Randomly Noted

We’ve written before about the activist investor saga at the oil giant, Occidental Petroleum Corp., so we thought it only fitting to provide the happy ending, arrived at last week.

The basics of the conflict were that some shareholders thought the long-standing chief executive, 75-year-old Dr. Ray R. Irani, was getting paid too much and that the company didn’t have a good succession plan. Shareholders already had approved a non-binding negative vote on management pay practices. 

There was little doubt that on a relative basis, Irani was quite well paid. The company also has done very well by shareholders. The company produced a total return of 874% for shareholders in the past decade, The Wall Street Journal reported.

The California State Teachers’ Retirement System (CalSTRS) and San Diego money manager Relational Investors LLC were so aggrieved they publicly sent a letter about plans to offer four competing director nominations to Occidental’s board, which they lambasted.

But now peace apparently is the order of the day at Occidental Petroleum. Irani will give up being CEO in May 2011. He’ll serve as chairman through 2014. Stephen I. Chazen, the president, will succeed as CEO. One board seat will go to dissident investors, The Wall Street Journal reported.

Both men will take slimmer though potentially still significant compensation packages. “The direction they moved on the compensation is very good,” said Anne Sheehan, the director of corporate governance at CalSTRS, as quoted in the Journal.

The point made in previous columns on this issue is worth repeating here. CalSTRS and Relational owned about 1% of Occidental’s shares, below the threshhold of the rule recently approved (but under legal challenge) by the SEC that would allow some big holders to nominate directors whose candidacy would be carried on the proxy materials distributed annually by companies.

The point then as now is that big institutional investors are capable, powerful entities that didn’t need the extra and potentially divisive power that will eventually come to them through the SEC’s so-called proxy access rule in order to exert influence at major public companies.

Recently approved ”proxy access” should mean  more would-be directors’  names listed in the voting packages received by shareholders.

But an even greater additional power granted big institutional investors by the regulation, which mandates larger holders’ director nominees be listed alongside board-approved selections, may be demonstrated through their greater leverage in private meetings with current board members.

Here’s Kathleen L. Casey, one of the five commissioners at the Securities and Exchange Commission, as part of  her dissent last week on this issue.

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The latest example of tin ears in the so-called c-suites and in board rooms comes courtesy of reporter Elizabeth Holmes in today’s Wall Street Journal. The retailer Abercrombie & Fitch Co. agreed to pay its CEO $4 million to limit his personal use of the company’s jet.

That’s right, CEO Michael Jeffries gets a lump sum payment of $4 million to induce him to only fly in the corporate jet for personal trips up to $200,000 a year. 

Jeffries’ prior employment agreement gave him unlimited personal use of the corporate jet. It’s a perk he seems to have put to good use. His personal travel on the jet in 2008 tallied about $1.1 million, the Journal said.

It’s simply hard to imagine why a board of directors of a public company would find it necessary to put unlimited personal use of a corporate jet into a CEO’s employment agreement.

One more piece of context supplied by the Journal article. Jeffries’ pay package in 2008, the last year for which data are publicly available, totaled $15.9 million.

Think about how this news is going to go over with Abercrombie & Fitch employees, customers and shareholders. Not to mention the broader public, where the deep recession has stirred significant resentment against high CEO pay, especially in situations where the pay doesn’t seem tied to company financial performance.

Abercrombie’s financial performance isn’t even the issue here, in this blogger’s view. I’ve maintained many times that what upsets many people is not so much high pay at top jobs when companies are performing, but the perks granted alongside that high compensation, perks that are typically unavailable to others.

That’s the tax “gross ups,” the easy terms on a mortgage, the country club payments. The view of the resentful, understandably, is that if you are making a lot of money you can pay your own taxes like everyone else.

Same thing applies here. With nearly $16 million in compensation in 2008, it doesn’t seem like too much to ask the CEO to limit his personal, not business use, of the corporate jet, and not have to pay big dollars for that adjustment.

When it comes to annual letters to shareholders, Jamie Dimon is no Warren Buffett.

Dimon, JPMorgan Chase’s chairman and chief executive, recently deposited 37 pages on unwitting holders that included none of the folksiness nor clever turns of phrase that pepper the writing of the famous Omaha investor.

Somebody should have told Dimon, arguably the most influential person in banking, that 37 pages is just too long and a little humor never hurts.

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Let’s hear at least one cheer for the corrective power of market forces, the power of public opinion, government pressure or more likley a combination of the three. Maybe even much maligned boards of directors deserve a little credit.

The cause for this at least tentative cheer: the front page article in today’s Wall Street Journal that reports compensation for U.S. chief executives edged lower in 2009, marking the first time in some 20 years that CEO pay declined for two consecutive years.

In 2009, the Journal’s Joann Lublin reported today, the median compensation for CEOs at 200 major U.S. companies fell 0.9% to $6.95 million. In 2008, pay fell 3.4%. This despite the fact that many of these companies’ stock prices, at least, and admittedly starting low, did pretty well in 2009.

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The top bankers at Big British financial institutions appear to be more responsive than their American counterparts to public outrage about large bonuses, especially for those banks that received government aid.

Our Newswires colleague Patricia Kowsmann inLondon reports Lloyds Banking Group Chief Executive Eric Daniels waived his 2009 bonus. He was entitled to 2.3 million British pounds despite the company planning to report a net loss for the year and being 41%-owned by the British government.

Stephen Hester, who heads Royal Bank of Scotland, 84% owned by the U.K. government, will turn down a 1.6 million bonus, Kowsmann reported.

Perhaps more surprising was the bonus turn down by Barclays CEO John Varley. That bank has thrived and taken no government assistance.

Might simply be a case – rare as it seems - of true long-term thinking in the executive suite. The Barclays restraint should serve the bank well with an angry public. 

Significant bonuses at loss-making institutions are no doubt harder to understand.

“This is not Bolivia,” U.S. Treasury Secretary Timothy Geithner is quoted by The Wall Street Journal as having said when pushed by others to not honor contractually mandated bonuses to certain employees of American International Group.

It’s a good quote and a better policy. Give Geithner credit for a willingness not to bend to populist demands. In the end, upholding contracts and reinforcing that the U.S. is  a place where legal agreements are honored even when they become wildly unpopular and perhaps even grossly unfair is much more important than scoring an immediate political point or two.

The profile today of Geithner in The Wall Street Journal by Deborah Solomon is well worth reading. One interesting point: despite the criticism he’s endured in the role, largely on Capitol Hill, a significant part of the U.S. population doesn’t know who Geithner is.

In the ongoing furor about top banker pay the main combatants have been politicians, regulators, the bankers themselves and the amorphous public, the individual compenents of which care about such matters in varying degrees.

Largely forgotten have been the shareholders of these publicly traded investment and commercial banks. Surely, sky high compensation is a bigue for shareholders. When a high percentage of annual revenue goes to pay people, it’s money that otherwise belongs to the company’s owners, the shareholders. It’s a pretty direct relationship.

Now, the shareholders are starting to make noise. Maybe their representatives, the corporate boards of directors, will listen.

Aaron Lucchetti reports in today’s Wall Street Journal that the statement by the new chief executive of Morgan Stanley, James Gorman, about reducing the percentage of revenue that goes to compensation “followed prodding by some large shareholders.”

“Company officials acknowledge being questioned by investors since Morgan Stanley reported three weks ago that compensation and benefits were equal to 62% of net revenue at the New York company,” Lucchetti reported.

Good for the shareholders. Other company holders should pay attention.

We’ll know we have entered a new era in compensation for top bankers when a board of directors actually exercises a “clawback” provision of the newly minted and less generous bonuses being proffered on Wall Street.

The headlines, of course, are about the dollar value of the bonuses now being handed out for work in 2009. Most noted and notable was Friday’s news that Golman Sachs Chairman and Chief Executive Lloyd Blankfein ‘only’ got a $9 million bonus, all in stock and no sale allowed for five years.

Beneath the news headlines is another reality. Yet more power is is being given to boards in their greater ability to pull back stock awarded in bonus packages if after the fact any tarnish is found on the results that supported the bonus payments.

These emboldened clawback provisions apply not just to Goldman executives but at other financial services companies, too. Indeed, the lack of certainty built into these stock-based bonuses (themselves a better way to tie executives to the firms’ long-term interests than cash) have spurred a new term, “shares at risk.” They earn that sobriquet because “the shares could be clawed back or lost if something goes awry at the firm,” recently wrote The Wall Street Journal.

How ironic that corporate boards of directors, accused of broadly being asleep at the switch during the accounting scandals of the late 1990s and the over-the-top risk-taking that led to the credit crunch, keep increasing heir power in the reformist wakes of every scandal.

Now they are getting more strings to attach to stock-based bonuses after widely being accused of letting top executive compensation, on Wall Street and Main Street, get out of control.

So the skeptic in me wants to see a board actually use such clawback power in coming years, when justified, of course, to see if it is going to be different this time.

Meanwhile, the debate about whether a bonus of $9 million was ‘enough’ for Blankfein after the sterling year enjoyed by Goldman will continue.

No doubt the heat and glare of the public and politicians about post-meltdown bonuses at commercial and investment banks helped rein in Blankfein’s 2009 compensation, along with the pay of other top people at Goldman. The New York firm has been dead center in the populist loathing.

Another question is whether the new sensibility about pay will last if and when the spotlight shifts elsewhere.

As for Blankfein, it’s worth keeping in mind that he was paid more than $68 million in cash and stock in 2007 and The New York Times reported his total compensation since 2000 comes in above $181 million, though not all has been cashed out.

The high-voltage issue of banker and other executive compensation is still seen by some as a matter for corporate, rather than government, reform.

Some voices at the World Economic Forum annual meeting here in Davos, Switzerland, have made that point. There’s also been some dissent to the notion that paying out bonuses in company stock that vests only after a number of years will reduce excessive risk-taking.

Executive compensation as the responsibility of a company’s board of directors is a “central tenet” of corporate organization, said Robert Greifeld, chief executive of NASDAQ OMX Group, said in a Wednesday interview at the outskirts of the Davos meeting.

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