I have always believed that crisis brings out the best or the worst in all of us. CEOs and company directors are no different. It is easy to be a leader in the good times, the true test of character of a leader is how they cope with the bad times. And to date, not many of them have impressed.
Because of the greed-is-good cult we now seem to be part of, in NZ this year we watched numerous finance companies fall over causing huge distress to their investors. Fortunately even as things worsened, confidence in our banks was and still is, pretty solid. We may have looked on the rest of the world with envy over the past few years as other countries seemed to be leaping ahead in the financial stakes; but the conservative stance of our banks has paid off. And I'm sure every New Zealander is now grateful for that.
The first CEO in NZ to leave me speechless was a man called Rod Petrecevic, executive director of a finance company (Bridgecorp). He now faces numerous criminal charges. Bridgecorp collapsed owing 14,000 debenture holders NZ$459million, yet during 2008, even though it was obvious the company was in serious trouble, he continued to draw his obscene salary; continued to take investor money; stashed all his very expensive toys into a trust fund. After the collapse he had the sheer audacity to go to court to get performance bonuses he believed he was owed!
One of our long term business heroes - Eric Watson and his business partner Mark Hotchin set up the finance company Hanover and fronted it with a famous, and trusted, TV presenter. They encouraged Mums and Dads to invest their hard earned savings and amassed an incredible NZ$1 billion. Meanwhile they had set up a shadow company and were using these funds to invest in risky investments of their own. Tragically for all concerned, the cards have come crashing down. No doubt these smart cookies will have stashed plenty in off-shore accounts so will be OK - but tough luck on the poor old (and most of them were old) investors.
We watched the directors of one of our power companies - Contact Energy - preparing to give themselves a 100% increase in director fees, even though every day newspapers, radio and TV were reporting yet another financial collapse. This brave band of men had awarded themselves a 90% increase just 3 years previously. Fortunately the Australian parent body saw sense and pulled the plug on the increase. But it has already cost the company a 5% drop in customers as enraged customers went elsewhere.
But the NZ examples pale into insignificance when we hear that the CEO of Lehman bank (the first bank to collapse in the USA) had earned a quarter of a billion dollars over a 10 year period; presumably he would have had a senior management team on similar salary packages.
How can any business sustain these humungous packages?
And as if these levels of salary aren't obscene enough, we read that Bob Nardelli, CEO of Home Depot (USA) for 6 years, was on a salary of US$42million, yet during those 6 years the share price of the company fell 8%. He was removed from office yet walked away with a US$210 million golden handshake.
I hear also that the CEOs of Fannie Mae and Freddie Mac could be due severance packages in the region of US$24 million each even though both companies collapsed leaving massive debts and thousands of home owners facing mortgagee sales! The mind boggles.
But the absolute top prize for sheer, unadulterated arrogance, has to be awarded to the 3 CEOs of the US car industry arriving in Washington to discuss a bail-out package for the car industry. They each arrived in their private jets, a round trip which cost US$20,000 per plane (a round trip 1st class on a domestic plane would have cost just under US$300 each). They were in Washington to demand a bail-out package for the car industry - their rationale - all the people that would be put out of work if Washington didn't bail them out! Bit like a wayward teenager spending money like there is no tomorrow, arriving at the home of his/her parents in a top-of-the-range Aston Martin (on hire purchase of course) demanding that the parents take out a mortgage on their home, to continue funding their darlings extravagant lifestyle.
I think not! Enough has to be enough. Tragically it isn't the CEOs in this case who will suffer, it is the thousands of employees they have let down with their greed and their arrogance.
Q: CAN ANY BUSINESS SUSTAIN THESE TYPES OF SALARIES AND PARACHUTE CLAUSES?
Q: IS ANYONE REALLY WORTH THE KIND OF SALARY PACKAGES SOME OF THESE PEOPLE ARE ON?
Q: HAVE WE LOST THE PLOT SOMEWHERE?
Surely the primary aim of any CEO or director is to ensure the ongoing viability of the company they represent.
Perhaps not because I have just read that Qantas Airlines top 5 executives received a 200% bonus between 2002 and 2008. The airline's return on capital employed grew only 84% in that period. As a CEO isn't that fiscal irresponsibility? Aren't the senior people in an organization charged with making decisions that do not risk insolvency?
I think we are now being faced with the reality that this upward spiral of ludicrous salaries is totally out of control. It has to stop. No business can sustain such obscene amounts of money being paid to staff. Even CEOs at the end of the day are only employees, not owners.
Owners would presumably have spent years building a business; they would have taken all the risks to get a business up and running, and they would probably have lived for years on the smell of an oily rag. Owners could justifiably take that sort of money out of a company because they had actually earned the right, yet being owners, I suggest that they absolutely wouldn't take that kind of money out of their company if they even remotely suspected that the company couldn't sustain it. It's fiscal responsibility 101 surely.
The owners I know have learned the discipline of delayed gratification; they know that the name of the game is staying in business.
Employees - even CEOs have NOT earned the right to salaries of such magnitude.
And to get a sense of perspective - in NZ our Prime Minister has just had a salary increase - up to NZ$393,000. That is a PRIME MINISTER. Yet several of our big organizations pay their CEOs up to NZ$5million, miniscule by global standards I know. One of our $5 million dollar men is the CEO of Fonterra - the company that went into a partnership with Chinese milk producers - the ones who padded out the milk powder with melamine! Has the CEO fallen on his sword? Not so far.
So, if nothing else comes out of this economic crisis, please let it be an end to obscene salary packages and director fees which risk the very organizations that these people supposedly represent.
MY SUGGESTIONS FOR GOING FORWARD
- I would like to see CEOs put onto some kind of fixed ratio of pay - something like 100 times the lowest paid worker in the organization. And even that is generous. So if the lowest paid employee's take home pay is $24,000 the CEO would be on $2.4 million. Not a bad package.
- If the CEO/directors get an increase, then so does everyone in the organization, that way we keep the ratio intact and the CEO/directors honest
- I would also dispense with CEO bonuses. A better way to reward would be to link CEO/director salary to the company share price. If the share prices goes up, their salary could go up by the same amount, if the share price drops, the CEOs salary drops, also by the same amount. So our Home Depot man would have had 8% deducted off his salary every year until he found a way to get the organization back on track. Now there's an incentive to do better.
Fortunately some CEOs have stepped up to the plate, and I applaud them loudly:
- Edward Liddy - CEO of AIG is taking a salary of just $1 per year until 2010 and all the senior executives are forgoing bonuses this year
- The CEO and executive team of the Goldman Sachs Group made the decision not to take their bonuses for 2008 because ‘it's the right thing to do' (they shouldn't suffer too much though - the CEOs salary is US67.5 million)
Rahm Emanuel, Obama's newly appointed chief of staff sums up the current economic situation by saying ‘Never waste a crisis.'
This then, is our moment. This is the world's opportunity to get back to some measure of sanity. To realize that greed got us into this situation and courageous leadership is the only way to get us out of it.
Courageous leadership says - I am responsible for this company and my remuneration will reflect that - but I will NEVER, EVER put the company at risk and if I have to set an example, I will halve my salary or quarter my salary, or take NO salary, until I get this thing back on track.
The day of the fat cat has to be over.