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NYC Demands Tougher Compensation Policies from Wall Street Giants

New York City Comptroller John C. Liu and the NYC Pension Funds submitted shareholder proposals to JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley requesting that they “hold senior executives financially accountable for losses that result from excessive risk-taking or improper or unethical product.”  The proposals would strengthen the banks’ existing clawback policies “that allow them to recoup incentive pay from employees who act improperly,” and would also “prevent the perverse incentives and bad practices that were at the heart of the financial collapse of 2008” by increasing executives’ accountability; holding supervisors responsible for bad behavior; and disclosing clawback actions.

 
JPMorgan, Goldman Sachs and Morgan Stanley were targeted as “they are among the largest and have each come under scrutiny for improper practices leading up to the financial crisis.”  Moreover, each company “has paid more than $100 million over the past 18 months to settle state or federal charges in connection with mortgage securities.”  Indeed, an article by Bloomberg News reported that Goldman Sachs agreed to pay $550 million in July 2010 to settle the government’s claims it misled investors concerning financial products connected to subprime mortgages.  Similarly, JPMorgan agreed to pay $153.6 million to settle a suit in June.  Also, “Morgan Stanley agreed to pay $102 million in June 2010 to settle claims by Massachusetts that the firm financed and securitized unfair residential loans.”

According to Comptroller Liu, “No one should profit to be rewarded with bonuses when engaged in improper or unethical behavior.  These tougher clawback provisions will not only recover money that shouldn’t have been paid in the first place, but also set the tone for a stronger standard of conduct for company executives as well as their bosses.”

SEC Charges Execs with Fraud at Fannie & Freddie

Following up on our September post "Big Bucks, No Whammies?" about the SEC's apparent inaction on the wells notices they had served to the execs of Fannie & Freddie. We write to report that Whammies finally came with  Friday's headlines . The SEC brought fraud charges after all, not just against Daniel Mudd, former CEO of Fannie Mae but also five others now charged with deliberately misleading government officials about the extent of their subprime exposure.

The NYTimes explores the charges in greater detail and there are new reports that an FBI investigation into the same conduct is underway which means the guys could face criminal charges.    Following the SEC announcement speculation had already begun that Mudd would soon step down as CEO at Fortress Investment Group (FIG).

“Can you really run a trading and investment firm with a guy accused of fraud in the corner office?”   a Fortress employee was reported to have asked.  Apparently not when the accusations become official. (UPDATE:  Mudd took leave as CEO of Fortress on Wednesday December 21)

Mudd has been on the board at Fortress since 2007,and was appointed CEO of Fortress when he left Fannie amid scandal after the bailout in 2008 Fortress is a publicly traded hedge fund which recently introduced new subprime mortgage bonds onto the market.... 

Wall Street’s “Moral Minority”

A New York Times article has revealed that long before Occupy Wall Street, the Sisters of St. Francis of Philadelphia were battling Wall Street over corporate responsibility. For the last thirty years, the Sisters have used the investments in their retirement fund to become Wall Street’s moral minority.

Using their status as shareholders, the nuns fought with Kroger over farm worker rights, with McDonald’s over childhood obesity, and with Wells Fargo over lending practices. They have met face-to-face with the heads of Lockheed Martin, BP, and General Electric. Most recently, they advised Goldman Sachs executives that the bank should protect consumers, rein in executive pay, increase its transparency, and remember the poor.

With their moral authority, the Sisters of St. Francis “can really bring attention to issues,” said Robert McCormick, chief policy officer of Glass, Lewis & Company, the proxy voting firm. “You haven’t seen shareholder activism until you see a nun battling it out with the CEOs. They can be devastating,” said Michael Passoff in a 2005 article on religious shareholder activists. Passoff works in the Corporate Social Responsibility Program for As You Sow, a leading organization in the strategizing and organizing of shareholder campaigns.

The nuns have been waging this war since 1980, when St. Francis Sister Nora Nash formed a committee with her community to combat troubling developments at the businesses in which they invested their retirement fund. The Roman Catholic order of over 500 nuns has teamed up with other orders and faith-based investing groups on shareholder resolutions. Much of Sister Nora’s activism takes place under the Interfaith Center on Corporate Responsibility, an umbrella group which includes Jews, Quakers and Presbyterians.

Sister Nora said that she and the order “want social returns, as well as financial ones.” She added, “when you look at the major financial institutions, you have to realize there is greed involved.”

The full New York Times article can be found here.

A Chance "To Talk About What's Broken" - Warren's take on Occupy Wall Street

Controversy surrounding Elizabeth Warren's position on Occupy Wall Street has been widely publicized this week, perhaps obscuring the simplicity and integrity of her words on the movement.    

Have you seen this powerful video yet? 

"I have been protesting Wall Street for a very long time. Occupy Wall Street is an organic movement, it expresses enormous frustration and gives a great faith all across the country for people to talk about what’s broken."

  

 



Big Bucks. No Whammies?

Tick Tock. Tick Tock.  In a scenario reminscent of the classic game show Press Your Luck.  It appears Former Fannie Mae CEO Daniel Mudd  may get a reprieve  courtesy of new Dodd-Frank stopwatch.  Mudd was put on notice March 11th that he could face regulatory action for his role in misrepresenting the underwriter's subprime exposure to investors and government agencies.  But Dodd-Frank amendments enacted last year introduced a 180 day time limit compelling Commission staff  to "either file an action or provide notice to the Director of the Division of Enforcement of its intent to not file an action,” within 180 days of the Wells Notice. 

The probe centers on his time at Fannie Mae and his role in creating the subprime debacle that would shock the country and the world.  But given the radio silence, observers wonder if  new admendments that were intended to make the agency more proactive in handling such cases have backfired.   

An alternate theory is that the inaction is related to reports that the SEC is winding down its investigations of Fannie & Freddie the NY Times reported that Fannie settlement talks were underway and fraud charges would likely be dismissed.  

As we explore more in the Pomerantz Monitor this month.  Fannie & Freddie Conservator the FHFA  also announced in early September that they'll seek to recover $196 billion in new actions against 17 banks for misrepresenting CDO risks to the underwriters.

For his part, Mudd has shown little remorse.  His failure, he said, was only that he could not maintain the “delicate balance,” required to meet such expectations.   Since taking over the CEO position at Fortress Investment Group Mudd's appetite for subprime has continued unabated.  In May, the publicly traded hedgefund unveiled subprime bond Springleaf acquired from AIG.  They  even managed to secure triple A rating from S&P after that agency had downgraded US treasury securities. 

So far, for Mudd its big bucks, and no whammies. 

Say-on-Pay Update

As we have reported in earlier posts on “Say-on-Pay,” the Dodd-Frank Act provides for an advisory shareholder vote to approve executive and board compensation at most public companies.  While companies have overwhelmingly passed their Say-on-Pay votes this proxy season, 39 out of approximately 2000 companies have reported failures.  Twenty-five percent of these failures have occurred in the energy sector, and almost all failed votes have followed on the heels of a “no” recommendation by the institutional investor watchdog, Institutional Shareholder Services.

The Dodd-Frank Act also provides that shareholders decide how frequently Say-on-Pay votes are held -- the options ranging from every one to three years.  As expected, companies who failed this year’s Say-on-Pay vote also saw their shareholders demand such votes every year.

While these votes are advisory in nature, plaintiffs are using failures to bolster unjust enrichment and corporate waste claims in shareholder lawsuits.  The stronger cases have coupled these claims with federal claims under the proxy rules, often attacking a company’s “Pay-for-Performance” policies.  So far, two such shareholder lawsuits -- against KeyCorp and Occidental Petroleum -- have settled.  A significant part of the KeyCorp settlement included substantial compensation policy reforms.  The terms of the settlement in Occidental (whose CEO Ray Irani has been paid almost $300 million over the past decade) are largely confidential.  The remaining cases are pending.

We are encouraged that shareholders are standing up for the principle -- both at the corporate ballot box and in litigation when necessary -- that public companies should not increase executive compensation as shareholder returns decline.

Executives’ Personal Portfolios Hedged

The New York Times reported Saturday that more than a quarter of Goldman Sachs’ partners used various hedging strategies from July 2007 through November 2010, based on its reporters’ analysis of regulatory filings. According to a Goldman spokesperson quoted by The Times, only 10 top Goldman executives are barred from hedging their Goldman shares. One Goldman partner avoided several millions of dollars in losses by putting a collar on 175,000 shares in a transaction entered into several months prior to the financial crisis, The Times reported.

A 2010 paper by professors Bettis, Bizjak and Kalpathy found that executives tended to place hedges after significant share price increases relative to the market, and that zero-cost collar and prepaid variable forward hedges tended to precede significant declines in the company share price, according to a summary on “Executive Pledging and Hedging” on the Stanford.edu Knowledgebase.

The SEC is drafting regulations under the Dodd-Frank Act to require U.S. issuers to disclose company policies permitting employees or directors to enter into transactions designed to hedge decreases in value of the firm stock.

 

US Companies Divided on Say-on-Pay Frequency, Towers Watson Poll Finds

According to a new poll conducted by Towers Watson (NYSE, NASDAQ: TW), U.S. companies are split on how frequently they should put their executive compensation programs to a nonbinding say-on-pay shareholder vote.  According to its press release, Towers Watson further reports that while some companies are making adjustments to their pay-setting processes, many are not yet clear on how to assess the success of the vote or prepared to address the results of the shareholder poll.

 Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, companies are required to conduct say-on-pay votes at least every three years.  However, it is left up to the company to decide whether it will hold annual, biennial or triennial votes.  Companies are also required to put the say-on-pay frequency question to a nonbinding shareholder vote at least every six years.

 While 51% of poll respondents expect to hold annual say-on-pay votes, nearly as many respondents (49%) don’t know what level of favorable shareholder say-on-pay votes will be considered a successful outcome by their boards, and only 8% of the respondents have a process in place for analyzing the results of the vote. 

 Poll results indicate that companies have a range of reasons for favoring a particular frequency.  Four in ten respondents cited accountability to shareholders and a desire to minimize administrative burdens as factors having the greatest influence.  Other factors include shareholder preferences, proxy advisory policies, and providing shareholders with an avenue to express concern about executive pay without casting negative votes on other matters.

 According to Towers Watson senior consultant, James Kroll, “The survey responses suggest that companies are struggling to understand the implications of say-on-pay votes and many are taking a wait-and-see approach to measure success…This new era will require companies to step up their ongoing communication with shareholders and tell a compelling story about how their pay programs help drive business performance, while also listening and responding to shareholder concerns.”

From the Pages of The Pomerantz Monitor: Relocation Subsidies: The Latest Corporate Giveaway

The Pomerantz Monitor reports on one of the latest issues angering shareholders -- relocation subsidies. Reimbursement of relocation expenses is nothing new: if a company asks an employee to move, the least it can do is pay the costs incurred. But now we have relocation expenses on steroids. Some companies hiring new executives, or asking existing executives to relocate, are reimbursing them not only for the moving van, but also for any losses they incur when they sell their homes. In today’s market, that can be huge.

For example, according to the WSJ, when Microsoft recruited Stephen Elop as president of its business division in 2008, it paid him $5.5 million in relocation benefits, including $3.7 million to cover his losses on the sale of his home. When he later quit Microsoft in 2010, he got to keep his relocation bonus. In response to shareholder pressure, Microsoft has since put limits on its relocation packages, including a clawback that requires reimbursement of the company if the executive jumps ship within two years. 

According to the WSJ, about 74% of companies reimburse some or all of employees’ home-sale loss if taking a job with the company forces the employee to move. Given the monumental housing losses some top honchos have taken, this has led to a shareholder mini-revolt at some companies.

For example, the California State Teachers’ Retirement System, along with other institutional investors, fought the reelection of three directors of Electronic Arts who had approved over $1.5 million in relocation benefits, paid to the chief operating officer, including reimbursement of an $800,000-plus loss on resale of his house. The three directors barely avoided being kicked out at last August’s annual meeting.

At Delta Airlines, Institutional Shareholder Services, the proxy advisory firm, urged its clients to vote against the reelection of the compensation committee members who had approved the payout of $377,500 to the CEO for losses on his resale of his home. Delta then abruptly cancelled its home loss reimbursement program, and ISS backed off its re-election challenge. 

At many companies the problem persists, however. ISS has now recommended that shareholders vote against the reelection of directors at eight companies where lavish home loss payouts had been approved for relocated executives. The WSJ quoted ISS special counsel Patrick McGurn as saying that “home-loss provisions are a hot-button issue with our institutional clients.”

This problem underscores what we already know: top corporate honchos live in a different world from the rest of us. They get reimbursed for their housing losses – even if they then purchased another home at a price that was reduced just as much as the house the executive sold. And when they resell their new houses at a later time, and make a handsome gain, is the company going to share in that profit? Don’t hold your breath. Heads they win, tails shareholders lose.

 

High Pay Based On Fictional Peer Groups

A recent study, Compensation Peer Groups at Companies with High Pay, published by the Investor Responsibility Research Center (IRRC) Institute and PROXY Governance Inc. (PGI) identified at least 15% of the S&P 500 companies with high pay that is not aligned with high performance.  The study reveals that these high paying companies select larger than appropriate peers, in sense of market capitalization and revenue for compensation benchmarking purposes.  From there, the boards of directors of these high paying companies ignore their own made up peer groups when it comes to paying their own CEOs and simply pays them an average of more than double or 103%, above the median of the self-selected peer group.

 

“The data indicate that some companies are ‘fixing the game’ by first choosing larger and better performing companies to be in the peer group against which they measure their CEOs compensation,” said Jon Lukomnik, Program Director of the IRRC Institute.  “Then, incredibly, even the ‘fixed’ rules are ignored to grant compensation more than 100 percent above the self-selected peer group….  Clearly, high CEO pay does not always go hand-in-hand with superior shareholder returns.”