New York – The recent turmoil in the American financial markets, and the troubled economic bailout plan, have sparked interesting analysis from alternative research firms covering management and corporate governance.
The Corporate Library, which covers corporate governance issues, has recently issued the commentary titled “Executive Compensation Reform by the Back Door: Pay Provision in the Bailout Plan.” The document examines the proposed limitations to executive compensation within the bailout plan. Much has been said lately about who should leave with what. Large paychecks and severance packages are seen by many as a reward to executives whose companies crashed. However, The Corporate Library’s analysis goes further highlighting a direct relationship between juicy paychecks and the current crisis. According to the commentary, which is available at the Corporate Library’s website:
“There should be no doubt that executive compensation lies at the root of the current financial crisis. There is a direct link between the behaviors that led to this financial collapse and the sort-term compensation programs so common in financial services companies that rewarded short-term gains and short-term stock price increases with extremely generous pay levels.”
The commentary expresses that compensation based on short term gains associated with risk-taking is inappropriate, to say the least. In contrast, performance based compensation should not be limited, especially if it is tied to “substantial long-term and sustainable gains in shareholder value.” The Corporate Library’s analysis concludes by pointing out a hurdle. Legislation incorporating pay limitations and severance prohibitions can only be enforced in those companies where the government holds a stake.
Another area within corporate governance that has attracted the attention of alternative research providers in the midst of the financial crisis is the one of management turnover. Liberum Research, an independent research provider specializing in corporate management changes, reported that the third quarter of 2008 presented a significant decline in executive turnover as compared to the same time frame in the two last years. This decline is occurring parallel to soaring unemployment rates and a severe financial crisis.
Liberum’s analysis expresses that “while there may not always be a direct correlation between executive turnover and overall unemployment numbers… for the last six months there has been a divergence between these two specific categories.” This is interesting since it would not be a stretch to assume that a growing economic crisis, including mediocre growth and diminished revenues, would bring along increased, not decreased, executive turnover.
Corporate governance certainly will be an area of special interest in our times of financial upheaval, and alternative research firms are in the game.