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Paulson Demands Too Little from Banks on Exec Pay

Treasury Secretary Hank Paulson, appearing on CNBC last week, seemed proud of the fact that the CEOs of the nation's nine largest banks agreed to restrictions on golden parachutes, salaries and bonuses in return for a massive, $125 billion taxpayer infusion.

I mean, some of these guys nearly wrecked the global financial system with reckless gambling on products they barely understood and "agreed" to cut back on their already bloated pay packages? How generous of them.

This is akin to giving the Titanic's owner, White Star Line Managing Director Joseph Ismay, a commendation for driving the ship so fast on its maiden voyage that it slammed into an iceberg and sank, claiming 1,500 passengers.

Ismay, of course, escaped on his own lifeboat and survived, unlike his captain, Edward John Smith, who went down with the ship. In corporate America these days, there are far too few Smiths and far too many Ismays.

One reason that Paulson may have gotten the banks to agree to the restrictions is that they do very little to actually restrict compensation. It only covers the CEO, the CFO and the next three most highly compensated executive officers.

This means that other highly paid executives aren't covered, such as Joseph Cassano, the head of AIG’s Financial Products unit who made $280 million in the last eight years writing credit default swaps that caused AIG's collapse, according to Congressional testimony this month.

And according to the Wall Street Journal, Peter Kraus, the head of strategy at Merrill Lynch for only two months, is leaving his firm with a $10 million bonus, even though Merrill's failed strategy led to its takeover by Bank of America, which accepted $25 billion from the Feds.

Additionally under Paulson's plan, golden parachutes are limited to three times an executive's average annual salary, so if the CEO made an average of $20 million a year, he or she could still take home $60 million in shareholder-paid severance.

Some restrictions!

This is what is wrong with corporate managements these days! It's heads I win, tails you lose when you get to the top, shareholders and employees be damned. Where are the non-existent boards? Out on shareholder-funded "pheasant hunts" perhaps?

This is what I aim to change with my new advocacy initiative, United Shareholders of America. We need better corporate governance in this country. We can't afford the kind of mismanagement that got us into a financial crisis that nearly caused an economic collapse.

Paulson's plan is a baby step in reforming executive pay but I have a better idea: why don't we give shareholders of any bank accepting a government bailout the immediate right to call a special shareholders meeting to elect new board members?

In my view, it was the boards of directors at institutions like Citigroup, Morgan Stanley and Merrill Lynch, Lehman Brothers, Bear Stearns, AIG and others that failed to stop management from pursuing risky strategies that crippled their firms.

In his latest book "Where Have All the Leaders Gone?," retired auto executive Lee Iacocca writes, "Am I the only guy in this country who’s fed up with what’s happening? Where the hell is our outrage? We should be screaming bloody murder!"

"Name me an industry leader who is thinking creatively about how we can restore our competitive edge in manufacturing," wrote Iacocca, adding, "The most famous business leaders are not the innovators but the guys in handcuffs."

I’m not saying I totally agree with Iacocca, because we do have some great business leaders in this country. But there is definitely too little shareholder outrage over self-serving executives who get massive paychecks for deeply flawed performances.

It was only after the threat of legal action that AIG, the collapsed insurance company that required $123 billion in federal loans, agreed last week to help recover millions of dollars in payments to its former CEO Martin Sullivan and to others, including Joseph Cassano, the head of the unit that caused massive losses at AIG.

But there are far too few of these clawbacks taking place.

Under pressure by New York Attorney General Andrew Cuomo, AIG also agreed to terminate some $10 million in severance payments to Stephen Bensinger, its departing CFO. It also said it would cancel 160 executive junkets and conferences for a savings of more than $8 million. Recent trips included a $440,000 executive trip to a California resort and a $90,000 U.K. trip for pheasant hunting, according to news reports. But it shouldn’t have taken the threat of government prosecution for AIG to take these actions. How much money is also wasted in other junkets, perks and salaries at other crippled firms that we will never know about?

Sarbanes-Oxley was aimed at making corporate board oversight stronger in the wake of the collapse of Enron, WorldCom and others. But when we see the kind of debacles that occurred over the last year, obviously that legislation is only part of the solution.

What we need is millions of shareholders to rise up and demand more accountability on the parts of boards and managements of the companies they hold.

Why, for instance, don't AIG shareholders demand a new non-executive board at AIG instead of continuing with one that presided over billions of dollars in lost value and a federal bailout over the last year? The fact that the AIG debacle occurred is reason enough to demand a change in shareholder representation.

This is why we are asking people to join our cause by signing up for United Shareholders on my blog, the Icahn Report. It costs you nothing and we need as many people as possible to demand change in Washington – NOW.

Some might say we should be concerned that we may not be able to attract top performers to executive positions without huge pay packages. I say we don’t need executives whose main concern is looting their companies and pillaging the Treasury no matter how matter how poorly the company performs.

I believe if an executive is good, he or she should be willing to accept a decent income and annual bonuses based purely on performance. I have no objections to executives getting substantial compensation as long as shareholders also win - over the long term.

Unfortunately, the latest Wall Street debacle demonstrates that many managements simply devised short-term routes to profits and bonuses in strategies that laid the groundwork for the crippling of their enterprises. This is outrageous and demands a serious and sustained shareholder response.

Comments

Where was the Lehman board as the company was failing? It was busy approving a $100 million bonus / severance package for executives. That's where it was.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4926278.ece



Well said, again, Carl. But how are you going to convince millions of shareholders to stand up and join United Shareholders of America??

Please read my previous comments about creating a "Fund" for investors. Use it as leverage, gain media attention, and possibly make money for people at the same time. Because if you really want people to trust you, not think you may have an indirect motive with what most agree as being necessary reform, you need to involve them directly.

Of course, by having a few hundred thousand people sign up to USofA should get some media attention, but not as much as if you had a few hundred thousand people putting their $s behind you as well.

Hopefully you'll be able to warm up to the idea and we'll read about it in the future.

Sincerely,

Glen F.



Excellent article this time around.

As for where would you get the CEO's to do what is necessary, well I'd give my left leg for the opportunity to create a turn around situation. I'm sure there are many others out there.

I will definitely ask the local library to order a copy so that I can read Iacocca's book.

Perhaps it will have his contact information in there so that I can point him to my web site at http://www.KeepAmericaAtWork.com as I'm doing everything that I can to promote the work you and Mr. Pickens and Mr. Peterson are doing.

By the way, check out the You Tube Video on my web site as it will show you exactly what we need to be doing.

Virgil



Simply put, we're with you a full 100% Carl!

I don't think people fully realize right now since one can only give recognition when looking back in history, but I see Carl succeeding in his efforts (hopefully) and going down in history with the ultimate legacy: Altruism!

We're at a pivotal, pivotal moment in history where America can continue the most successful form of Government in the history of humankind (Democracy) or quickly continue to steer in the direction of Plutocracy which history has shown time and time again with the Roman, Greek,Persian etc. Empires to mark the doom of those civilizations. I greatly applaud Carl's effort as a man who is working on a controversial cause while most other Forbes 400 members sit quietly. Warren Buffett is the closest individual that comes to mind who shares Carl's view, however as much as I admire and respect Warren, there is one big difference between him and Carl...Action!

As I mentioned in 2 earlier posts, I believe Carl would be the ultimate SEC Commissioner to really implement these changes, but I fully respect how he doesn't want to deal with the political nonsense and compensation cut. I've also read a post on this discussion from Glen F about a step-by-step plan in creating a fund that I would fully support and believe millions to tens of millions of outraged American Citizens would as well.



Carl, like T. Boone, we need more influential people like you to "slap the hands" of these idiots (Please note, I don't use this term casually).

Your solution is pretty simple by just giving some power back to the the shareholders and basing bonuses on performance. The bonuses should be put in some sort of vested account with a 5 year vesting schedule. The schedule should be similar to how most working people with 401-K plans are done. Addtionally if the vesting was based on the stock/company performance from the date the bonus was paid through the vesting date.

This restriction would prevent the theives from getting bonused on CDS but the impact not being felt for years later.

Please let us all know how we can help in getting the message out.

Regards and thanks for all you do,
Michael



Dear Mr Icahn,

From a European, or more specifically Swedish, perspective, your words and actions go a long way towards restoring some of the shattered trust that many Europeans have in American boards and corporate management. The problem is not as wide spread in the Nordic countries (or perhaps we just haven't gotten around to discover just how far this corruption has spread yet), but it does rear its ugly head now and then.

It is high time that this kind of leadership was exposed for what it is - a disgraceful act of pillaging private and public funds.

Thank you for being a voice of reason.

Regards from Stockholm,
A.L.



Dear Mr. Icahn,

In regard to you initiative for the shareholders of America, I would like to propose, that you would get involved in setting up the same concept for European shareholders in regard to European companies,
because management in this continent is as equal incompetent as their counterparts in the United States.

From a tactical point of view, attacking from two sides is the classical way to win any war. Now is the time that politicians are weak (they are mostly always weak) and desperate for initiatives that would get them out of the mess of which

they got themselves into. For them (the politicians) it would be a way to clean their slate and sacrifice those whom the public demands to be retaliated

I would be thrilled with you and with the help of your company, your supervision and your expertise to arrange all the necessary framework up here in Europe
Sincerely yours,

dr. Micha Fuks



Franklin said "We MUST hang together or most certainly we will hang separately"! It is survival of the unfittest because they have us divided.

So, how can we fight? I propose a non-profit United Stockholder Corporation (USC), part of whose job it would be to investigate boards independently, report to stockholders, and propose emergency stockholder meetings to elect new boards. They would would grade present boards and management, and where needed vet out new members and report back to stockholders. Corporations would have to provide an annual fee to the USC, which could be reduced or waived if the corporation receives high marks.

In the meantime, a 6 month "emergency" board of professional, retired earthshaker reformers could be offered while a new board was selected.

Their other "job" would be to lobby at the national level to REQUIRE all of the bylaws Carl is suggesting be put into law. If a corporation wants to do business in the U.S., it would have to have all the bylaws in the Articles of Incorporation.



There is no reason for golden parachutes. They are not in the shareholder's interest. They are a merely manifestation of the monopsonic power top executives hold over the large diversity of businesses and shareholders -- a cancer. They are not good for America.

Why tolerate 3x golden parachutes? Legislate it to zero, I say.



Your comments are great. I think the best strategy would be to approach it from a political standpoint. Do not forget corporations are a figment of the government.....they are permitted to exist by grace of the government.....and they came into being to perform acts in the best interest of the nation.....not offshore all the jobs and transfer all the cash to the officers.....Now we see the valuation of the entire market is about where it was in 2000. Is it possible the entire increase went into the pockets of the officers and the companies are worth about the same....or less considering inflation?? Look at GE, for example...and consider the outrageous compensation and exit package Jack Welch got.



Count me in.

I have been writing about similar problems from the oil and gas point of view. (http://innovation-in-oil-and-gas.blogspot.com) Prior to the meltdown, 4 Canadian oil and gas producers had granted themselves $3.3 billion "in the money" stock options. (Nexen, Petro-Canada, Encana and Canadian Natural Resources.)

If we are to rebuild our organizations we need to first and foremost build the IT systems that are necessary in our advanced societies. Today SAP is the bureaucracy. That is why management continues to purchase the application, it keeps them in power.

Society today is too complex to approach from the point of view of change first. We need to build the structure and support it with IT. Our choices are the bureaucracy with SAP, manual systems or defining and building our organizations for tomorrow.



How do you get rid of the Fox that's guarding the Chicken House?
In other words the same politicians that we want to implement reform are the ones protecting the very people who are responsible for the problems.



We have talked enough! Let's act before it is too late. Or maybe it is. But United we stand!
Act now !!



I agree entirely with your blog and the comments above. Although a UK citizen, I have a lot of money invested in American companies and would hope that your initiative doesn't exclude people like me.

Also, I agree that the same sort of behaviour is happening in board rooms across the UK, so I would fully support this as a global initiative.

The bottom line is, what these people are doing amounts to embezzlement, regardless if it is in the form of 'team building activities', bonuses or golden parachutes. Maybe the threat of legal action will encourage them to clean up their act.




Excellent article, count me in.

I cannot understand why after AIG and the rest of them were rescued with tax payer dollars their boards were allowed to stay on. Talk about the fox in the hen house. I'm watching my retirement savings drop everyday and then I see the $ that the CEO's of the poorly lead companies are walking away with, my blood starts to boil.

Keep it up Mr. Icahn



I've started posting details of this on Yahoo Message Boards for ABK, BAC, C, FNM, FRE, MBI.

Please make this an international group, shareholders in the rest of the world are subjected to the same problems.



I have been writing Investor Relations departments since 2002 about executive pay excesses and areas of waste when I see them. It is embarassing how most large public companies deal with controllable expenses.

If I had not seen Mr. Icahn on Fox today I would not have known how to add more power to my voice. The last two years I have encouraged other investors to get more involved. Now that so much damage has been done by incredibly poor risk management practices my friends are finally joining me in my efforts (although I stlll have to draft the letter for them).

Keep up the good work and keep us posted on how we can help.



"What we need is millions of shareholders to rise up and demand more accountability on the parts of boards and managements of the companies they hold."

Average shareholders feel pretty powerless. Most large entities today are majority owned by institutions. Withholding my proxy vote is near meaningless as a result (though I do it where I feel it's justified). The real question is why those major holders aren't demanding greater accountability and results? It seems they should have every reason to do so, but instead it's a rare day when a major institution takes a public stand against the management of a company they're invested our money in. And maybe that's the problem, it's not really their money. What we need is a hedge fund for the average investor, with someone leading it who has their skin in the game too and will ensure CEOs and Boards perform for shareholders.



I'm a long-time fan of you, Carl, and I have several friends that have worked for you over the years.

That said, and notwithstanding that you've repeatedly proven to be prescient with respect to identifying fundamental flaws in the management of otherwise good companies that produce good products and services, I respectfully suggest that the underlying cause of our current economic situation can be found in Uncle Sam Inc. (if the stock symbol were USINC, it would be pronounced "U-Sink").

This is the entity that sets the example for our democratic and capitalistic society. And the management of this "company" has, instance after instance, provided the text book example of astoundingly idiotic corporate governance, waste, mismanagement, and arguably, rampant fraud; from the corner office to the cubicles.

However politically risky it would no doubt be for you to re-focus your energies and resources on the core, underlying problem that we face today, and the 'fixes' that need to be done that can correct the spiral we're in, banging your shoe on the table about corporate mismanagement is, in all due respect, missing the more important point at this critical time in history.

Like the vast number of poorly-equipped and agenda-diseased corporate executives, our government is the enterprise that promoted and approved of undertakings that from the outset were wrought with financial risks and promoted leverage that any rational person would have eschewed even before the respective proposals were inked, no less put to a vote.

For the sake of trying not to dwell on political 20-20 hindsight, lets all accept that our $10 billion-a-month expenditure i.e. Iraq, a campaign that has cost at least several hundred billion dollars, thousands of American and American allies lives, was a fraud at the outset; if it were a corporate initiative, federal prosecutors would have already charged the executives involved with multiple counts of fraud.
Other than perhaps Ron Paul, there isn't one single Senator or Congressman that hasn't approved an earmark that condoned the wasteful spending of tens of millions, hundreds of millions and/or billions of dollars that provided a mere fraction of the proceeds towards stimulating employment and the economy--as opposed to lining the pockets of lobbyists, and executives--the latter of which returned the favor via political campaign contributions.

Now to the more salient and pressing issue. It was the same congressmen and senators that voted for, and in many cases, rigorously promoted the massive leverage techniques, regulatory structures, and accounting standards that set the stage for our financial dislocation.
1. Facilitating legislation and government agency regulations governing banks that allowed these institutions to use 30:1 leverage.
2. Promoting and otherwise insisting that government-sponsored corporations (fanny and freddy) facilitate the highly-leveraged risks that banks were taking.
I could go on and on--but it should be obvious to anyone at this point that the vast majority of our "leaders"--on both sides of the aisle, have less familiarity with basic economics than my 14 year old daughter.

We're now in a position that even the most erudite economic experts in the world are devoid of any tangible solutions with regard to steps that can put our country's, no less the world's economies back in order.

Carl-you're a leading proponent of cutting and shredding corporate waste and re-focusing on financial discipline as a means to deliver sustainable corporate health, profitability and competitiveness.

Harry Truman, derided for years while he served, only to be vindicated long after his death as one of the foremost US Presidents said "the buck stops here". With any luck--and we'll need more than just luck, the management teams that we'll be electing in November will lead by example--and outspoken people such as yourself (perhaps along with Warren Buffet, Mike Bloomberg, and other objective, insightful, impartial and experienced people will join hands and lead the way...Go ahead-take out full page ads with bullet-pointed proposals that will cut wasteful government spending, and in turn, insist that government provided funds be used to restore CONSUMER confidence, appropriate levels of consumer lending, which can resurrect consumer spending, and savings. In sum, a laundry list of well-thought out initiatives that can, with high probability, help stem the massive layoffs and bankruptcies that are already taking place.

And the concept of providing hundreds of billions to banks to shore up their balance sheets--without the caveat that they make lending available at affordable terms to qualified borrowers is bizarre. And if any congressman says they voted for this package, one to be administered by a 35 year old "MBA" with zero experience managing a business, with the belief that it would provide credit to their constituents, those same congressman should be summarily impeached.

Blasting the waste and lack of governance in the corporate board room works when you have a controlling stake in the companies, how do we wrestle back our citizen's stake in the country?



The great fears of passing a bailout plan and giving the taxpayers' dollars to a Wall Street insider (Treasury Secretary Paulson) are coming to pass.

The management of PNC Financial is getting a gift of more than $7 billion dollars--not to make loans and stimulate the economy--but to further entrench themselves and their huge compensation packages by using the funds to take out National City Corporation. National City's board of directors had already cleaned house and "retired" bad management, went out to get additional private capital infusions amounting to billions of dollars, and increased National City's capital ratios to among the highest in the nation.

However, the powers in the U.S. Treasury Department have decided that National City's share of the bailout money, amounting to more than $3 billion, should be combined with PNC's share of the bailout money of more than $3 billion, to allow the entrenched management of PNC to take down the largest depositor institution in the State of Ohio. Oh yes, the Treasury Department insiders have close relationship with the insiders of the Office of the Chairman at PNC, a good old boy network. Your taxpayer dollars at work, aiding an institution (PNC) that over that past twenty-five years has had serious asset quality problems, mismanagement of interest rate risk and net interest margin, problems with management performance at the most senior level, and a questionable record of overall sustained financial performance by entrenched management involving "hand-picked" successors. While previous management at National City made mistakes in the mortgage and home equity area, and unduly concentrated financial risk in this line of business, management was removed and, equally important, National City has, in its long history, never had problems with senior management's performance until this latest debacle. So what makes PNC's senior management better than National City's new management, which was cleaning house and doing the right thing?

The bailout plan is not helping the economy by stimulating lending and strengthening the spending "mulitiplier", as was sold to the Congress and the American people. Rather, the funds are being used to promote the back-slapping, buddy-buddy network of entrenched management to the detriment of National City shareholders. Under the bailout plan, National City shareholders were entitled to the $3 billion as a supplement to the dramatic steps new management was already taking with respect to capital infusion and recognition of loan losses within the balance sheet.

More bank managements of the "chosen" institutions being picked to "survive" have already stated that, they too, will use taxpayer dollars (borrowed from China and the rest of the world) to make other strategic acquisitions that will only serve to enhance their existing outrageous compensation packages for running their institutions into the ground. The chosen ones are not in any better financial shape than the ones picked for the garbage bin, creating huge losses for existing shareholders while entrenching the undeserved management of ugly, weak institutions. Citigroup, with all of its losses and off-balance sheet derivatives exposure will receive $25 billion in bailout money and will reportedly give out $25 billion in year-end 2008 planned bonuses. How much taxpayer money will PNC and other hand-picked survivors be given for bonuses that are not warranted in 2008?

Thank you Mr. Paulson for creating even bigger institutions that will be "too big to fail". Thank you Mr. Paulson for arbitrarily selecting which financial institutions' shareholders will lose everything and which will receive windfall gains and "guaranteed" survival no matter what entrenched management does in the future, all compliments of the United States taxpayer.



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