Proposals for Corpoate Governance and Executive Compensation Reform

08Feb12

Wall Street is broken, and it’s endangering both capitalism and democracy in the United States and abroad. There, I’ve said it. Most people skirt around the issue, saying instead just that Wall Street and Main Street are disconnected, or things like that, but the conclusion is inevitable. What was once a forum for the trading of shares of companies (companies which were of limited duration) has become a speculators’ market. Stock prices which supposedly reflect a company’s value have become untethered from the company’s actual value. Executives earn salaries approved by boards of directors who are executives at other companies. Top level executives who cut salaries or positions regularly cite their fiduciary duty to the shareholders, while treating their own compensation as an exception to that duty. The shareholders themselves (who own the company) effectively have no say in compensation for top executives or corporate political activity. Executive compensation bears no reflection on corporate value. Only on Wall Street and in Lake Wobegon is everyone above average.

With all that in mind, I submit the following proposals for consideration, in the hopes of saving American capitalism from those who would profit from scavenging its bones:

Proposal One:

In the event that a publicly traded company posts a loss in its annual report, top level executives shall be held responsible.

The people holding the positions of President, Chairman of the Board of Directors, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Information Officer, or their functional equivalents, shall post monies equaling the loss to an escrow account.

The senior most executive’s contribution shall be no less than the combined contributions of any other two officers.

The monies shall be held in escrow for up to five years.

If the company posts a profit for any of the following five years (verified by audits by two independent auditing firms), the contributors to the account may make a withdrawal from the account an amount equivalent to their proportion of the contribution as applied to the profit, but not to exceed the original contribution (e.g. an executive who had contributed half of the escrow for a company which had posted a loss of $5,000,000 and in the subsequent year posted a $1,000,000 profit would be able to withdraw $5000,000 in the profitable year, but would not be able to withdraw more than his original $2,500,000).

If the company has not recouped the loss after five years, the balance remaining in the escrow account shall be turned over to the company.

If the company has recouped the loss after five years, any revenue accruing to the account shall be distributed to the original contributors according to the proportion of their contribution.

Departure of any of the contributors from their positions shall not affect their liability or rights as outlined.

Upon the death of any contributors, their estates shall have claim to their proportion of the monies, only to the extent that the contributor would have, if living.

While stock options and other forms of compensation allow executives to share in a company’s good fortune, it is currently rare for executives to share in the burden of a loss. This (relatively simple) move would ensure that executives had a stake in the performance of their company, rather than being richly rewarded for driving a company to bankruptcy. At the same time, it recognizes that a short-term financial loss is sometimes necessary in the creation of longer term gains.

Proposal Two:

Direct monetary compensation of the people holding the positions of President, Chairman of the Board of Directors, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Information Officer, or their functional equivalents, in publicly owned companies shall be capped at $500,000 per year or 500% of the full-time-equivalent salary lowest-paid employee, whichever is lesser.

Companies may choose to compensate these officers beyond these restrictions through insurance benefits, pensions, or paid leave (not to exceed public civil service benefits offered in the state in which the company is incorporated).

Any compensation beyond the above must be in the form of company stock, the number of shares to be determined at the beginning of the contract. Half of said shares shall be disbursed at the end of employment, with the other half disbursed at a predetermined time no less than five years after the end of employment.

Should stock split or merge at any point before disbursement, the number of shares disbursed shall be proportional to the original number of shares, had the split or merge not taken place.

Should an  executive return to employment with said company before the second disbursement, he or she shall return the disbursed shares (if in possession) or shall reimburse the company for any stock sold or gifted (at the price of the stock at sale or reemployment, whichever is greater).

Proposal Three:

At the request of 10% of the shareholders (or 10% of voting shares) executive compensation is subject to referendum. Should such a referendum be called, the compensation clause in said contract must be approved by a majority of shareholder votes/voting shares. All votes must be cast by the shareholder voting, by any direct means (including, but not limited to vote-by-mail, electronic voting, or in-person voting). Proxy voting shall not be allowed on issues of executive compensation.

Proposal Four:

All executive compensation and political activity must be approved by a majority of shareholders (or voting shares). All votes must be cast by the shareholder voting, by direct means (to include, but not limited to: in person voting, vote-by-mail, or electronic voting). Proxy voting shall not be allowed on issues of executive compensation or political activity.

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