by David Moon
The Citigroup board of directors increased the pay of its CEO, Michael Corbat, 27 percent in 2016, to $16.5 million. The board justified the increase because Corbat’s 2014 pay compared unfavorably his peers.
It took Citigroup three times and four years to pass the Federal Reserve’s stress test. Wells Fargo surpassed it to become the country’s third largest bank. This, while the stock returned zero since 2014 and has fallen 10 percent this year. Corbat deserved to be paid less than his peers.
Horrible corporate governance like this explains some of the income inequality in the U.S. Some.
Even massive differences in income between groups of workers, is not, by itself, immoral. That is, at least based on the biblical parable of the workers in the vineyard it isn’t immoral. An economy that is increasingly dependent on intellectual capital rather than labor will necessarily and more profitably reward those who possess/control and effectively deploy intellect.
A significant portion of today’s wage differential in the U.S., however, is simple thievery, enabled by corporate boards of directors who too often act as agents of management, rather than representing the people who actually own those businesses—the shareholders.
The managers of a public company are supposed to run the business for the benefit of the shareholders. Companies do not exist for the benefit of employees, whether they be executives or janitors. Some boards and executives do realize, however, that a happy, cohesive work force is an important—if not crucial—component to maximizing a company’s financial performance.
Too many boards of directors, however, engage in a game of competitive one-upmanship, embarrassed if their CEO isn’t among the most highly-paid in their industry.
Most boards base their executives’ pay on things like comparisons to other CEOs and earnings-oriented measures of company performance. But any measure that ignores a company’s balance sheet encourages a CEO to take on an increasing amount of risk and debt to produce higher earnings, even if corporate returns on capital decline. And any evaluation system designed to put CEO pay in the top tier of a peer group leads to perpetual salary inflation.
Authors John Gillespie and Davis Zweig write that boards of directors are ruining American business and costing both shareholders and taxpayers trillions of dollars. In one example they describe a conversation with a former Lehman Brothers top executive who described the Lehman board as “a joke,” only weeks following the bank’s $60 billion failure.
Sarbanes-Oxley has been an abject failure in creating true board reform. It has, however, guaranteed lifetime employment for a generation of accountants, lawyers and superficial compliance Nazis.
Wall Street is not an economic Lake Woebegone where all CEOs are above average. Someone has to be below average; Citi’s Corbat is a prime candidate for that position.
David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).