Shooting holes in golden parachutes

By Chandran Nair

This column appears in the Ethical Corporation March 2007 issue

Bob Nardelli's handsome reward for a job badly done has brought the inequities of extreme capitalism into the spotlight

There was no surprise when Bob Nardelli decided to quit as chairman and chief executive of Home Depot. The world’s biggest home improvement retailer suffered falling share prices and sales on his watch. What sent eyebrows arching was the size of his payout: Nardelli walked away with US$210 million.

The size of his severance package prompted editorial outrage in many of the world’s leading newspapers. It drew anger from labour unions, which described the payout as “extreme and obscene”. It has moved leading investors to launch an unprecedented campaign to curb such compensation packages.

If he has done nothing else, Mr Nardelli has helped bring worries about “extreme capitalism” to mainstream consciousness. These “golden parachute” agreements are the norm, with executives paid huge sums regardless of their company's performance. They embody the kinds of excess that poison capitalism and globalisation in many people’s minds.

Interestingly, these excesses are uncommon in corporate Asia, for all its flaws. It is Asia’s shareholders’ and business leaders' vital challenge to keep them from taking root – even whilst they clean up their corporate governance act.

Capitalism's disease

Extreme capitalism is nothing more than simple greed, regardless of the arguments that its apologists put forward. The corruption that this greed fuels has been unfortunately legitimised by fancy governance doublespeak and cosmetic rules that are easily overlooked by self-serving boards and compensation committee insiders and their advisers. It’s a phenomenon that the Financial Times calls “a disease”.

While it is the shareholders whose investments have suffered and who lose out heavily from these excessive payouts, they are only one group among many. The accumulation of surpluses and their distribution to undeserving business leaders has deep implications where multinational corporations chase their wealth and profit.

There are various means by which these surpluses are built, but two practices stand out: transfer pricing, and the externalising of business costs. Both affect stakeholders globally.

Transfer pricing -- charging internally between branches of a multinational company to produce high incomes in low-tax jurisdictions -- cheats treasuries across the world, but wounds most deeply in developing economies whose peoples are deprived of trickle-down monies. The connection between transfer pricing and distorted pay packages is no brainteaser. But the north-south element in the formula should not be ignored; it is intensifying tensions.

The drive of economic globalisation constantly demands cheaper raw materials and labour. Supply chain and foreign direct investment decisions are inextricably tied in -- an unfortunate consequence is the exploitation of lax taxation, environmental and labour law enforcement, inevitably in developing economies. Even the best-intentioned companies are caught in this web, regardless of their pronouncements of good governance and ethics. Often joint-venture partners, intermediaries and local authorities collude.

There is a need to bring these open secrets into the light: they are the mechanism behind exaggerated payouts and bonuses. They have become the unquestioned norm. Much of the responsibility for allowing this rests with business advisers, including the cartel of large accounting firms and the associated management consulting practices. These few wield enormous powers.

Now the Nardelli episode has galvanised some of the world’s biggest investors – fund managers, pension funds and insurers – together with religious groups to push for a greater say in executive pay. They are urging that a non-binding shareholder vote on these packages be instituted, much like the practice in Britain.

This may have an affect, especially if pay is tied to company performance, as the top tier at banking giant HSBC has found. The bank’s scheme is tied not only to shareholder return but also to the bank’s performance relative to other banks -- and poor performance last year has put the skids on their bonus payouts. Chairman Stephen Green missed out on more than one million pounds in bonus shares, Douglas Flint, finance director, lost more than 800,000 pounds, while Michael Geoghegan, chief executive, more than 400,000 pounds.

As a pay scheme, it has its pluses. But it is only a small step in a campaign to save capitalism from its elite. There are still many more considerations, as outlined above. In the end, the struggle to expose flawed arguments and blatant wrongdoing will be long.