When is "Too Much" Really Too Much?

Last week, I cheered for some Catholic nuns who are pressing Goldman Sachs on the issue of compensation excesses. The "how much is too much" issue seems to be gaining attention, although not enough.

In yesterday's New York Times, columnist Gretchen Morgenson interviewed a Texas money manager who argues that "you don't have to pay nosebleed compensation to attract good people."

The money manager, Albert Meyer, is a former professor of accounting and skilled at ferreting out the nuggets buried in proxy statements. Excessive compensation is a "red flag", he says: "Does the company exist for the benefit of shareholders or insiders?"

And stock-based compensation -- heralded by many as a way to ensure that executives work harder for their shareholders -- receives particular scorn: "Stock-based compensation plans are often nothing more than legalized front-running, insider trading and stock-watering all wrapped up in one package."

Mr. Meyer's money management firm ends up investing in many international companies whose corporate governance is "more respectful of shareholders" (Ms. Morgenson's phrase) than most American companies. Mr. Meyer is committed to doing the best possible job for his clients' capital, of course, but there is a significant social ethics component to his thinking too:

Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs.... There has been a massive wealth transfer from middle-class America's retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny.

Want an example of that wealth transfer? Turn to today's Times, and a David Carr article on Gannett.

Since I'm a journalism junkie, you don't have to tell me that running a business that has (among other properties) more than 80 small-city dailies (plus its iconic USA Today) is going to have trouble dealing with a major recession, declining circulation everywhere, and an advertising flight. Given that, you might say that CEO Craig Dubow has done a pretty good job: revenues down last year only marginally, operating cash flow up, debt down.

As Carr writes,

That's a testament to what the Street would call "aggressive cost management." But out in the rest of the world, we know that generally means dumping bodies overboard, and Gannett is a high achiever when it comes to downsizing. In the five years that Mr. Dubow has run the company, its work force has gone from 52,000 employees to just over 32,000.

Most of its employees are nonunion, so the leadership is free to manage as it sees fit, including telling some people their careers are over and telling the people that remain not to come to work.

Those Gannett employees who work for the community-news division, for example, will be taking a full week of (unpaid) furlough again this year. Lest they think that executives not be empathetic to their situation, they were told that the senior executives would each "be taking a reduction of salary that is equivalent to a week's furlough."

We may begin by musing whether a CEO is as likely to be living paycheck-to-paycheck as his lower-level employees.

And then there's the matter of the cash bonus of $1.75 million that Mr. Dubow received in 2010. Not to mention stock, options, and deferred compensation. Yeah, he's really going to have to cut back.

Carr notes that

In fact, the top six executives at the embattled publishing company would receive 2010 compensation packages of more than $28 million if the company does very well, which seems unlikely, but the symbolism remains.

The savings from two years of mandatory furloughs for the rest of Gannett employees: $33 million. Well, that didn't go very far, did it?

As one blogger on the Gannett Blog wrote, "Who says charity doesn't begin at home?"

Once again, we're seeing the rank-and-file getting screwed while the top 1% chuckle all the way to the bank. Why is there no more outrage? Could it be because we have systematically seen unions bashed and broken? Who is left who will speak for the employees? Or are we all going to buy into the plutocratic theory that if you're poor, it's your own damn fault?

Transocean Executives to Donate Meager Portion of Unearned Bonuses

Can you spell "insensitive"? Sure you can.

How about "insufficient"?

Consider this headline: "Transocean Executives to Donate Bonuses".

How generous, you may think. If you've forgotten, it was Transocean that owned the Deepwater Horizon rig that exploded last April in the Macondo area of the Gulf of Mexico; eleven rig workers died in the accident. The bonuses will go to a fund established for the victims' families.

Wait a minute: bonuses? What are the bonuses for? Among other things, for "the best year in safety performance in our company's history." (click here for Forbes's Jeff McMahon's take on this)

Transocean has since allowed that the wording of their announcement was "insensitive". I can think of other adjectives.

The remainder of the bonuses awarded appear to be for additional work ... responding to the Deepwater Horizon disaster.

According to the Transocean annual report,

Many of our senior executive officers… dedicated a significant portion of their time in 2010 following the Macondo Incident to responding to the needs of the victims’ families, coordinating the involvement of additional resources required to stem the flow of hydrocarbons, including drilling rigs and personnel to drill relief wells and other operations as requested by the Unified Area Command, cooperating with the numerous federal, state, and local reviews and investigations into the incident, overseeing our internal investigation of the incident, and managing other demands stemming from these activities, in addition to performing their normal responsibilities.

And this means that these executives are due additional compensation?!? And it was an "Incident"?!?

The headline I quoted above is from today's Wall Street Journal (click here for Dionne Searcy's article; note that most is behind a pay wall). In the article, Searcy reports that while the five senior executives are donating their safety bonuses, the total sum dontated ($250,000) represents slightly more than one-quarter of their overall bonuses.

I think mine is a more accurate headline: "Transocean Executives to Donate Meager Portion of Unearned Bonuses".

Goldman Shareholders: Please Vote with the Nuns

Who would you trust when it comes to deciding what "God's work" involves: senior bankers at Goldman Sachs or four orders of Catholic nuns?

Me, too.

The nuns (Sisters of Saint Joseph of Boston, Sisters of Notre Dame de Namur, the Sisters of Saint Francis of Philadelphia, and the Benedictine Sisters of Mount Angel) have prepared a shareholder proposal to be presented at Goldman Sachs' annual general meeting next month that asks the bank's compensation committee to review whether "senior executive compensation packages (including, but not limited to, options, benefits, perks, loans and retirement agreements) are 'excessive' and should be modified."

The five most senior executives at Goldman received $69.5 million in pay last year, despite a 38% drop in annual earnings and an essentially unchanged share price.

The nuns also ask the compensation committee to explore "how sizeable layoffs and the level of pay of our lowest paid workers impact senior executive pay." (click here for Alex Hawkes' article in The Guardian; here for Katya Wachtel's Business Insider piece)

The nuns, together with the Nathan Cummings Foundation, are Goldman shareholders. While individual nuns take vows of poverty, orders of sisters may have investable funds. The nuns, of course, have a fiduciary responsibility to see that those funds are well- and wisely-invested. They also have a moral obligation to speak out when they believe funds are being unwisely spent. And they understand that compensation is not just a financial issue, but a moral one.

Goldman's chief executive officer, Lloyd Blankfein, famously said in 2009 that the bank was doing "God's work" (click here for my post on that comment and others like it); the nuns seem to disagree.

Goldman, in the SEC filing that revealed the nuns' proposal, urged its shareholders to vote against the request, as "the preparation of the requested report would be a distraction to our compensation committee and our board, [and] would entail an unjustified cost to our firm..."

Apparently, they're not concerned that their pay packages might be an "unjustified cost".

A New Definition of "Chump Change"

It might be nice to think of $3 million as "chump change", but I doubt that I'll ever be able to do that.

The question is, Is it ever worth profoundly damaging your reputation (at the very least) or risking massive fines and jail time (at the worst) for chump change?

Martha Stewart, please pick up the phone.

News broke Wednesday that David Sokol, "heir apparent" to Warren Buffett's Berkshire Hathaway, had bought shares in a company that he then encouraged Berkshire Hathaway to acquire. It sounds an awful lot like insider trading, but Mr. Sokol (and Mr. Buffett) insist that he did nothing wrong.

Mr. Sokol has resigned from Berkshire Hathaway, and, according to today's New York Times, the SEC is investigating (full story here).

From a timeline prepared by Reuters, it's not clear that Mr. Sokol actually broke the law. He did make a profit of at least $3 million which would be a rich reward to most of us, but is likely only chump change to Mr. Sokol, who has earned many times that amount in the last three years as chairman of MidAmerican Energy, a subsidiary of Berkshire Hathaway. Would it be worth risking everything for such a (relatively) small amount?

Even if the investigation proves that Mr. Sokol's actions in buying Lubrizol shares only days before recommending the acquisition to Berkshire Hathaway were not illegal, the appearance of his action is bad; the ethics is certainly shaky; and the best one can say for it is, Stupid stupid stupid. So if it's not a trifecta of illegal, immoral, and dumb, it's definitely a two-fer.

Actually, I find Mr. Buffett's behavior a little more puzzling than Mr. Sokol's. According to the timeline, in mid-January, "Sokol suggests buying Lubrizol to Buffett, with a 'passing remark' that he owned some stock in the company."

Despite the fact that Mr. Buffett was apparently not interested in acquiring Lubrizol at the time (again, per the timeline), wouldn't you have expected him to ask some questions?

As reported in today's Times "Dealbook" (full story here),

At that point, most corporate chieftains would have asked questions, directed the executive to seek legal advice or even put the idea of a deal on ice, experts said. But Mr. Buffett did none of those things — even though his company, Berkshire Hathaway, like most large companies, has policies that restrict employees from using or sharing confidential information for “stock trading purposes.”

“It just seems odd to me that it didn’t throw up some red flags,” said Greggory Warren, a senior stock analyst at Morningstar. “As much as they don’t like to have their hands in what managers are doing, there are occasions like this where they have to.”

Mr. Buffett assumed that Mr. Sokol had held the stock for years, not days, which would make the timing of the deal less suspicious. “It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings,” Mr. Buffett said in a statement on Wednesday announcing Mr. Sokol’s resignation.

Well, that seems a little disingenuous, doesn't it? Why would Mr. Buffett have simply "assumed" that Mr. Sokol had held the stock for years? Particularly when Mr. Buffett has for so long built and protected his company's reputation for ethical dealing.

Mr. Buffett seems to understand just how quickly a carefully-developed reputation can be undone; "Dealbook" also reported that in a July 2010 letter Mr. Buffett had told his managers to guard the company's reputation "zealously".

Mr. Buffett is quoted as saying, "We can afford to lose money — even a lot of money. But we can’t afford to lose reputation — even a shred of reputation."

Prescient words, unfortunately.