CEO Oustings in Corporate America

Washington Post business columnist Steven Pearlstein was online Wednesday, Sept. 13 at 11 a.m. ET to discuss the recent departures of several corporate leaders, including the recent news from HP and Bristol-Myers Squibb , along with Ford, General Motors and Pfizer.

In today's column, The Corporate Noose, A Little Too Tight , he writes how this may be affecting the competitiveness of American business and capital markets. In a post-Enron era, are these oustings a sign of over-reaction or just good governance?

A transcript follows .

About Pearlstein : Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here .

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Rockville, Md.: Would it matter if we were to limit executive salary? Perhaps a limit in the tax code would work.

Steven Pearlstein: Like many, I am appalled by executive compensation and think it reflects a rigged market for chief executive services. But I don't think it is something that should be regulated by government directly. Let's remember that the big push into stock options was prompted by a tax change that makes any salary in excess of $1 million non-deductible by the firm. That said, corporate governance rules could surely be strengthened so that shareholders have a say in approving it, particularly stock and option grants that dilute their holdings.

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Houston, Texas: The power of the institutional investors is the tail that wags the dog. Don't you think this aspect is under reported?

They demand quarter to quarter performance and boards comply by linking that to CEO compensation. Given that, it's a miracle any CEO lasts 5 years.

It's all about share price; strategic long term planning, governance, and often ethics and legality take a back seat to that pressure. Until that is sufficiently addressed, competitiveness will suffer.

Steven Pearlstein: Amen, pardner. But corporate executives also have to take some of the blame for going along with this game. They could push for compensation schemes that are based on company fundamentals more than the share price, which is a perfectly reasonable position to take. And they don't have to go along with the quarter to quarter mentality -- there are some very fine companies where CEO's refuse to do that, where no earnings guidance is given, and that over the long run have delivered very nicely to shareholders. The one I work for is one. So is Berkshire Hathaway.

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Chapel Hill, N.C.: As a former equity analyst for a European investment bank, I read your article but am still not sure where you are going with it. In the case of HP the California attorney general said criminal charges could be filed against company employees (I am assuming wire fraud give the 'pretexting' allegations) and in the case of Bristol-Myers, Dolan was fired for sheer incompetence as he lost the exclusivity for Plavix which led the company to lower earnings forecasts by around 35 cents (25%) per share. In addition, the share price has fallen around 50% during his tenure. In both of these situations valid reasons for termination exist and are not 'ritual hangings'. Is Sarbanes-Oxley too tough - yes, but it is completely ancillary to the HP and Bristol-Myers situations. Finally, I believe investment banking fees are lower in Europe due to competition - you have a very large presence of banks from all over the world (Nomura, ABN Amro, ING, DeutchBank, Societe General - along with all of the usual suspects) that you don't have in New York.

Steven Pearlstein: Lots of points there. The Sarbanes-Oxley reforms, taken as a whole, really put the onus back on directors to start doing their jobs and paying more attention. And it is in that context that you can better understand what has happened at HP and Bristol Myers Squibb. In both instances, the directors, reluctantly, I grant you, concluded they had to take action because the new legal, regulatory, investment climate demanded it. Sometimes these things go too far -- as I wrote at the time, I think the firing of Harry Stonecipher for his marital indiscretions was probably not called for. But this general feeling now among directors that they cannot and will not tolerate unethical behavior, or tolerance of unethical behavior, on the part of top executives is a good thing. At BM Squibb, the proximate cause wasn't just the fall in share price, but the allegation that the chief executive might have engaged in an illegal conspiracy to fix prices, and then lie about it or withheld information from federal investigators. gators. Given that the company was already under an order from a previous legal problem, that probably was the last straw for the directors.

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Silver Spring, Md.: Ok, not quite the topic of the column, but CEOs none the less. At what point, if ever, do you suspect the outrageous CEO-to-employee compensation ratios to take their toll on employee morale and make it's mark on overall productivity? What's the statistic... 30-40 years ago or something it was 13:1, now its along the lines of a hundred some odd or a couple hundred some odd to 1? I've seen a bunch of numbers on this.. but all well over a hundred. Eventually aren't employees going to get bitter about working for someone else's wealth, while they struggle to pay rent, the highest prescription drug prices in the modern world, health care and retirement savings - because their employer quit covering those too?? Seems like historically, the further you split the rich and the poor and the more people you push to the bottom, the more potential energy you're putting into the inevitable backlash. It seems to me, everytime that CEO/employee compensation ration goes up another tick, that's a lot more outraged people. Do you see that as the case?

Steven Pearlstein: People are outraged, that is for sure. And I think, at some level, it probably does affect employee morale, which affects company performance to some extent. I think it gets magnified, however, when employee pay is relatively stagnant or there are layoffs. In companies where employees are at least sharing in the good times, I don't think it probably matters much if the pay gap with the CEO is widening.

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Washington, D.C.: How would you compare corporate responsiveness (CEO oustings, etc.) in the U.S. economy to that of say Britain or Germany? Japan?

Steven Pearlstein: I can't say I know enough about that. The Japanese have a tradition of the top guy falling on his sword, figuratively if not literally, but the embarrassment has to be a big one. Otherwise, its a pretty tight clique that runs things, and the press, the investment community and the regulators are all probably less aggressive than ours. In Britain,too, the top executives and directors are probably less responsive to public and investor pressures, although the regulators are as good if not better than ours. Germany, the corporate ruling elite is responsive to cultural norms generally, but probably not that responsive in the case of individual events. That's a pretty tight group.

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Philadelphia, Pa.: The situation, in my opinion, is even more dire than your column indicates. The quality of management in public companies is declining as many of the most innovative executives choose to go into private concerns. For investors, this issue is magnified as many of the best money managers work in hedge funds as opposed to mutual funds. The net result is that average people will get a double whammy...inferior managers choosing among inferior investments that are publicly available.

Steven Pearlstein: You know, this is a very interesting issue you raise -- the development of a two-tier corporate and investment culture in which the best people cluster in private equity (including hedge funds) and privately run companies, working with each other, while everyone else has to settle for investing in less well-run public companies through less-ably managed mutual funds. Sounds like a column idea to me. Thanks.

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Fairfax, Va.: In general, people don't stay with their jobs as long as they used to anymore. It's rare, especially among the younger generation to find someone working at the same company for 10 years or more.

Do you think CEOs are becoming careless because they don't feel the same kind of job security pressures, knowing that there are many other job opportunities out there?

Steven Pearlstein: No, I don't think they are becoming careless. No executive wants to go through the kind of turmoil these guys are going through. Its very unpleasant and tarnishes their reputation, which they value highly. Remember, these guys (less so the gals) tends to have very big egos.

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New York: An example of business deterred by lawsuits: vaccines.

Steven Pearlstein: Point made and very well documented. So let me revise and extend the remark: outside the pharmaceutical area....

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McLean, Va.: Back in the 80s (when I was in college), we were taught that corporations were granted charters if they agreed to be a good corporate citizen - it included recognizing an objective to enhance the value (quality of life) in those communities where they resided in concert with profit objectives. However as the decades passed, I feel companies simply see themselves as machines without conscience that are focused solely on accelerating shareholder wealth. In some ways it feels like we have returned to the 1890s. One tactic they have used to max profits is to secure dominance (either individually, or by M&A or by agreements) in their respective business sectors. To me, corporate leaderships are behaving more and more like thugs who just want the money and everything else is just chatter.

Steven Pearlstein: I don't know what the words say on a corporate charter, but that really isn't the state of the law. Companies are run for the financial benefits of their owners -- shareholders--and everything else is secondary, as perhaps it should be. That's the purpose of the exercise, and we have experience in this country that when companies go about maximizing wealth creation, within the confines of the law, that generates the best overall outcomes. If we want to tame those tendencies in some way to achieve other social or economic purposes, we should change the law, so that every company competes on the same basis -- you can't expect companies to serve divergent masters while its rapacious competitor is focused solely on maximizing profit.

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Silver Spring, Md.: "I think it gets magnified, however, when employee pay is relatively stagnant" Median houshold income has been flat or down for eight years running, the past four of which have been the midst of our "economic recovery". What gives with the public? Is it the effect of our overvalued real estate prices fooling us into thinking we're sharing in the good times when the statistics show otherwise?

Steven Pearlstein: That's a big part of the story, yes. And that situation is now coming to an end.

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Tampa, Fla.: I have to disagree with your statement in your column today:

"The Sarbanes-Oxley law, which required corporate directors and executives to establish and test their internal controls to assure the accuracy of their financial statements, has been taken to ridiculous lengths by auditors and lawyers who have profited handsomely as a result."

Sure, the accountants may have gone a bit too far, and the lawyers always will, but let's consider the baseline of these fees. As a CPA, I can assure you audits were a loss leader for the Big 8-6-5-4-almost 3. No one can tell me the audit of Fannie Mae cost only $2 million. The accounting firms more than made up on consulting fees. Witness the tax shelters KPMG sold to Fannie Mae--all while having to sign off the provision review for FAS 109. Fortunately, SOX now prohibits this. Much of the increase in audit fees is simply charging fair value for the attest function. Businesses are just whining that they now have to bear the true cost of the audit.

Have the accounting firms overreacted to some extent? Of course. For years, the audit partners had to settle for less because they generated fewer profits than their tax and MAS co-partners. They feel they have a lot of ground to make up.

As for internal control systems costing so much, that's the nature of implementing new accounting systems. Heavy up-front costs, followed by lower costs to operate in later years. That's why SOX costs have declined recently.

Finally, in response to business complaining about SOX costs, where were the complaints about the high costs of the executive compensation consultants who convinced the boards of directors to pay their CEOs outlandish sums? As I understand it, SOX costs average LESS than CEO compensation costs. Where's the whining about those costs?

Steven Pearlstein: Well, those are actually all good points. But I think you are overlooking some of the ridiculous things that have been done in the name of giving directors and top executives the necessary control systems. Let me give you a small but telling illustration. Here at the Washington Post, if you don't use your computer for five minutes, it now automatically turns itself off. The reason: SOX. The auditors were fearful that, if I walk away from my desk, somebody could send out an unauthorized email in my name that could have devastating consequences for the company, and therefore, its shareholders. Well, first of all, I doubt the damage could be lasting. Bad stuff happens, but it gets corrected. And anyway, what does this really have to do with the accuracy and integrity of financial reporting, which was the reason we got into this control thing in the first place. Anyway, its those types of things that, while they may not be hugely cost in and of themselves, add up -- not just in terms of money, but in terms of frustration and the respect people have for the law.

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Arlington, Va.: Wondering if you could comment briefly on compensation committees? How they are formed? What laws they adhere to? When did they first appear? I have always been baffled by them because they only exist for corporate executives. I've never heard of a compensation committee meeting to negotiate a salary for say, and electrical engineer. Or I as think about it a little more, maybe our system (with the Dept of Labor and HR depts.) is, in effect, functioning as a compensation committee for the workers.

Steven Pearlstein: Yes, HR departments do have compensation groups, in fact. And it makes sense for boards to have compensation committees, made up of outsiders, to set pay and negotiate compensation with top executives. After all, if they don't do it, who would? The HR director who reports to the chief executive?

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Reston, Va.: I worked as a financial analyst for a defense contractor. One of my duties was to work, daily, a spreadsheet that was designed to maximize executive staff pay by adjusting labor with respect to approved billable labor rates.

Bottom line was to hire someone at the lowest salary possible (say $30,000), bill the Government at the agreed upon fully burdened rate (say $150,000) and pocket the delta. It's a scam.

The person actually doing the work should be one who is compensated. They are always playing around with the numbers. It was a publically traded company so targets and metrics were critical, but the numbers could be easily manipulated.

Steven Pearlstein: That's pretty interesting. Why don't you send me a personal email from your home computer, and we can discuss this further. That, also, might make for a pretty good column.

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New York: One thing I don't understand is why people want to force mutual fund companies to reveal how they voted their proxies. If anything, I would think that secret ballots would make it easier for mutual funds to attack management. Making the votes public allows company managements to see which mutual funds are supporting them (and thus reward them with pension business, etc). Any thoughts?

Steven Pearlstein: Well, that's a good theory. But the way it has worked out is quite different -- mutual funds either don't vote, or vote for management. So, as a second best solution, reformers have come up with the idea that they should at least be up-front about their voting with their own customers. The unwanted result is that, by the same process, they also have to reveal themselves to the companies in whose affairs they are participating. My own feeling is that that is a tradeoff worth making.

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Rockville, Md.: Doesn't the tendency of today's CEO's and boards to blame Sarbanes-Oxley for hindering their ability to run a success business in reality show their inability to successfully run a corporation? To me, this is like Joe Gibbs saying he can't win a football game unless his players are allowed to rough up the opposing team's quarterback after he had thrown the ball. Every year the rules change, you still have to abide by them.

Steven Pearlstein: You know, its become instinctive with them at this point. They equate any infringement on their freedom of action as being bad for business. Maybe that's just a natural human tendency -- after all, most of us think of ourselves as pretty competent, good people who will do the right thing without having the government tell us what to do or looking over our shoulder. And if you are a corporate CEO, with a huge ego and with everyone always bowing and scraping before you, this is probably an even stronger tendency. So its just the thing to complain about when you're in Washington for some reason or at the spring meeting of the Business Roundtable. It gives the Washington offices of the busienss organizations something to do, and the think tanks something to chew over. The result is that what may start out as an annoyance, or a minor new cost, or something that impacts decisions at the margin, all of a sudden gets transformed into GREAT THREAT TO AMERICAN CAPITALISM AND LIFE AS WE KNOW IT. I think one of the things a columnist can do is to put these things in perspective.

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Burke, Va.: Could Hedge Fund Reglation in Britain be a feature rather than a bug? Personally if I were investing in something I'd like some regulation.

Steven Pearlstein: Yes, that's the idea behind Sarbanes Oxley, remember. To RESTORE investor confidence after the egregious corporate misdeeds of the late 90s. Sometimes people forget that now, as if investor confidence was never threatened. It was, which was why the corporate types in the end had to support the legislation. They hated it from the beginning, but they hated the fall in their share prices even more.

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Steven Pearlstein: Thanks, folks. I may be out of town next week, but should be back on line in two weeks.

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