Hathaway Inc) or its subsidiaries who are employees or spouses of employees do not receive fees for attendance at directors’ meetings. A director who is not an employee or a spouse of an employee receives a fee of $900 for each meeting attended in person and $300 for participating in any meeting conducted by telephone. A director who serves as a member of the Audit Committee receives a fee of $1,000 quarterly. Directors are reimbursed for their out-of-pocket expenses incurred in attending meetings of directors or shareholders.
Berkshire Hathaway board members were paid $2700 or $6700 for the year ended December 28, 2008 depending on their duties. This is in a day of 6 digit pay for board members. It is not uncommon to find director compensation nearing $200,000 at many companies. There is no director at Berkshire Hathaway that is in fear of loosing their big pay check due to a disagreement with others. If anything, it encourages directors to be more open with their thoughts. Charlie Munger, Buffett's right hand man, has blasted director pay and behavior in the past as can be read about in this article.
In the past, Buffett has said that "the way to get big shots to change their behavior is to embarrass them" and that "the press has great opportunities for this, but the big institutional investors could help." Executives at American International Group (ticker: AIG) gave back millions in bonuses after its near collapse due to pressure made by the media.
In the 2005 Berkshire Hathaway shareholder letter Buffett wrote the following:
Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.
Given the above comments, what can be done to put the interests of directors in line with those of the shareholders? Executive compensation is an important part of corporate governance, and is often determined by a company's board of directors. So, what can be done?
The government needs to step in even though it is not a popular proposition. The thing is, shareholders are being hurt by executives and directors at most companies. Too many companies have these people all sleeping in bed together. The directors are paid egregiously in many cases. It does not take a stretch of the imagination to think that a directors interest is in their pay check and not towards the benefit of shareholders. So, it is proposed that the government step in and regulate director compensation to be stock only. And only stock that must be held for several years. Some sort of cap on this should be instituted. A maximum cash compensation should be extended to to directors for expenses. These actions would contribute towards a reorientation of director intentions towards the shareholders. An obvious benefit to shareholders at some companies would be a tightening of the belt in regards to executive compensation among other actions that would be more shareholder friendly. Directors would be more apt to behave like dobermans than cocker spaniels. Directors are there to represent the shareholders. So make their sole interest being that of the shareholders by compensating them with stock only and things will change since their interests will be in growing the company of the value!
To a great extent, activist investors deserve a pat on the back for putting board members in place that have their interest alined with shareholders.
Stock options need to be addressed. Directors should not be allowed to hold stock options which Buffett has called lottery tickets in the past. Options simply promote short sightedness. It does not matter if the directors acquire them on their own or if they are given to them by the company as “bonuses”. They simply should not be allowed to touch them.
Another change is in regard to “gifting”. In defense contracting, it is very well known that a company can not even buy a military official lunch at McDonald's. Doing so could lead to a rash of legal issues. Letting a commander borrow your yacht for the weekend would also be a big no no. These are all equivalent to bribes, whether it is a $5 gift or a $20,000 gift. Board members should have the same set of rules applied to them in regards to any employees that work for the companies that they represent under penalty of law.
The proposed changes are not overly complicated or confusing. It is rather simple in it's ideology. There is one short coming. Executives still are the ones that typically nominate directors. There is no obvious fix for this. Someone has to nominate people that are proper fits for the company. With so many companies out there, there may be no good alternative. While the ideas presented in this article may be objected to by some, it is the overall proposition that there are things that the government can do to orient the the intentions of directors more towards the shareholders.
Directors of the Corporation (Berkshire Hathaway Inc) or its subsidiaries who are employees or spouses of employees do not receive fees for attendance at directors’ meetings. A director who is not an employee or a spouse of an employee receives a fee of $900 for each meeting attended in person and $300 for participating in any meeting conducted by telephone. A director who serves as a member of the Audit Committee receives a fee of $1,000 quarterly. Directors are reimbursed for their out-of-pocket expenses incurred in attending meetings of directors or shareholders.
Berkshire Hathaway board members were paid $2700 or $6700 for the year ended December 28, 2008 depending on their duties. This is in a day of 6 digit pay for board members. It is not uncommon to find director compensation nearing $200,000 at many companies. There is no director at Berkshire Hathaway that is in fear of loosing their big pay check due to a disagreement with others. If anything, it encourages directors to be more open with their thoughts. Charlie Munger, Buffett's right hand man, has blasted director pay and behavior in the past as can be read about in this article.
In the past, Buffett has said that "the way to get big shots to change their behavior is to embarrass them" and that "the press has great opportunities for this, but the big institutional investors could help." Executives at American International Group (ticker: AIG) gave back millions in bonuses after its near collapse due to pressure made by the media.
In the 2005 Berkshire Hathaway shareholder letter Buffett wrote the following:
Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.
Given the above comments, what can be done to put the interests of directors in line with those of the shareholders? Executive compensation is an important part of corporate governance, and is often determined by a company's board of directors. So, what can be done?
The government needs to step in even though it is not a popular proposition. The thing is, shareholders are being hurt by executives and directors at most companies. Too many companies have these people all sleeping in bed together. The directors are paid egregiously in many cases. It does not take a stretch of the imagination to think that a directors interest is in their pay check and not towards the benefit of shareholders. So, it is proposed that the government step in and regulate director compensation to be stock only. And only stock that must be held for several years. Some sort of cap on this should be instituted. A maximum cash compensation should be extended to to directors for expenses. These actions would contribute towards a reorientation of director intentions towards the shareholders. An obvious benefit to shareholders at some companies would be a tightening of the belt in regards to executive compensation among other actions that would be more shareholder friendly. Directors would be more apt to behave like dobermans than cocker spaniels. Directors are there to represent the shareholders. So make their sole interest being that of the shareholders by compensating them with stock only and things will change since their interests will be in growing the company of the value!
To a great extent, activist investors deserve a pat on the back for putting board members in place that have their interest alined with shareholders.
Stock options need to be addressed. Directors should not be allowed to hold stock options which Buffett has called lottery tickets in the past. Options simply promote short sightedness. It does not matter if the directors acquire them on their own or if they are given to them by the company as “bonuses”. They simply should not be allowed to touch them.
Another change is in regard to “gifting”. In defense contracting, it is very well known that a company can not even buy a military official lunch at McDonald's. Doing so could lead to a rash of legal issues. Letting a commander borrow your yacht for the weekend would also be a big no no. These are all equivalent to bribes, whether it is a $5 gift or a $20,000 gift. Board members should have the same set of rules applied to them in regards to any employees that work for the companies that they represent under penalty of law.
The proposed changes are not overly complicated or confusing. It is rather simple in it's ideology. There is one short coming. Executives still are the ones that typically nominate directors. There is no obvious fix for this. Someone has to nominate people that are proper fits for the company. With so many companies out there, there may be no good alternative. While the ideas presented in this article may be objected to by some, it is the overall proposition that there are things that the government can do to orient the the intentions of directors more towards the shareholders.
