Saturday, July 26, 2008

The Investment Zoo Chapter 4: Corporate Crooks

Jarislowsky comments on the outrageous greed exhibited by corporate executives that has been on open display in recent years. He is flabbergasted that board directors allow management to essentially steal from shareholders via excessive salaries, over the top bonus plans and exorbitant lifetime retirement packages. He refers to it as a racket, where board members keep their easy pay jobs by staying in the pockets of the CEO while they set each other up for no risk gains. He feels that the excessive compensation, especially in the form of stock options and golden chute retirement packages act as anti-incentives to having those managers align their interests with the shareholders. While Jarislowsky suggests that greed is not going away anytime soon he advises to be aware of it and control the boundaries of where it is allowed to play.

One of his recommendations is that the top executive pay should be a bit higher but fairly close to the other company executives' pay. If the top job pays ten times that of other executives, it is unfair and does not promote team work amongst the management team. Instead, he argues that it sets up an environment where the other executives are gunning for the top job. He believes that the top executive jobs are way overpaid and that most executives would perform just as well or better with even less pay. He observes that the high executive pay is not helping to reduce the frequency or size of writedowns experienced with companies in the markets. He feels that salaries for employees should allow a comfortable lifestyle, but that bonuses (not exceeding the annual salary), should pay for the perks.

Jarislowsky would prefer that stock options didn't exist at all. However, since they do, he recommends that stock options not exceed 5% of the common share float. Also, he wants to see stock options fairly shared amongst all the rainmakers in a company.

To get CEOs to effectively manage a company they need to be given incentives to think like long term shareholders. For this reason, he suggests requiring the CEO and other top executives to be heavily invested as long term shareholders in the companies they work. This will get them to work for the common good of the company.

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