Thursday, October 30, 2008

Executive Compensation and Bad Shareholders

I was speaking at a client seminar yesterday and the topic of executive compensation came up. The crowd was older and not that sophisticated in terms of investment knowledge. They were very well dressed, though. The general tone from the audience was that both Wall Street and Washington are to blame for our current problems, and that both are motivated by self-interest.

Whether that is true or not, in my opinion or anybody else's, is not germane to the next few paragraphs. My question is this: If you are in favor of limiting executive compensation, bonuses, stock grants and golden parachutes, who do you want to do the analysis and implementation?

I for one do not want the government to control executive pay of companies in which I invest, although having some limits in the case of companies that participate in the TARP plan is OK with me.

I have two ideas:

1. There is already an entity that is supposed to be doing this. It is called the Board of Directors, who are elected by the shareholders to represent the interests of said shareholders. The Board approved every major pay package and golden parachute. Let’s stop giving them a free pass.

In the same seminar, a disenfranchised-shareholder-type asked me what she should do when she receives the proxy materials in the mail. I wish I hadn’t but I told her that by owning the stock, she was effectively voting with management so if she wasn’t willing to sell the stock she might as well vote with management. That was stupid of me.

2. If you own stock in a company, and the Board is approving decisions you don’t like, DO SOMETHING. Vote no. Write in Fred Flintstone’s name as a Director. Send a letter to the current Board or a newspaper. Go to the annual meeting and ask the hard question.

We need better Boards and better shareholders.

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