Crusading against CEO pay.

CORPORATE AMERICA has made some progress in cleaning up its governance, but overly high compensation levels for CEOs show that much remains to be done, says Nell Minow, editor and chairman of The Corporate Library, a research group based in Portland, Me. Here are excerpts from a conversation originally conducted for The New York Times:

Q: How do you assess the progress that corporations have made in improving the way they manage themselves since Enron imploded?

I have a "best of times, worst of times" perspective. Some things are much better than I ever dreamed. In other areas, things have been disappointingly slow and yet in other areas, we've gone backwards. Probably the most important change is in the boardroom. Boards of directors are universally taking the job more seriously and doing a better job. It wasn't that long ago that O.J. Simpson was on an audit committee.

Q: So boards are more independent from CEOs?

Yes, they are. But they continue to fail at their single biggest challenge, which is CEO pay. If they can't get that right, then something is still wrong.

Q: Don't CEOs who create wealth for shareholders, customers and employees deserve to be well compensated?

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Of course. I'm all for tying pay to performance. But the fact is CEO pay went up 30 percent last year and performance certainly wasn't anywhere near that.

Q: How did you arrive at that figure of 30 percent?

There are a lot of different ways of looking at pay. You have to be consistent about it. You can look at stock option grants in the years that they are made or you can amortize them over time. The most important thing is to compare apples with apples. It was long-term compensation mostly, but base pay has gone up enormously as well.

Q: Didn't last year see major gains in corporate profitability?

Yes, but CEO pay gains were vastly in excess of shareholder gains.

Q: Can anyone outside a company really control CEO compensation?

The only people are the shareholders and they've done a very poor job. Boards of directors should control it and, if they don't control it, shareholders should respond. Shareholders have failed to understand that CEO pay is not just something to shake your head over when you get your proxy statements. Bad CEO pay is a terrible example of bad asset allocation. The return on investment for CEO pay is unacceptable. It's an indicator of a failure of oversight on the part of the board that permeates throughout the company. It's a symptom of a very serious disease.

"Independent" Directors

Q: Compensation committees are increasingly independent and hire their own outside consultants. So why is it not working right?

Because at the end of the day, I don't really believe there is such a thing as "independence" on the board of directors as long as the CEO is still picking the directors. You've got the CEOs picking directors and they're writing checks on somebody else's account. When you have Warren Buffet admitting in his 2002 annual report that, while serving on boards, he agreed to approve CEO compensation because it was embarrassing to speak up, you know that something is wrong with the system.

Q: Why do people get so excited about CEO pay but not about what sports stars and movie stars make?

There are five categories of people in the stratosphere of compensation. Aside from CEOs, you mentioned two, sports and entertainment, and the other two are rock stars and investment bankers. These other four are the ultimate pay-for-performance people.

There are many actors out there waiting tables and there are many investment bankers who could be waiting tables next week. It's all on the basis of market-driven, arm's length negotiations. If Kate Moss, who is a model, is photographed using cocaine and loses all her endorsements, that's a perfect example of the market working. But CEOs are the only ones who pick the people who set their pay.

Q: Let's say I have created a company whose market capitalization is $10 billion and I have a personal net worth of $1 billion ...

Hurray for you. That's great. I love to see that. At my core, I am a capitalist. Unfortunately, what I see more often is Gary Wendt saying, "I won't even walk in the door without a $45 million cash signing bonus." Or the CEO of Global Crossing saying, "I won't walk in the door without 2 million options at $10 a share below market."

Q: Aside from what's happening at United Airlines, Delphi and some other companies in bankruptcy, wouldn't you say that, overall, boards have made progress in linking compensation to how a CEO performs?

No, I don't think so. I was an English major but even I know that if you give someone 2 million options at today's price and it's not indexed to the market and it's not indexed to the peer group, he's going to get paid on the basis of what the market does, not on what he does. I see a lot of what I call hot fudge sundae compensation plans, where you get the ice cream and the fudge and the nuts and the whipped cream and the cherries and the bananas. What is that delivering?

Boardroom Chemistry

Q: Regarding your point that CEOs pick their directors, hasn't that practice changed in recent years as boards are more involved in picking their own members?

It's very slowly beginning to change. But it's still a closed loop of friends of friends. I feel very strongly that what we really need, and is the most important corporate governance reform that's on the agenda right now, is majority vote. Companies should adopt a policy that no one can serve on the board unless he or she has received over 50 percent of the vote. I've never seen a shareholder initiative gain traction as quickly as that one.

What's great about it is that it's very embarrassing for a company to try to argue that someone who gets less than 50 percent of the vote should be allowed to serve. So I foresee a time very near in the future when companies that give their executives outrageous pay packages will find that shareholders will refuse to support the compensation committee that made the decision.

Q: CEOs say that if they're not involved in choosing directors, that alters the chemistry of the boardroom. What is your view?

It's my opinion that the chemistry of the boardroom is undermined by the current system, which is overly cozy. What I'm saying is that I don't anticipate a time when shareholders are nominating their own directors and I always expect that the CEO will be involved in having some say. But it's human nature, particularly for CEOs--who by their very chemistry are independent-minded and aggressive--to want to put cheerleaders on the board, not real partners.

Q: Recruiters say they are looking for people with specific sets of skills to put on boards. Is that just a smokescreen?

If bad corporate governance is a disease, executive compensation is running a fever. I think boards are doing a better job, but they have a long way to go.

Q: Where would you say the standards of governance are higher, in the corporate world or in Washington?

Political careers are falling apart because of the Abram of scandal. There may be two or three representatives or senators whose careers are over. We've also had it come out that the author of the second best-selling book of last year wildly exaggerated some of the things in his purportedly nonfiction book. No sector has a monopoly on the problems of grappling with integrity. See Final Word, p. 64.