A Step Back on CEO Compensation

There's more to taking a company public than simply ringing the bell at the New York Stock Exchange.

When you sell a company to the public, there's give and take. Companies get access to capital from public markets, but they also assume the responsibilities that go along with public ownership.

Since 1933, the federal government has sought to design a system that promotes capital formation without exposing the general public to the same level of financial fraud and deceit that contributed to the Great Crash of 1929.


As we learned recently, however, the path to better market oversight is less exemplified by a steady march forward than by the old adage: "Two steps forward, one step back."

Dodd-Frank takes two steps forward...
Under the 2010 Dodd-Frank financial reform law, a company's shareholders now have the right to vote intermittently on compensation for executives and directors. The law also requires companies to disclose how executive compensation compares to stock performance.

Although the vote is non-binding, these rules provide at least a partial solution to the disturbing doctrine in corporate governance and management theory known as the "agency problem" -- that is, a corporation's directors and executives are likely to overpay themselves because, quite simply, they can.

It's no exaggeration to say that the stock market is full of examples of corporate executives and directors regularly and thoroughly fleecing their own shareholders. In one of the most egregious recent examples, Reuters discovered that the CEO of Chesapeake Energy (NYS: CHK) , Aubrey McClendon, took out a $1.1 billion loan to finance his personal and highly leveraged gamble on company-owned wells. And this was on top of an already exorbitant compensation package and other highly suspicious related-party transactions. In 2008 alone, McClendon was paid a whopping $112 million.

...the JOBS Act takes one step back
Unfortunately, in the awkwardly titled Jumpstart Our Business Startups Act, Congress rolled back these investor protections in the name of "job creation." So long as a newly public company is valued below $700 million and earns less than $1 billion in sales, its exempt for up to five years from holding say-on-pay votes and disclosing compensation versus stock performance.

Although the say-on-pay rules have yet to be widely used, the timing of the JOBS Act's evisceration of them couldn't be worse, as it will unquestionably stymie an otherwise burgeoning trend of doing so. Last year, in the first full year of its existence, shareholders of 41 companies on the Russell 3000 index -- including Hewlett-Packard (NYS: HPQ) , Jacobs Engineering (NYS: JEC) , and Stanley Black & Decker (NYS: SWK) -- used the newfound powers to express their disapproval. And already this year, shareholders at major institutions like Citigroup (NYS: C) and Barclays have gone on record to dispute the inequity of exorbitant executive pay and shareholder wealth destruction.

Bipartisan cowardice
It's difficult to interpret the JOBS Act's say-on-pay exemptions as anything other than blatant election-year pandering to lobbyists and corporations. Call me cynical and simpleminded, but I fail to understand how hobbling shareholders' newly acquired nonbinding oversight of exorbitant executive pay could be anything but a step back for investors specifically and society generally. Indeed, it leaves one wondering whether sanctioning shareholder exploitation is the only thing our political parties can agree on.

Let the SEC know how you feel about the JOBS Act by following this link. Simply tell them you're an individual investor and feel free to share your concerns or suggestions.

Click here to read how the JOBS Act places a priority on IPOs -- not investors.

The article A Step Back on CEO Compensation originally appeared on Fool.com.

Fool contributor John Maxfield owns no shares of the companies mentioned above. The Motley Fool owns shares of Chesapeake Energy and Citigroup. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum