US Corporate Directors named strategic planning as their top concern followed by corporate performance and CEO succession according to the 2007 National Association of Corporate Directors (NACD) Public Company Governance Survey released today at the NACDs Corporate Governance Conference in Washington, DC.
The survey was done in conjunction with Oliver Wyman Delta Organization & Leadership, and shows that the three issues are perennially top concerns for directors, but are also areas where directors indicate low levels of effectiveness. Consistent with 2006, of the top three issues, respondents felt that they were least effective in the area of CEO succession. Nearly half indicated that they did not have a formal plan for succession. 77 percent of respondents rated CEO compensation was either too high or somewhat high relative to CEO performance.
The US Institute for Policy Studies reported in August 2007 that:
The US Pay Gap
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CEOs of large U.S. companies last year made as much money from just one day on the job as average workers made over the entire year. These top executives averaged $10.8 million in total compensation, over 364 times the pay of the average American worker, a calculation based on data from an Associated Press survey of 386 Fortune 500 companies.
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The private equity boom has pushed the pay ceiling for American business leaders considerably further into the economic stratosphere. The top 20 private equity and hedge fund managers, Forbes magazine estimates, pocketed an average $657.5 million, or 22,255 times the pay of an average U.S. worker.
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Workers at the bottom rung of the U.S. economy have just received the first federal minimum wage increase in a decade. But the new minimum wage of $5.85 still stands 7 percent below where the minimum wage stood a decade ago in real terms. CEO pay, over that same decade, has increased by roughly 45 percent.
The Pension and Perks Gap
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CEOs at major American corporations enjoyed, on average, $1.3 million in pension gains last year. By contrast, only 58.5 percent of American households led by a 45-to-54-year old even had a retirement account in 2004, the most recent year with data. Between 2001 and 2004, the retirement accounts of these average households gained only $3,775 in value per year.
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CEOs of S&P 500 companies, according to Corporate Library data, retire with an average $10.1 million in their Supplemental Executive Retirement Plan, just one type of special account large American companies routinely set up for their top executives. But most Americans now move into their retirement years with no pension protection whatsoever. In 2004, only 36.3 percent of American households headed by an individual 65 or older held any type of retirement account. The accounts that did exist, on a per household basis, averaged only $173,552 in value, a miniscule 1.7 percent of the dollars in the supplemental accounts set aside for Americas top CEOs.
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The top 386 CEOs took in perks worth an average $438,342 in 2006. These perks ranged from using private company jets for personal travel to reimbursements for country club fees, commuter expenses, and even the extra taxes due on bonus income. A minimum wage worker would need to work for 36 years to earn the equivalent of what CEOs averaged just in perks last year.
Last January, Jeffrey Immelt, Chairman and CEO of General Electric said on CNBC that his pay should have a reasonable relationship with his top 20 reports in GE and remarked that it would for example be "weird" if his earnings were 14 to 15 times the Vice-Chairman's.
"Transparency is key," Immelt said. "In my belief, and again it's just my belief, people shouldn't have contracts....I think you ought to be in the same position that every other person in the company is. You've got to bring it every day, and if you don't bring it, you shouldn't have a contract that defines what you get when you fail. That's my own philosophy. You have to have a lot at risk."
The Financial Times said last week that after years spent focusing on the absolute value of the princely pay packages commanded by corporate leaders, shareholders, and to a certain extent regulators, have begun looking at boardroom inequality.
Their argument is that a large differential between those at the top of the corporate ladder and those just one rung below - chief financial officers, division heads, or even superstar sales executives - is a symptom of a deeper malaise.
Christopher Ailman, who manages more than $170bn for the California State Teachers' Retirement System (Calstrs), believes that a yawning gap between the pay of top executives points to weak corporate controls.
"Paying chief executives an excessive amount relative to their number twos is a warning signal that the chief executive may have the compensation committee sewn up and that the board is not doing a good job of the succession plan," he says.
The average total compensation for a S&P 500 chief executive was about twice as much as the second most highly paid executive last year, according to a study conducted for the Financial Times by the research group, Salary.com.
However, at SLM, the student loan group known as Sallie Mae, the pay of Thomas Fitzpatrick, chief executive, who resigned in May, was more than 10 times that of June McCormack, his executive vice-president.
At more than 30 other companies, the gap ranged from four times to seven times.
Corporate Directors in today's survey also expressed discomfort about their relationship with shareholders. Only a third (36.4 percent) of directors thought their boards communicated very effectively with shareholders, and likewise did not believe that shareholders communicated well with boards.
NACD published the report in conjunction with its research arm, The Center for Board Leadership, and with the assistance of its alliance partner, Oliver Wyman Delta Organization & Leadership. The NACD survey had been published for ten years biannually until it became annual in 2005. The 2007 report consists of primary research with 791 respondents conducted from July to August, and is supplemented with data from the 2007 proxy statements of over 5,000 public companies. The report breaks down key data from 24 major industries and serves as a benchmarking guide for directors and boards on nearly 100 board practices.
NACD President and CEO Ken Daly said, Strategy took a back seat over the past few years as boards grappled with volatile markets, shareholder pressure and regulations, but directors recognize the need to focus on the longer-term as indicated by their top three issues to be addressed."
Also noteworthy, added Daly, is the data showing that less than half of directors find their relationship with shareholders highly satisfactory, and that fewer think they communicate very effectively. Although boards are putting heavy emphasis on corporate strategy, shareholders may not be aware of that emphasis. Yet strategy is often the tension point between boards and shareholders. The good news is that with the issues now out in front, boards are preparing to address these key concerns.
Directors and CEOs are seeking to find the best ways to involve the board in strategy, said Elise Walton, partner at Oliver Wyman-Delta Organization & Leadership. While they cant be involved in the daily or quarterly level detail, the role directors play must be more than the rubber stamp at the end of the decision making pipe. Most directors are asking for full risk assessments, including the strategic, financial, and operational, and management is looking to create a process of meaningful dialogue and appropriate decision-making that impacts the future of the company. Striking this balance is an area companies need to get right.
Additional highlights from the The 2007 NACD Survey:
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CEO compensation: Director discomfort with CEO pay continues this year. Consistent with the 2006 survey, 77 percent of respondents rated CEO compensation was either too high or somewhat high relative to CEO performance. Top reasons included: absence of genuine performance objectives; granting of equity awards that have little connection to future corporate performance; and lack of strong negotiation by the compensation committee.
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Information management and decision making: In general, directors gave management high marks for providing the appropriate level of information, with the highest level of satisfaction with information relating to financial oversight. But information around executive talent management received the lowest scores, with less than half of respondents finding the information they receive very adequate.
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Peer Evaluations: For the first time, peer evaluations were as prevalent as self-evaluations, a shift in the methods for evaluating directors. Individual director evaluations performed by boards increased only slightly to 46 percent compared to 45 percent in 2006.
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Director candidates: In addition to wanting a current or former CEO on the board (91.7 percent of respondents), additional pools of senior executives, professional advisors and technical experts are also increasingly seen as highly valuable additions to the board. Areas of functional experience most desired in board members are finance (74.8 percent), operations (66.7 percent), external audit (45.5 percent), and marketing (45.4 percent).
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Diversity on boards: 65.0 percent of respondents report having a woman on the board, but the average number of women is 1.6; while 41.7 percent of respondents reported a minority on the board, the number of minority directors on those boards averaged 1.7.
Daly concluded, In this, our 10th directors survey since 1992, we see boards coming to grips with planning, shareholder relations, compensation, board structure, risk oversight and other critical issues. At a time when board directorship is as complex and challenging as weve ever seen it, we believe that information and shared insights will lead to stronger boards.
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