Streetwise

Lauren Rudd

Sunday, November 6, 2011

Know Thy CEO

A key element in the analysis of any company’s investment potential is the deference it has for its shareholders. In other words, a corporation has an obligation to place the well-being of its shareholders, and its employees, above that of its executives.

So I am appalled and can only shake my head in disbelief when the Wall Street Journal reports that Eugene Isenberg will receive $100 million in cash for dropping his title as chief executive officer of Nabors Industries, an oil drilling company. Isenberg, who will retain his title of chairman, will receive the payment due to a clause in his contract that was triggered "as a result of his change in responsibility," according to a regulatory filing.

Isenberg is just the latest in a long line of CEOs to receive such largesse. Douglass Foshee, CEO of El Paso, a pipeline company recently acquired by Kinder Morgan earlier this month, is eligible for a $91 million exit package if he leaves within two years of the acquisition, which Foshee says he plans to do.

And it gets worse. Some CEOs even received astronomical payoffs for doing what could only be graded as unacceptable management performance. For example, the New York Times reports that Leo Apotheker, the former CEO of Hewlett-Packard, netted a $13.2 million severance package after being let go by HP’s board of directors. Carol Batz, the former CEO of Yahoo received almost $10 million after being fired.

Moreover, CEO pay has reached the point where it exceeds a company’s tax bill, according to a study by the Institute of Policy Studies cited by the Washington Post. A quarter of the highest paid executives earned more than their company's respective tax bill in 2010, the study finds.

Despite the decline in the U.S. median income level for the second consecutive year to $26,364, the Labor Department reported that the 2010 compensation paid to the country’s chief executives increased an average of 27 percent. And that does not even consider the issue of those so called “required” perks, such as corporate jets, even as companies cut costs, often by laying off employees.

So what happens when corporate management pays more attention to their personal piggy banks rather than the business at hand? John DeLorean, a former 17 year veteran of General Motors stated it quite succinctly back in 1979 in his book, “On A Clear Day You Can See General Motors.”

“Our inability to compete with the foreign manufacturers is more due to management failure than anything else. Past management spent our lush advantage extravagantly...the system and management are stifling initiative. Leadership and innovation are impossible...Not only is management of no help, most of what they do is wrong...Isolated executives find their markets taken away by competitors attuned to the wants and needs of the public.”

To which I would add, “And the needs of the company’s employees and shareholders.”

Keep in mind that DeLorean wrote those words over 30 years ago, well before the current level of lavishness set in. And well before self-indulgent executives forced a deterioration in the esprit de corps of their workers.

Therefore, from an investment perspective you should seek out those companies that demonstrate a fair and efficient management style that extends well into the executive suite, while avoiding those where the management is more self-serving. Given the current market environment such investments should be easier to find today than ever before.

An excellent example is Apple and the tone set by its former CEO, the late Steve Jobs. In his book titled, “Steve Jobs,” Walter Isaacson recounts how upon seeing the menu for a dinner for President Obama, Jobs responded that some of the dishes proposed by the caterer – shrimp, cod and lentil salad – were way too fancy.

Jobs particularly objected to the dessert that was planned, a cream pie tricked out with chocolate truffles. However, here Jobs was overruled by White House staff because the President liked cream pie. And this from a CEO whose salary was one dollar and whose company had, in its last reporting period, $76.156 billion in cash on its balance sheet.