Wednesday, March 6, 2013

Mad as Hell and Not Going to Take This Anymore

Joe and I have a lot of fun when we are on the opposite side of an issue, and he anticipated my response to his blog today, sending it to me with the subject: perhaps we'll have another debate?  Yes, I think we will.  Look for an alternate view this Friday.  



Just like Howard Beale in Network, the Swiss voters overwhelming passed legislation requiring shareholder approval on all executive and director compensation. Additionally, they banned golden handshakes and parachute severance arrangements. The law goes beyond shareholder say on pay (SOP) rules in other countries, including our own Dodd Frank nonbinding SOP rules.

My initial reaction was to dismiss it as typical European socialism. Upon further reflection, I think it suggests something deeper may be happening. It reflects a justifiable voter frustration over weak corporate governance allowing seemingly incompetent managers to be unjustly rewarded. They may have used the wrong tool, but they have identified the right problem; namely the poor state of corporate governance at many large public firms.

The close knit world of executives, directors and professionals has neutered governance at many firms. The executives nominate the directors and chose the consultants who recommend the compensation programs. External control from activist shareholders and takeover threats has been weakened by legal developments including, inter alia, poison pills and staggered boards. Large institutional shareholders prefer to vote with their feet rather than make waves. Things have to get really bad before any actions are taken.

The result is the perception of corporate looting-or if you prefer a softer tem-rent seeking by executives. This includes both executive compensation and value destructive misguided M&A e.g. HP.The Swiss voters may be signaling a non market response to a perceived market failure. A governance revolution may be developing from outside the system. Executives, Directors and Professionals- ignore this at your peril. The citizens are getting mad as hell and are not going to take this anymore.


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