CEOs Should Remember Leadership Role

April 18, 2008

As the U.S. economy continues to sink, the general public, presidential candidates and the media have been quick to label corporate executives as Public Enemy No. 1.

A large part of this anger is directed at those financial CEOs who continue to reap enormous salaries and bonuses even as their companies post historic losses and lay off thousands of employees.

It's always easier to blame someone else when your own luck runs out, but should executives be punished for poor market performance that’s the result of weakness in market regulations?

The New York Yankees are paying more than $73 million for the combined salaries of Alex Rodriguez, Jason Giambi and Derek Jeter this year, but the Yankees haven’t won the World Series since 2000.

Mutual fund executives are highly paid individuals. Attracting the best talent for your firm is costly. They are highly compensated for good reason: Few others can do the work they do. Many CEOs are slaves to their companies, and like most people who work hard, they also play hard. But how hard they play – and how often – can draw the ire of those who don't have it so good. The prudent should be aware of behavior that provokes resentment. As the proverb says, discretion is the better part of valor.

I have the utmost respect for anyone who is very good at their job, whether they are a portfolio manager or a grocery store manager. I also have no problem with someone who enjoys their work. If you don't like your job, you're in the wrong career.

The best executives truly care about their companies and want to see their employees succeed. Outstanding, hardworking individuals should be rewarded for their efforts, but publicly traded companies – especially asset managers who bear fiduciary responsibility – also need to balance the interests of shareholders.
One CEO with whom I was speaking recently said, “Everyone is complaining about CEOs and executive compensation. Not every CEO gets a million-dollar bonus and the use of the corporate jet. I don’t have a corporate jet.”

Enormous executive pay increases during times of declining profits and cutbacks are a major concern among institutional investors, and the golden parachutes given to departing executives who are forced to resign only serve to destroy investor confidence and trust in corporate leadership.

But you can hardly blame a CEO for accepting a huge bonus. How many people do you know who would turn down a performance raise?

In the last few weeks, mutual fund companies have seen an increasing number of proposals from shareholders to allow stockholders to vote on whether to approve executive compensation plans.

There have also been increased efforts by shareholder activists to force the hands of heavyweight mutual fund portfolio managers (Fidelity is one that comes to mind with regards to PetroChina and American Airlines holdings).

These proposals have not generally received a warm reception with the mutual fund boards of directors. Even though the votes would be non-binding, firms say the plans would put them at a competitive disadvantage to other firms who aren’t subject to such a vote.

Ultimately, shareholders have more power than they realize. If the average shareholder is able to shake their voter’s apathy and start to take a real interest in how much the CEOs of their mutual fund holdings earn, or what the portfolio managers there are doing with their money, the industry could see some real changes soon.

On the compensation front, CEOs and their boards should, ideally, take steps to find the right balance of executive pay and tie salary and bonuses to performance standards.

People look to their leaders in times of trouble. Leaders must be accountable and take responsibility for the results, be they good or bad. They should do everything in their power to correct a problem, or step aside and allow someone who can.

The best leaders lead by example.

Comments? Write to John Morgan at john.morgan@sourcemedia.com.

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