Review of executive perks

There is a shareholders’ revolt going on in two of the world’s biggest banks that may set a trend for public companies.

Last week, the stockholders of Citigroup, an American multinational financial services corporation, voted against the compensation packages that the board of directors proposed for its key officers.

Although Citigroup CEO Vikram Pandit received just $1 in 2010 as compensation, the $15 million salary that the board wanted to give him for services rendered in 2011 was rejected by the stockholders.

They felt his performance record last year was not good enough to justify that pay since the value of the company’s shares had remained low compared with other similarly sized banks for the past two years.

Despite the turndown, however, Pandit and the rest of the executives will still receive their salary allocations.

The vote, which was taken pursuant to the Dodd-Frank Wall Street Reform and Consumer Act (the law enacted by the US Congress to prevent a repeat of the 2008 financial meltdown) is not binding; it is merely advisory.

Under that law, public companies are required to submit to stockholder vote at least every three years the compensation scheme for their executives.

The exercise, although ceremonial in nature, is aimed at informing the board of the stockholders’ sentiments about the salaries and perks that are given to corporate top brass.

Performance

This week, the stockholders of Barclays PLC, a premier British multinational financial services company, will decide at its annual stockholders’ meeting on, among others, the compensation package for its CEO and CFO.

Ahead of the meeting, the bank’s major stockholders have served notice of their strong disagreement with the proposed salaries and other financial benefits for the two officials.

The stockholders think they do not deserve the recommended multimillion-dollar compensation because they have not met the performance targets they have set for themselves for the preceding years.

To avoid an embarrassing rebuff at the stockholders’ meeting, the two officials have offered to modify the terms of their compensation to meet the concerns raised by the complaining stockholders, majority of whom are institutional investors who are grizzled veterans in their craft.

The adverse reaction to executive pay by stockholders of two iconic financing institutions in the world’s most developed economies represents a major shift from the traditional attitude of giving the boards a free hand in determining management’s compensation.

Until the near collapse of the US economy in 2008, stockholders of most American and European public companies assumed that their boards acted in their best interests whenever they awarded hefty compensation packages to their executives.

Independents

The trust proved to be misplaced.

The string of bankruptcies and takeovers that later ensued showed that, while the companies were hemorrhaging from hidden liabilities and exaggerated revenue streams (all of which were papered over through clever accounting manipulation), their top brass continued to enjoy extravagant perks and privileges.

So where were the directors, especially the so-called independent directors tasked to act as “loyal opposition” within the board, who were supposed to see to it that the company was properly run?

Either they were sleeping on the job or had been co-opted through lavish allowances (courtesy of management) into turning a blind eye to the true state of things within the company.

No longer the passive onlookers they used to be, the stockholders, especially institutional investors who have clients’ interests to protect, are asserting their right to have a say in management’s compensation.

This time, the top honchos are being asked to prove their entitlement to their perks through pre-determined performance targets on either the value of the company’s stocks or its bottom line. Real financial gain, not projections, is the name of the game.

There are attendant risks to ignoring stockholder sentiments about executive pay. Disgruntled stockholders can vote out directors they believe are insensitive to their concerns, or sue them for damages for violation of fiduciary responsibilities.

Activism

In our country, executive pay in listed and public companies is not considered appropriate for discussion in stockholders’ meeting or, for that matter, in business forums. It is something discussed in the privacy of the board rooms, exclusively. The oath of omerta on this matter is strictly enforced in corporate offices.

The closest that minority stockholders or the public get to know about this is in the Information Statement that these companies are required to submit to the regulatory authority prior to their annual stockholders’ meeting.

Even then, the figures given are in the aggregate, that is, only the sum total of the salaries of the top executives, not the individual salaries, is disclosed.

For alleged reasons of security (read: scrutiny by the Bureau of Internal Revenue), these companies will fight tooth and nail, even go to court if necessary, to prevent the release of accurate information about their executives’ pay checks.

It is a “tribute” to our imaginative lawyers and accountants that some of the executives who grace Forbes’ list of wealthiest people in the country are nowhere near the BIR’s roster of top individual taxpayers.

(For feedback, write to <rpalabrica@inquirer. com. ph>.)