 After six months of financial services companies recording massive losses in the sub-prime markets and enormous falls in the value of their shares, owners (shareholders) must take a stand with management.<
One of the main issues that has earned the comment of central bank heads, European presidents and prime ministers, congressmen and investors is the rewarding senior executives for failure. And we have had some impressive examples.
Merrill Lynch “The Board recognizes our shareholders’ interest in executive compensation practices and exercises great care in determining and disclosing executive compensation. As discussed in the Compensation Discussion and Analysis, the Management Development and Compensation Committee (MDCC) applies a compensation philosophy designed to pay for performance,……”Merrill Lynch 2008 Proxy Statement
The Performance - On 17 January 2008, Merrill Lynch reported a net loss from continuing operations of US$ 8.6 billion for the full year 2007. The results were dramatically impacted by net write-downs in the 2nd half of 2007 of US$ 19.4 billion relating to U.S. ABS, CDO’s and US sub-prime residential mortgages. The Pay - Stan O’Neal, the Chairman and Chief Executive Officer, resigned but walked away with over US$ 160 million, estimated to be the 5th highest payment for a “severed” US executive this millennium. The Assessment - The replacement Chairman and Chief Executive, John Thain, has been explaining to analysts and investors that the profit hit was caused by a number of significant failures including poor risk management on the trading desks, the increased siloing of the business over the last few years with not enough control from the top, lack of collaboration across the firm, insufficient management of the balance sheet and an inappropriate incentive scheme. Surely this is a criticism of his predecessor. The Conclusion - The bank lost US$ 8.6 billion in 2007 with more write-downs to come in 2008. Thain said there were significant failures under O'Neal's watch. The Board allowed O'Neal to resign and he left with US$ 160 million. We conclude that this was an enormous reward for an enormous failure.
Citigroup
"Citi has in place a compprehensive, performance based executive compensation program Citi's executive compensation program, described in the Compensation, Discussion and Analysis of this Proxy Statement and in the Senior Executive Compensation Guidelines, emphasises pay for performance in a competitive marketplace...." Citigroup Inc. 2008 Proxy Statement
The Performance - Citigroup announced that the 2007 Full Year Net Income was US$ 3.6 billion, a fall of 83% from the previous year’s US$ 21.5 billion. The results included US$ 18.1 billion in pre-tax write-downs and credit costs on sub-prime related direct exposures and a US$ 4.1 billion increase in credit costs primarily on US consumer loans. The Pay - The Chairman and Chief Executive Officer, Chuck Prince resigned but the Board decided that he deserved a performance bonus of US$ 10.4 million for the year. The Assessment - "Citi's troubles today are a culmination of a set of problems. There has been a general weakening of the management fabric," said John Reed, former CEO. "If the body loses its immune system, you are going to die of something. The core of what was happening was a lack of supervision and structure at the managerial level." Also Sandy Weill, another former CEO said, "What didn't work was that we had very poor management and management decisions over the past couple of years." The Conclusion - The bank suffered write-downs of US$ 22.2 billion. Prince is allowed to resign. Previous CEO's blame the management. The Board decides to award Prince a US$ 10.4 million bonus for his performance. We conclude this is reward for failure.
UBS
“Pay-for-performance: performance is the primary driver of compensation decisions..” UBS AG 2007 Annual Report The Performance - UBS has announced a net loss attributable to shareholders for the full year of CHF 4.384 billion. During 2007, UBS was forced to write-down its US sub-prime holdings by US$ 18 bn. In the first quarter of 2008, UBS took further write-downs of US$ 19 billion. The Pay - The then Chief Executive, Peter Wuffli, the then Head of the Investment Bank, Huw Jenkins and the then Finance Director, Clive Standish all left the bank but will share CHF 60 million in final payments. We have not seen how much the retiring Chairman will get. The Assessment – In a press release in April 2008 UBS admitted that fundamental mistakes had occurred. “… the Board is reviewing the root causes of and lessons learned from its sub-prime losses. In particular, the Board is thoroughly examining governance, strategy implementation, risk management, monitoring, and control systems, incentive plans and succession planning and is committed to making all necessary adaptations and changes to ensure it establishes best practices in these areas.” The proposed new Chairman states it will take UBS at least three years to re-establish its reputation. The Conclusion - UBS losses for the year were CHF 4.834 billion. The senior executives are blamed but "resign" with a CHF 60 million package. We conclude that this is reward for failure. With the Annual General Meeting season with us, shareholders have the opportunity to let their company’s Board of Directors know that reward for failure must stop.
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