CEO greed at its worse…a disgusting examination of who we really work for

January 23, 2009 · Posted in Featured, Finance, Financial Crisis, Government, People in the news, Personal Blogs, Politics, Rant, Social Change, Society, Things to think about, Thoughts on the economy · 1 Comment 

The news is ghastly and literally makes you sick to your stomach.   Once again, a large corporate CEO has been exposed and details are coming forward concerning John Thain.  Thain is the recently ousted chief exec at Merrill Lynch after news of his extravagant spending has come to light.   We need people to lead and companies need quality CEOs to guide the culture and direction of its employees, but this is grounds for a free range turkey shoot.

I don’t know how to react to this but I’m almost forced to pull at heart strings because I don’t know how our system will change.  If you analyze what this man did and what potential repercussions it has on other people, it is completely and utterly criminal.  I mean in the same category as a masked gunman robbing a bank, robbing an elderly couple on the street, or simply robbing hard working human beings of their dignity.

He’s not the only one who has plundered corporate finances on meaningless and material objects.   Dennis Kozlowski, former CEO of Tyco, was jailed for his elaborate spending.  He once arranged a birthday party for his wife in a tropical location, hired Jimmy Buffet to perform, had a fountain with flowing vodka, waiters dressed in togas, and had a life size cake of his wife made with exploding candy breasts, no kidding.  He used company money.  At times, the stories are humorous but only so if the economy is good and people have jobs.

Considering the economic struggles of Americans right now – this hits home with me.  It hits home with me because my family has been impacted by the economy and we’ve been impacted by health issues.  This is not a sob story or an attempt to make someone feel sorry for another person, but rather a look at how this man’s actions actually have a trickle down effect to others – as if he actually pulled out the financial rug himself.

Here is a lay out of what he did and theoretically how it impacts the rest of us paupers:

Hires White House decorator guru Michael  Smith to decorate his corporate office at $800,000, which is about the same as sixteen Merrill Lynch analysts making $50,000 who were laid off when ML announced a 10% workforce reduction in 2008.

Area rugs valued at $131,000, which is roughly the value of a first time home for a young family which are now left with a mortgage payment and no income.

Guests chairs valued at $87,000, which equates to the salary of a highly skilled network administrator losing his IT job.

Wall sconces at $2700, which equates to about six months of the average COBRA payments for a laid off worker who has no other health coverage.

A credenza valued at $68,000 – another salaried employee – gone.

A $1400 trash can – again another mortgage payment- gone.

Do not forgot the $4 billion in executive bonuses which he paid out as Merrill Lynch was being purchased by Bank of America.    This was billions (billions!) of dollars handed out to individuals who didn’t even have the leadership capability to keep ML afloat.   BofA has just recently received $25 billion in bailout funds just prior to the take over of Merrill Lynch.  Thank god our government stepped in and helped with the financial burden caused by that huge ass $13,000 chandelier hanging in Thain’s office !

This rant could go on and on.  The damage has been done and it is most likely Thain will get a nice pension payout from BofA execs under the table unless it becomes public news – which if he does – it will.   If he does- it may be time for me to run naked down the street because apparently you can get away with anything in this country.  Hopefully, it does not happen and the man slithers back into his life outside of his corporate crime spree.   It’s nothing more than a crime spree considering Merrill Lynch was a sinking ship and pink slips were being handed out.

A CEO is hired based on his or her credentials and seemingly a perfect fit for the organization –  so they are compensated nicely.   The problem is that the methodology of “salary” is relative to all employees within the company.  The assembly line worker making $40,000 still wants to be paid if the company does not do well.  The same goes for the CEO as they don’t want their value depreciated by a falling stock price just as much as the worker in the office.   Hell, if you had $40 or $50 billion in stock value – you’d probably not even wink at someone walking in with a chair valued at more than a car.  Board of Directors are creating invincible, highly compensated money churning robots with no regard for those people who hold very fragile roles within the framework of a corporation.   It’s a reality, we work in an At Will employment environment which is dictated by the behavior of the market.  Good market= jobs, bad market= layoffs.   But, can the spending be justified when employees are being escorted out the door, salaries are lost, and families forced to suffer a little bit until something better comes along?  Many people never get that second chance to recover, but this slimy pig will.

This irresponsible corporate spending is virtually untouched by any current laws governing corporate responsibility.    How does this type of criminal “free” spending not fall under any Sarbanes Oxley guidelines?  There is no accounting oversight even though , based on the books, this spending looks certified.    The legislation apparently only concerns itself with whether or not the spending is reported as “complete” and “accurate”.     I do not understand how the SEC can’t hold the power to freeze the payment for outlandish office decor – is this not considered a “large” or “unusual” payment?

A road warrior consultant can’t spend over $30 on an out of town dinner, but John Thain can do this.

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The Biggest Joke in Corporate America

October 23, 2008 · Posted in Big Business Ripoffs, Political Issues, Things to think about · 5 Comments 

In theory the Board of Directors of a corporation is supposed to look out for the shareholders, supposed to rein in excess risk taking, excessive executive compensation and act as a check on the strategic decision making of the executive managers.

In practice, this is the joke.  Unfortunately, it is not in the least bit funny.

As someone who believes in capitalism I have to point this out.  The system is not working.

An appointment to the Board of Directors of a publicly traded corporation is typically made through a nominating process over which the executive management has tremendous (and often times absolute) influence.

As a result of this, Board membership has become primarily a lucrative “side job” wherein directors offer little oversight lest they be seen by the CEO as a threat and thus excluded from the decision making process.  A director trying to promote a view different from that of the CEO is often handled much the way an opponent in a legislative body is – the CEO will work through the rest of the Board to isolate that member and ultimately to have him/her removed as soon as the term expires.

I have experience with Boards through my professional dealings – both from within corporations and as a shareholder who has participated in activist campaigns.  I can tell you from experience that this is the case.

What can we do about it?

I believe that free, working markets are the best means of allocating capital.  The key word in the last sentence is “working” markets.  For a market to work, the checks and balances within the system must work.

The Board of Directors is a critical check in the system and it is not working.

To make it work I believe that legislation at the national and state level must be enacted to do the following:

1) Change the nomination process for Boards of Directors.  The nomination process should be driven by shareholders through an independent director on the Board that has no affiliation with the company outside his / her role as independent director.  The executive management should not have influence over this process

2) State pension funds which control an enormous amount of capital and shares of American publicly traded companies must be compelled by their state legislatures to take a more active role in governance of the companies in which they invest the retirement savings of state public employees

3) Board members should be required to have a meaningful amount of their net worth in the Company over which they are governing.  If a director worth $100 million owns $1 million of stock in that company or, more likely, owns no stock outright and is on the Board with the intent of getting options as part of his/her package they have no “skin in the game”.

I think directors of major public corporations should be required to have 3-5% of their liquid net worth in the company on whose Board they serve.  A more meaningful level of “skin in the game” will make directors take their role as watchdog more seriously.

4) Bonuses to executives should be paid based on rolling multi-year performance of a company.  Paying a bonus based on one year of performance inserts to much randomness into the system.  Consider this, a mediocre CEO happens to be in the right business when some major trend develops or economic boom.  As a result the profits surge for a year or two.  The executive hires a consultant to justify an enormous paycheck based on this performance, which of course the executive takes credit for.  In fact, the performance was essentially random and had little to do with the executive if anything at all.  This is the problem with huge cash bonuses and stock options.  Executive compensation should be based on stock that an executive must hold for years after he/she leaves the position and a rolling multi-year performance criteria with respect to cash compensation.

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If you wanted to fix the big banks and help the little guy…

October 8, 2008 · Posted in Financial Crisis, Thoughts on the economy · Comment 

The government could cap interest rates on certain qualifying mortgages, namely those issued to the lowest income borrowers (not speculators) who actually live in their homes.  This would be accompanied by a trade-able tax credit issued to the bank for the loss in value on the mortgage.

In this way the plan would work as a targeted stimulus package with the stimulus targeted at those homeowners most in need while compensating the bank with a tax credit against future income.  To the extent the bank does not need that tax credit, it can sell it to a third party receiving cash and enhancing its capital.

A second program could be enacted on those lower quality mortgages the government acquires with the $700Bn bailout.

Assuming, as anticipated, that the mortgages are acquired at 65 cents on the dollar.  The government could offer certain targeted homeowners an incentive.  The rate will be lowered and capped as indicated above.  The mortgage will be restructured into a two tranche mortgage.  If the homeowner pays the interest on tranche 1 (80% of the mortgage value) and lives in the home for some period of time (say 5-7 years), tranche 2 (20% of the mortgage is forgiven).  I would open the program up to folks who are currently renting, but would be interested in occupying some of the excess housing stock on these terms.

This is a win-win-win (for the banks, homeowners who are not in financial distress but constrained by loss of value in their home, and homeowners in jeopardy) because you provide a major incentive to take the excess supply of homes off the market thus allowing the housing market to price homes at levels that do not reflect significant overhang.

It would be ideal if States would help by reducing / eliminating property taxes only on homes included in the programs above for some period of time, say 3- 5 years.  The idea behind this is that the worst thing for our economy is to let the hangover of excess supply in houses cause significant further deterioration in home prices.  By getting families in these houses with incentive to make payments the States would benefit long term because there would be someone with a vested interest in continuing to own that home and thus pay property taxes.  Allowing them to get their “feet under them” and get established in the home through a property tax holiday really would not cost the State, because consider that abandoned or foreclosed homes will not likely pay the tax anyway.  So unless the States want an inventory of homes to dispose of this makes sense and helps to establish future tax paying citizens.

These two programs would help the individuals that need the most help, help a lot of individuals that would otherwise like to get into a home but are locked out of the current mortgage market, help specifically those banks in the most trouble and help the economy as a whole.

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