Wolf D. Fuhrig
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09-14-03

Reforms To Combat Corruption And Greed

Washington, D.C.    Ever since the Enron scandal woke up the watchdogs of Wall Street, revelations about illegal and immoral business practices in the corporate world continue to make news while reforms are progressing only sporadically. The Sarbanes-Oxley Act brought numerous new rules, but corporate executive officers (CEOs) still hold too much power, boards of directors remain insufficiently involved, and most shareholders are kept silent and in the dark.

The latest criminal prosecution of a major corporation came last week in Oklahoma where MCI (formerly WorldCom), its former CEO Bernie Ebbers, and five other former executives were charged with an $11 billion accounting fraud. Ebbers' abuses of his leadership role had reached grossly excessive proportions. MCI's bankruptcy court investigator, Richard Breeden, disclosed that the corporation's board had rewarded Ebbers by rubberstamping a $400 million personal loan, the use of the corporate jet for a fee of $1 a month, and a $500 million severance package.

Obviously shaken by its past failure to prevent large-scale mismanagement and abuse of power, MCI's board of directors adopted 78 changes in the corporation's governance, as proposed by the bankruptcy court investigator. The motto: "Restoring Trust." Here are the most important changes that are to be written into the corporation's articles of incorporation and therefore to be approved by the shareholders:
  • The same person should never simultaneously hold the positions of chairman of the board and CEO.
  • Any one director or auditing firm should never serve for more than ten years.
  • Every year, a new director should be brought in.
  • Executive pay should be limited to $15 million per annum.
  • The directors' qualifications and workload should be enlarged, and their pay should be increased from $35,000 to $150,000 a year.
  • Raises above the established limits in the remuneration for CEOs and directors will have to be approved by the shareholders.
  • The arrangement of an electronic "town hall" should enable shareholders to communicate directly with the board of directors at its meetings.
  • Shareholder proposals with substantial backing (25 per cent or more) are to be put to a vote at the annual shareholders' meeting.
  • Management must formulate an explicit dividend policy that can be changed only by a vote of the shareholders. (Breeden's suggestion: annual dividend payout of 25 per cent of net profit.)
What Breeden proposed for the governance of MCI is badly needed for the many corporations still unwilling to change their unfair, if not corrupt, practices. A look at the annual CEO compensation study, entitled "Executive Excess 2003," by the Institute for Policy Studies shows that at the 50 companies with the most layoffs in 2001, CEOs received median pay raises of 44 per cent to accrue to median salaries of $5.1 million. A few examples:
  • Hewlett Packard dumped 25,700 employees but raised CEO Carly Fiorina's compensation from $1.24 million to $4.11 million.
  • Delta Airline laid off 17,400 employees, only to increase CEO Lee Mullins' pay from $2.18 million to $4.69 million.
  • Tyco let 11,300 employees go, yet almost doubled CEO Dennis Kozlowski remuneration from $36.4 million to 71 million.
In 2002, the 30 firms whose pensions were most underfunded raised CEO pay by 59 per cent to a median of $5.9 million. Between 2000 and 2002, the Fortune 500 corporations with the largest number of offshore tax havens rewarded their CEOs with 87 percent more pay than the firms in the median range.

In 1982, the pay ratio in the U.S. between CEO and average worker was 42 to 1, last year it was 282 to 1. Fortunately for the corporate elite, most American workers and small-time investors don't hear and read little about these absurd excesses. Even when they know those facts, they simply tend to swallow them as unalterable characteristics of the capitalist system.
 
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