Knights of the Business Roundtable: A Circle With Few Virtues

When it comes to Justice and Generosity - two of seven knightly virtues -- the powerful Business Roundtable (BRT) has precious few shining knights.

Some 157 leading CEOs are seated at the Business Roundtable, one of the most forceful lobbying groups in Washington. For years it has kept a constant vigil over the corporate governance system, guarding the perquisites of the "imperial CEOs" against even the slightest proposals for reform, especially those which would empower company owners - i.e. shareholders.

"Corporations were never designed to be democracies," Business Roundtable President John Castellani explained last month to the House Financial Services Committee during a hearing on Barney Frank's "say on pay" bill (H.R. 1257, The Shareholder Vote on Executive Compensation Act), which would give shareholders the right to take a nonbinding advisory vote on CEO pay plans.

For years Castellani and his fellow CEOs have exhibited a gut disdain for shareholders, attacking virtually every corporate reform that has come before Congress and the SEC. This unbending resistance is the biggest reason why British experts told the Financial Times that things are worse for U.S. shareholders, who "lack basic rights which they take for granted in other developed countries." Frank's "say on pay" proposal has in fact been policy for years in the UK, where both shareholders and executives agree that it has improved communication between corporate boards and shareholder activists. (As Robert Reich writes in the American Prospect, Frank's bill will probably have a modest effect on out-of-control CEO pay, which is why it will be necessary for Congress to eventually do a lot more if they're serious about curbing corporate greed, including make changes in the tax code, procurement policies and other laws).

It's widely accepted that there will be little change in CEO pay until shareholders gain the ability to replace directors and nominate their own candidates for the board. Yet Frank's bill, as modest as it is by comparison, still faces an uphill climb so long as other members of Congress bend towards the position of the BRT and the Chamber of Commerce, and the SEC continues to be afraid of crossing the deep moat that encircles the current system of corporate governance.

Last year the SEC backed off a proposal to let shareholders nominate their own candidates for the board, a victory for the BRT, which had waged a fierce campaign against the proposal, lobbying anyone who'd listen, including the SEC, the White House, Treasury, Commerce and Congress.

Then these corporate warriors helped push an empty suit of armor into the top slot at the SEC. Commissioner Cox initially supported the SEC's expanded CEO pay reporting requirements, but then backtracked a bit over the Christmas holidays when few of us were paying attention. By March, the New York Times' Stephen Labaton reported that Cox was leaning in the direction of business. Although the story rankled Cox, one wonders where he's hiding the evidence to suggest anything else?

As for the BRT and its allies at the Chamber of Commerce, whenever anyone mentions how CEO greed is driving the country towards medieval levels of inequality, they usually resort to a bunch of blather about "independent directors" and other reforms. All of this has been an obvious charade ever since Enron, whose board after all was supposedy "independent."

The truth, as everyone knows by now, is that no board is really "independent" if the nomination process begins in an impenetrable chamber high up in the corporate castle where the CEO and the board call all the shots without interruption. When CEOs are finally forced to stop treating their own shareholders like peons and give them a voice in the process, the farce known as corporate governance will only stop when the merry-go-round of interlocking boards, the hiring of corporate compensation consultants, and the use of corporate money to pay trade associations like the BRT and Chamber of Commerce to lobby against the interests of shareholders also cease.

The latest data on executive pay -- published by the Wall Street Journal on Monday and analyzed in a report we published with the Institute for Policy Studies -- indicate that this lobbying has paid off for the BRT members -- who hauled away nearly 50 percent more in direct compensation last year than the typical major corporate CEO surveyed by the Journal. The median direct compensation total for the 83 CEOs in the Journal sample who serve on BRT was $9,863,700, compared to the overall average of $ 6,548,000.

By now the objection is usually made that top earners deserve what they get, so long as the rest of us reap the benefits of the broad prosperity that results from their leadership. That might be true if we were, but that's just it -- we aren't. CEO raises last year were much bigger than those received by average American workers -- 10.6 percent versus 3.7 percent for typical white collar workers. And this divergence has been the trend for some time: A 2003 study of publicly traded corporations by Harvard's Lucien Bebchuk found that the ratio of the top-five corporate executives' compensation to the aggregate earnings of their firms nearly doubled from 5 percent in 1993-1995 to about 10 percent in 2001-2003. The total take paid by public companies to the top-five executives during this period: $350 billion. (Source: Lucian Bebchuck and Yaniv Grinstein, "The Growth of Executive Pay," Oxford Review of Economic Policy, Vol. 21, No. 2)

Worse, some CEOs are not only cashing out while leaving everyone else behind. Many corporations are rewarding their CEOs for catapulting scores of hapless employees as a cost-cutting measure. Merck & Company CEO Richard Clark, for example, received a 167 percent pay increase in 2006 after announcing over 7,000 job cuts. (I wonder if Clark offered them any free painkillers when he announced they were getting the axe.)

Clark is one of a number of Business Roundtable CEOs who appear to have been wildly over-compensated in 2006:

* Anadarko Petroleum CEO James Hackett's salary rose 78 percent in 2006, according to the WSJ, even though the company's stock dropped from a nearly 57 point high in April 2006 to its current 45 (after dropping to 38.4 in March).

* Sara Lee Corp. CEO Brenda C. Barnes' salary rose 56.7 percent in 2006, even though the company's stock rose just two points (from 15 to 17) from a year ago.

* Solectron CEO Michael Cannon's salary rose 173.9 percent in 2006 at the same time that the company's stock lost a quarter of its value, dropping from around 4 to 3 points.

* Con-Way CEO Douglas Sotlar's salary rose 95.8 percent, even though the company's stock is priced at about the same value as a year ago (after dropping nearly ten points).

So much for the knightly virtues of generosity and justice.

[To learn more, check out the new report by the Institute for Policy Studies and the Center for Corporate Policy, "Selfish Interest: How the Business Roundtable CEOs Stand to Lose From Real Reform of CEO Pay"]