For another example of the sheer disconnect between CEO pay and performance these days, look no further than the $55.6 million “golden parachute” compensation package the board of BlackBerry approved for its CEO Thorsten Heins.
Over the past few years, this once-dominant smartphone maker has mismanaged its way into near oblivion, its share price slumping a whopping 96% since mid-2007 and losing nearly $1 billion in the second quarter. Now, as 4,500 workers are being laid off, the board hands the CEO a pay package that triples his compensation if the company is sold, as it plans to do.
The irony is that I can’t even blame the CEO for his chutzpah in agreeing to this outrageous “pay for failure” package, although the buck stops at him for BlackBerry’s catastrophic performance. It goes without saying that this fall from grace as the market leader to near-collapse is evidence of colossal vision, planning and/or execution failures.
My question is how can the board have such contempt for shareholders, workers and the community by approving this enormous compensation package using shareholder money for such abject failure?
How can this board sit idly by and let the CEO destroy so much value and then turn around and sack thousands of workers? Where is their fiduciary duty to shareholders? Where is their sense of obligation to their community? But perhaps most importantly, why do institutional shareholders and mutual funds tolerate this?
The answer, as I have long stated, is that these days boards operate as fiefdoms with virtual impunity, insulated from shareholders and protected by the “business judgment rule.” Long-suffering investors have limited power to change the make-up of boards. Many boards act like private clubs, with memberships confined to “people we like,” with investors relegated to a “take it or leave it” status. They can vote, but their votes can be ignored. In many cases, the only way to get new blood on the board to change its direction is through a major proxy war.
The Imperial Board is alive and well and it’s killing the economy. If you asked the people of Waterloo, Ontario why their community is suffering due to job losses at BlackBerry, they would probably blame competition from Apple. In my view, they should look to the board of BlackBerry.
Shareholders should have more power to nominate directors and eliminate anti-takeover devices like “poison pills.” But these demands regularly face staunch opposition from the “boards-know-best” crowd, led by Wachtell Lipton, the Business Roundtable lobby group and others.
Is it any wonder that institutional investors are often silent and simply sell their investment in troubled companies? If they had more power to DO something, then they might start working for real change at misguided companies, rather than run for the exits.
BlackBerry’s golden parachute award amounts to a golden fleece of shareholders. It is Exhibit A for why “board-centric” rules need to be changed. But it’s not just BlackBerry. It is equally egregious that the boards of Home Depot, Hewlett-Packard, Pfizer and many others approved enormous pay packages for their CEOs in recent years while shareholders suffered.
If a BlackBerry board member needs evidence of the corrosive effect of golden parachutes, they need look no farther than a 2012 study by Prof. Lucian Bebchuk of Harvard Law School. The study found that the adoption of golden parachutes “is subsequently followed by significant erosion of value” and that this value continues to “erode over the next several years.”
These kinds of egregious awards are also why I support enactment of the SEC’s recently proposed rule requiring companies to disclose the pay gap between what the CEO makes and the median pay for its workers.
The rule, in my view, would not only show the ever-widening and corrosive pay gap between the Imperial CEO and its workers, but also show how many boards prize loyalty to the CEO who placed them in their lucrative positions over their fiduciary duty to shareholders to maximize value.
One hand washes the other in corporate boardrooms these days, investors be damned. This is why I am starting the Shareholders Square Table campaign to change the rules to allow greater proxy access and the elimination of poison pills, both of which would do much to to shift the balance of power in corporate America to the owners – the shareholders.
That the board of BlackBerry is allowed to hand its CEO a monstrous pay package when thousands of workers lose their jobs and shareholders get hammered is only the latest evidence that the board-centric system needs a major overhaul.
Follow me on Twitter: @Carl_C_Icahn.