CEOs’ ethics: what’s new

In the past week, three stories relating to CEOs caught my attention.

The first was a recent report by the research organization MSCI on CEO compensation, the summary of which provides: Has CEO pay reflected long-term stock performance? In a word, “no.” Companies that awarded their Chief Executive Officers higher pay incentive levels had below-median returns, based on a sample of 429 large-cap U.S. companies observed from 2005 to 2015. On a 10-year cumulative basis, total shareholder returns of those companies whose total summary pay was below their sector median outperformed those companies where pay exceeded the sector median by as much as 39%.

While stunning, this is not completely a surprise. High-profile examples of CEOs being lavishly paid for poor performance are plentiful, as noted in this piece in ZME Science.  And it is an issue of some consequence from a C&E perspective: while not a topic covered in most companies’ codes of conduct, fairness in executive compensation is surely an “ethics issue” for millions of American and other workers – indeed, one which eclipses in significance areas that are frequently in codes (including conflicts of interest).

The second story of note in the past week was in a post on the Harvard Corporate Governance Blog by Robert H. Davidson,  Assistant Professor at Georgetown University McDonough School of Business, based on a recent paper he wrote with Aiyesha Dey, Associate Professor of Accounting at University of Minnesota Carlson School of Management; and Abbie J. Smith, Professor of Accounting at University of Chicago Booth School of Business. Davidson’s summary of their research includes the following: We … examine whether materialistic CEOs [defined as CEO’s who have relatively high luxury item ownership] head firms with lower [Corporate Social Responsibility] scores and find that firms led by materialistic CEOs have lower CSR scores in all five CSR categories and a lower aggregate score. Firms with materialistic CEOs have fewer CSR strengths and more CSR weaknesses, with the magnitude greater regarding CSR strengths. in CSR weaknesses.

This, too, was, not a total shock, but is nonetheless noteworthy given how important good  corporate deeds can be to addressing many of society’s ills. The study’s finding was also depressing, since it is hard (but not impossible) to imagine many corporate directors putting to use the central insight of the piece, i.e., that in considering candidates for CEO their respective companies might wish to steer clear of those with a lavish lifestyle.

Third, and also courtesy of the Harvard blog, was this post  by Quinn Curtis, Associate Professor at University of Virginia School of Law, based on paper he authored with Justin J. Hopkins, Assistant Professor at University of Virginia Darden Graduate School of Business Administrations. Curtis writes: Corporate directors who suspect malfeasance by managers may face conflicting incentives. On the one hand, encouraging transparency and demonstrating diligence by pressing for the investigation and disclosure of problems might be rewarded with re-election, appointment to seats on other boards, and greater shareholder support. On the other hand, revealing misconduct could draw negative attention to the company and result in worse career outcomes for directors. In Do Independent Directors Face Incentives to Monitor Executives? we empirically examine whether directors who publicly demonstrate diligent monitoring are rewarded. Our findings cast doubt on whether directors face strong incentives to monitor. Instead, our results suggest that directors sometimes benefit from looking the other way when they suspect problems.

Taken together, these three studies paint a picture of there being many CEOs whose greed hurts both shareholders and society, and of directors who for institutional reasons may not be up to the job of reining them in.

I would not go so far as to call this a “rigged system,” as Donald Trump has robbed that phrase of its meaning – at least for the moment. But addressing the infirmities described in these studies will require a lot of effort – and certainly more clout than the C&E profession can currently muster.

 

One Comment
  1. Jason Lunday 1 year ago

    Great identification of resources, Jeff! I think one ethics aspect of CEO pay that agency theory addresses is that shareholders expect the Board to develop a compensation system for senior executives that motivates them to act in the shareholders’ long-term interests. CEOs, as agents, work for their own interests. As long as these and the company’s interests are aligned, their comp should align with shareholder returns. If the Board fails to do this–or to correct its mistakes with earlier systems–then it may fail in its fiduciary duty.

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