With the increase in hedge fund activism, a growing array of corporations and corporate activity are coming under pressure. No aspect of corporate decision making, not even M&A and corporate strategy appear insulated from activists’ reach. However, amid the growing activist voice, little attention has been directed on broader corporate governance issues such as the upward spiral of CEO compensation.
In 1965, the ratio of CEO pay to that of the typical worker was 20:1. Now it’s 300:1. Between 1979 and 2011, productivity rose by 75 percent, but median pay rose by just 5 percent, yet from 1978 to 2013, CEO pay rose by a mind-boggling 937 percent.
Nancy Koehn, a Harvard researcher writing in the Washington Post said,“they [CEOs in the post war era] drew their public legitimacy by orchestrating national prosperity.” But then something changed. In the 1980s and ’90s CEOS became celebrities. Steve Jobs and Lou Gerstner were revered as saviors. In 1992 Ted Turner was Time’s Man of the Year, first CEO to win that accolade since 1955. In 1999 Jeff Bezos was Time’s Person of the Year. Koehn cites the “Great Man” theory as partial explanation for the current state of executive compensation. She notes that examining the top decile of the top one percent of income distribution between 2000 and 2010 shows that between 60 and 70 percent of those earners were top corporate managers — not celebrities or athletes.
Dodd-Frank and other regulations have attempted to create more transparency on compensation practices in order to discourage lavish compensation through, in effect, public shaming.
“I don’t think those folks are particularly ashamed,” observes Regina Olshan, head of the executive compensation practice at Skadden Arps. “If they are getting paid, they feel they deserve those amounts. And if they are on the board, they feel like they are paying competitively to attract talent.”
Ironically, CEO pay is criticized using much of the same logic that is levied against activist hedge funds: “CEO capitalism creates incentives for executives to favor policies — reducing jobs or research and development — that boost stock prices for a few years at the expense of long-term growth. How much of this is a real problem as opposed to a rhetorical debating point is unclear. But the contrast between executives’ rich rewards and the economy’s plodding performance suggests why CEOs have become political punching bags.”
For whatever reason, hedge funds have not been punching that bag.
Perhaps CEO compensation should be studied more closely by the capital markets. In a purely unscientific exercise, I compared the 50 names on Goldman Sachs’ “Very Important Short Positions” list to Equilar’s list of the 200 highest paid CEOs. The correlation is remarkable.
From the GS list of most shorted companies by hedge funds, here’s how many are also on the list of highest paid CEOs:
- 8 of the top 10
- 17 of the top 20
- 25 of the top 30
- 29 of the top 40
- 35 of the top 50
That appears to be more than coincidence. Hedge funds need to look more holistically at issues of corporate governance and spark a national discussion in the press and in the boardroom about the relationship between corporations and shareholders. For every lightning rod topic like share buybacks and every proxy battle over board membership there are important governance issues such overpaying for performance and unfair dual share structures that are not getting enough attention.
Are banks “un-PR-able?” In the wake of Lehman, subprime, AIG, TARP, TBTF, feasting at the discount window, Libor and the London Whale (the list could go on and on), the answer is probably yes. The complexity of financial products and the scope of the large banks’ operations means that it is not a question of if another scandal will emerge, it’s a question of when. From standpoint of reputation, there is no way to effectively assess and mitigate the multiple risks inherent to global banks.
So what’s a PR guy at [insert name of global investment bank] to do?
Lucas van Praag, former head of corporate communications at Goldman Sachs recently spoke with PR Week about the options. He suggests says that banks need to fight off the instinct to withdraw into the bunker and just focus on corporate social responsibility initiatives. “CSR is important, but [banks] shouldn’t rely on it to repair reputation,” he tells PR Week. Explaining, Goldman’s sometimes confrontational media strategy, van Praag explained that the common link between the firm’s key audiences, including shareholders and regulators, was that “all got most of their information from the media,” meaning that a do-nothing approach was out of the question for Goldman. He goes on to say that “culture is driven from the very top. Banks need to take the initiative to reset the moral compass, and do it often.” The Financial Times echoes this in a recent column, but was more direct, saying it might be “necessary to retire this flawed generation of [bank] leaders.”
Clearly, not all banks have the stomach to spar with media like Goldman once did. In the November 16 issue of Levick Weekly, Candi Wolff, EVP Global Government Affairs at Citi, suggests that the image of banks it tied to the economy and because people believe that banks caused the recession, they will forgive and forget when things improve. “As the economy improves, I think you’ll see an automatic rise in confidence or at least support for banks,” she states. Citi appears to be keeping its head down and focusing on basics. A couple of years ago, it was among the first financial institutions to begin blogging in order to communicate directly with constituents, so it gets the CSR thing, but, for now, is content to play defense. Perhaps the new CEO will change that.
So who is right? I don’t think there is much choice to for banks to play defense and, frankly, pray. Van Praag calls for “structural, operational, and cultural change,” but other than what is mandated by Dodd-Frank and other regulation, change will be slow. Banks simply don’t know when and where the next crisis will hit. How can one realistically take on the skeptics in the media if one doesn’t know what self-inflicted problem is lurking around the corner?
Glencore’s pending IPO has generated much speculation about how the firm will stand up to the scrutiny of life as a public company. However, two more common names are also making headlines for their IR/PR and they demonstrate different approaches to managing reputation under the glare of the spotlight. First up, Google. Investors and analysts were miffed after CEO Larry Page spent only three minutes on the company’s recent earnings call and did not participate in Q&A. Unconventional, but remember that Google is the same company that did its IPO via dutch auction and deprived Wall Street banks of millions in guaranteed fees. Google has never given earnings guidance and its “Owner’s Manual for Google Shareholders” states that Google is “not a conventional company [and doesn’t] intend to become one.” The challenge of IR is getting Wall Street to buy into the long-term vision, especially in times, like now for GOOG, when the short-term expectations of investors are not being met. GOOG trades around $525, so most are trusting Page’s vision thing. But, Therese Poletti at MarketWatch wonders if the “company still merits its unconventional stance toward Wall Street.”
While Google seemingly thumbs its nose at the conventional way of doing things, Goldman Sachs is sitting on its thumbs and other fingers as it tries to convince the world that it is the kindler, gentler vampire squid. Andrew Sorkin of the New York Times is bewildered by Goldman’s continuing spin about their mortgage market investments and hedges during the housing meltdown. “Goldman Sachs did not take a large directional ‘bet’ against the U.S. housing market,” said Goldman last year. For some, that doesn’t square with the fact that it was $3.8 billion short the housing market and $3.3 billion long housing market in 2007. Sorkin says Goldman should stop tap dancing and “be proud of its prescient call about housing. It was better for its shareholders, and frankly better for the taxpayers, that the firm was smart enough to short the mortgage market.”
Goldman also downplays trading in its latest earnings news release. In fact the word “trading” does not appear in the news release and related materials for Goldman’s Q1 earnings announced on April 19. I repeat, no mention of trading. CNBC points out that last year, the announcement mentioned “trading” nine times and in 2006, “trading” popped up 11 times in one quarter. Truth is in Q1, Goldman’s equities and fixed income traders hauled in more than $2 billion in revenue. Not bad for the business no one wants to talk about.
As it deals with media and investors and uncomfortable truths, will Glencore emulate Goldman and play by the rules but try to keep the truth obscured by sleight of hand? Or will it follow Google and give a more decipherable, perhaps Swiss, hand gesture to those who want transparency about their business? Hang loose, we’ll find out soon enough.
Glencore, a Swiss commodities trading firm, is poised to announce an IPO according to an feature story by Reuters. The IPO could yield $16 billion, valuing the little-known firm at $60 billion. By comparison, Goldman Sachs raised $3.6 billion in its IPO in 1999, giving it a $33 billion valuation at the time.
But the potential comparisons with Goldman might not end with dollars and cents. While Glencore, no doubt, wants permanent capital from a public listing, but is it ready for the public expectations that comewith going public? Goldman, a private partnership like Glencore before its IPO has had a mixed record in dealing with government, media, and public scrutiny. Now, it publishes a Code of Business Ethics, has a report from its Business Standards Committee, and a year ago hired a communications strategy firm with roots in the Bush administration. These are things that companies are forced to do to manage expectations of diverse stakeholders, not things an investment bank with a culture of privacy elect to do.
Glencore should look to Goldman as a cautionary tale. And it might have even more to want to keep away from prying eyes. As a buyer, transporter, warehouser, and seller of physical commodities, Glencore operates in some of the world’s most risky and controversial areas: Congo, Sierra Leone, Zibabwe, Kazakhstan, Zambia, Colombia, and the list goes on.
Then there’s the money. Gelncore’s traders are paid extremely well, even by Wall Street standards. Known for its trading prowess and keen market intelligence the firm has a reputation for shrewd dealings. A source in the Reuters story said, “We all know Glencore never leaves any crumbs on the table.” To boot, the company was founded by Marc Rich, who lived as a fugitive for 17 years until he was pardoned by President Clinton. The combination must be irresistible to enterprising journalists and environmental and human rights activists.
So, is Glencore ready? What do you think? Here’s what the firm told Reuters in response to inquiries for the story linked above: “Glencore is a private company and our communications policy with the media reflects this status.”