Reforming Corporate America

Barney Frank has hit on something that will absolutely resonate with the American public: skyrocketing CEO salaries. It is unconscionable that CEO pay rises no matter a company's performance, that 10% of employer profits are larded upon the top 5 executives at the average US company, and that shareholders have absolutely no say in the matter.

Well, Barney Frank is doing something about it, and we should support him. It's H.R. 4291, known as the Protection Against Executive Compensation Abuse Act:

In response to public revulsion over the astronomical pay packages awarded to some CEOs, a House Democrat introduced legislation Thursday that would force companies to let their shareholders vote on executive compensation.

"This bill does not dictate pay levels for corporations," he said. "It sets rules for public corporations about how to go about things."

There's certainly abuse in the CEO spoils system. I'm sure the counter-argument will be that CEOs make money for their shareholders, so who cares what they get. Well, of course, the problem is that CEOs DON'T always make money for their shareholders, but they get theirs anyway:

Nell Minow, editor of The Corporate Library, a corporate governance watchdog group, praised the bill. "What's sexy about this legislation is that for the first time, it gives shareholders some veto power," she said. "If you look at people whose pay is in the stratosphere, they are movie stars, rock stars, athletes, investment bankers and CEOs.

"One of these things is not like the other. The first four are paid for their performance. Why is it that CEOs are the only ones who have absurd contracts? They're not negotiated in arm's-length transactions."

So how does this legislation work? Basically, it simply gives shareholders a window into the process, and casts sunshine on the rewards CEOs receive:

Frank's proposed legislation calls for large public corporations to include detailed summaries of CEO pay contracts in the annual proxy statements sent to shareholders. Shareholders would then have to approve those contracts. The summaries would include:

• Full disclosure of compensation, including extra goodies such as pensions, personal use of company jets, apartments and other now-hidden compensation. This proposal came in response to the revelation two years ago that former General Electric CEO Jack Welch had been granted a generous farewell package upon his retirement. The SEC sanctioned GE for not fully disclosing the details of Welch's deal.

• Full disclosure of golden-parachute agreements. Frank criticized the $153 million payout awarded to James Kilts, former CEO of Gillette, who received the windfall after selling Gillette to Procter & Gamble.

• Disclosure of the corporate policy for recapturing incentive pay awarded for faulty financial results. Frank said this portion of his proposal was designed to force CEOs to give back any bonus payments they received for hitting their numbers in a particular quarter if the results that quarter subsequently had to be restated.

Public sentiment is sharply against such abuses, and they'd be even more strongly in opposition if they had the kind of information this bill would require. This LA Times article shows that Frank's strategy is good policy and good politics:

In introducing the legislation, Frank said that executive pay took an increasing bite out of shareholder returns but often bore little relation to a company's financial performance.

He cited a study showing that in 2003 the top five executives at each U.S. public company received compensation that on average amounted to 10.3% of their employer's profit, up from 4.8% in 1993.

"This is not an assault on corporate America," Frank said, acknowledging that his measure would face strong opposition from business. "It empowers stockholders to get a handle on pay. This is all about enlightened self-interest. We're telling companies you have to do a better job. But we are not prescribing a particular solution."[...]

In 1980, the average CEO earned about 42 times the pay of the average worker, but now CEOs earn about 431 times what the average worker does, according to the AFL-CIO.

And pay is rising at a rapid clip.

The average CEO took home a 91% raise in 2004, according to Corporate Library, even as workers got raises amounting to less than 4% on average.

The bill is co-sponsored by Reps. George Miller (D-Martinez) and Martin Sabo (D-Minn.). If the measure survives the committee process, Frank is hopeful of a full House vote next year, when members of Congress will be seeking reelection.

"I think this could be an election issue," he said.

I think any Reform Democrat that believes in accountability, ethics and oversight should proudly stand with Rep. Frank on this legislation. As for those who stand against it, this is their pathetic response:

The Business Roundtable, a lobbying group for large companies, said it would oppose the measure — although spokeswoman Tita Freeman said it hadn't reviewed the proposal carefully enough to articulate why.

We're against it. We can't tell you WHY we're against it, but we're against it. Actually, if we did tell you why, the answer would be "because CEOs like their jets and their golden parachutes and their baths of cash." But that night not play well.

The great thing about this bill is the frame of protecting SHAREHOLDERS. The investor class has broadened over the years, and Democrats need to show that they are looking out for the interests of the aspirational class of (frequently) suburbanites. This good government bill allows the mass of investors to have a place at the table, and if instituted, I think, this will stimulate economic growth by passing salary packages down into R&D or, perish the thought, the rank and file.

Let's get behind this proposal by trying to get it out of committee. Forcing a full House vote on it in 2006 is crucial. The bill is coming to the House Committee on Financial Services, a huge committee (72 members) chaired by Michael Oxley of Ohio. There are a few moderates on that committee, and if we get enough we can get this to the floor.