SRI Notes

Strong Study on Executive Pay

Jeff makes the point that when you see one of these corporate disasters, there's usually an executive pay issue lurking in the background. If I had to pick one indicator of the strength of a company's corporate governance, it would be executive pay, simply because it's where the temptation is greatest.

For many years Graef Crystal was a voice in the wilderness on this issue, but now mainstream academics are documenting some of his claims. In November Lucian Bebchuk of Harvard Law School and Jesse Fried of Boalt published a book version of their academic work on executive pay. Like Crystal, they find that levels of executive pay don't correlate with observable measures of performance. They also find a trend of rising pay as a percentage of earnings: They calculate the top five executives at the average company got pay equal to 4.8% of earnings in 1993-1995. By 2001-2003 that figure had more than doubled, to 10.3%.

They have also written a paper criticizing Raines's pay at Fannie Mae. Since Fannnie Mae is a large holding for social investors (#22 in the Domini Fund, #7 in KLD Social Select), this should be more than a passing concern.

I'm voting proxies at the moment and see plenty of resolutions on executive pay, but they usually have significant flaws. Many are overly prescriptive or punitive, others would be easily circumvented. Governance experts and social investors need a better plan for dealing with this important issue.

The Christian Science Monitor has an interesting article on this, including some commentary on Calvert's recent initiatives, here.

Graef Crystal Back Online

In the early days of The Internet, Graef "Bud" Crystal had an excellent website covering executive compensation issues.  Then he joined Bloomberg as a columnist and the website disappeared.  But Bloomberg now makes his columns available online.

If you are interested in executive compensation, you could not ask for a better teacher than Crystal.  He does two things most journalists can't or won't do:  he does the math (correctly, I might add), and he names names.  He doesn't offer you the opinion that CEOs make too much - he tells you who he thinks makes too much, and why he thinks it.

I do have methodological quibbles with some of his work, usually over the time horizons and benchmarks he uses.  He likes to evaluate the performance of a company's stock vs. the S&P 500 over a one-year period.  I'd rather he used a sector index and  a longer time period (three years?).

Another quibble:  In today's column he argues that broad stock option ownership has not been associated with great returns the past three years.  Not surprising, since the tech sector was a disappointment during that period.  But what about the previous 20 years?  Without those broad stock option programs, Silicon Valley (and all the wealth it created) probably would not exist.  And the benefits to society - cheap computing, better cancer drugs, free blogging software - would probably still be waiting to be invented...

The Economist also had an excellent review of executive pay last year.