News Column

Scandals Delay Market Rebound

April 28, 2003

Jeff Brown

The war in Iraq is over, but the stock market hasn't enjoyed the big rebound many experts had predicted. The sluggish economy is an obvious factor. But is there something else?

Indeed, there is. Little has happened to restore investors' faith in the honesty of Wall Street and Corporate America.

Consider some of the stories we read about just last week:

The chairman and chief executive of nearly bankrupt American Airlines was forced to resign after his employees learned he had quietly engineered a rich bonus for himself and other executives while getting union members to tighten their belts.

Two partners in accounting firm Ernst & Young were barred from corporate auditing after regulators found they'd aided and abetted accounting fraud at Cendant Corp. in 1998.

The New York Stock Exchange is investigating a number of floor traders who may have padded their pockets by violating rules meant to ensure that investors get fair prices when they buy and sell.

Investigators at the Securities and Exchange Commission urged their bosses to file an insider-trading suit alleging that a former Wall Street analyst had passed confidential information to her husband, a professional stock trader.

Meanwhile, 10 of the biggest Wall Street firms are likely to come under new criticism this week when state and federal investigators release internal company documents as part of a settlement of a long investigation of analysts' biased recommendations.

If you want to view the glass as half-full, some of these instances are just what we want to see - a crackdown on miscreants. Indeed, some of these cases involve offenses alleged to have taken place years ago, during the market bubble.

Still, there's plenty of reason to believe that greed is just as pervasive now on Wall Street and in the corporate suite as it was in the '90s.

As the annual meeting season winds down, investors have fresh examples of the extraordinary pay lavished on top executives. A new study commissioned by Fortune magazine found that median pay for CEOs at 100 of the largest U.S. corporations rose last year by 14 percent, to $13.2 million, while the average S&P 500 stock plummeted 22.1 percent.

To ordinary folk, multimillion dollar pay is obscene on its face. Top executives who held large blocks of stock and stock options made fortunes as they rode the market's coattails in the '90s. In fairness, they should be losing money now, but their pals on their boards of directors protect them.

Take the American Airlines case. Directors there signed off on the lavish executive "retention" package meant to give top executives monetary incentives to stick with the troubled company. Last week, the directors turned on CEO Donald Carty not because the package was outrageous but because his lack of candor with union leaders caused a backlash that threatened a belt-tightening deal needed to keep the company out of bankruptcy.

But why did the board agree to the package in the first place? Why spend a fortune to keep the executives who presided over the company's near collapse? AMR shares traded around $44 early in 2001, now they're down to about $4.

Granted, it's been a tough few years for airlines in general. But if employees must suffer with layoffs, pay cuts and reduced benefits, shouldn't executives suffer, as well?

The problem, of course, is that the managers and directors aren't working on behalf of employees or shareholders; they're working for themselves.

Directors, who are supposed to be looking after shareholders' interests, typically argue that they must pay well to get and keep top executives - that it's just a matter of supply and demand.

But it's not a legitimate marketplace because the directors don't have a personal stake in keeping this spending under control - they aren't spending their own money. And the Soviet-style system for electing directors - just one candidate per opening - insulates them from shareholder wrath. It's virtually impossible for an outsider to get elected against the insiders' wishes.

Many directors are executives at other companies. They're perfectly happy to promote the industry-wide rise in executive pay, and they don't want to rock the boat and jeopardize the generous compensation they get as board members.

CEO pay has thus ratcheted to levels far higher than we'd get in an honest market. Imagine if the average CEO pay at those 100 large corporations fell from $13 million to, say, half that. It would still be an extraordinary amount.

What else could those executives do to make so much? They're not going to become major-league pitchers or rock stars.

Certainly, there are many qualified people who'd be happy to do these jobs for less - and focus more on service to shareholders, employees and customers.

Look elsewhere and you find an abundance of talented, hardworking leaders who don't make wealth their reason for being. The academic world is full of them.

So is the military. Those people who led the war in Iraq weren't doing it for a pile of stock options.

Of course, those commanders represent the best the country has to offer. The corporate suite, too often, represents the worst.



Source: Copyright ©2003 Philadelphia Inquirer. All Rights Reserved.


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