Joseph W. Brown, CEO of MBIA Inc., received a 730% raise in total compensation in 2014, the same year his company's stock lost 20.1% in shareholder value. This is unacceptable. It shows that corporate governance efforts to tie senior executive pay to performance are still failing and that boards of directors are failing in their responsibilities.
Among Standard & Poor's 500 companies, Mr. Brown ranked as the 11th highest-paid CEO in 2014, according to an analysis, released Aug. 27, by The Conference Board. His total compensation was $43.8 million in 2014, according to the company's 2015 proxy statement.
Taking a longer-term view of the company's performance during Mr. Brown's tenure as CEO, MBIA's total shareholder return for the three years ended Dec. 31, 2014, was -6.1%. (Returns for periods of more than one year are annualized.)
Shareholder and CEO interests clearly are misaligned looking at the contrasting percentages for pay and return.
Corporate governance activists consider CEO compensation policy a window into the oversight and decision-making process of corporate boards. Shareholders must hold boards accountable for what that windows displays.
David M. Zaslav, president and CEO, Discovery Communications Inc., ranks as the highest paid CEO in 2014 among S&P 500 companies, with total compensation of $156 million, according to The Conference Board study.
Mr. Zaslav picked up a 368% raise in total compensation in 2014 even though the Discovery Communications stock's total return was -23.8% for the year. For the three-year period, the company's total shareholder return was 18.9%, underperforming major indexes.
In 2014, the total return of the S&P 500 was 13.69% and the Russell 3000, 12.56%. For three years, ended Dec. 31, 2014, their total returns were, respectively, 20.36% and 20.47%.
Both companies have underperformed their peer groups.
The stocks of the peer group 17 companies MBIA uses in its process of developing executive compensation policy had combined total returns of 11.8% for 2014 and 29.6% for the three years. Only three of the peer companies had a negative return in 2014, the worst of them an 11.2% fall in total shareholder return; none of the companies had a negative return for the three years.
The stocks of the peer group of nine companies Discovery Communications uses in its executive compensation setting process had combined total returns of 4.5% for 2014 and 32.6% for the three years.
Shareholders should insist boards provide more than a list of peer group companies. Proxy statements should include the performance of each company and the entire group to enable better investor evaluation of a board's decisions on executive compensation policy.
So far this year, the CEOs don't appear to be earning their pay, based on severe underperformance of their companies' stock. For this year through Sept. 14, MBIA's total return is -27.57% and Discovery Communications, -22.87%. By contrast in the same time frame, the total return of the S&P 500 was -3.73% and the Russell 3000, -3.38%.
Mr. Brown's 2014 compensation includes cash of $1 million in salary and $5 million in bonus and stock awards valued at $35.5 million, according to MBIA's 2015 proxy statement. Nearly all his compensation increase comes from the bonus and stock awards, both of which were new in 2014.
Mr. Zaslav's 2014 compensation includes $3 million cash in salary, $95.5 million in stock awards and $50.5 million in option awards, according to Discovery Communications' 2015 proxy statement. Nearly all of his compensation increase comes from the stock awards, which are new, and the option awards, which are up from $22.5 million in 2013.
Any pay raise, especially a triple-digit increase, in light of the plunge in shareholder value and overall underperformance, greatly misaligns corporate and shareholder interests. CEOs must share risk on the downside, not just benefit on any upside. Their pay must fall when companies underperform, and if that underperformance continues, the board must replace them.
Boards must address to shareholders how their CEO pay packages add value for shareholders.
Asset owners and other institutional shareholders must demand that boards better align executive compensation and corporate performance to better serve shareholder interests. By overpaying underperforming CEOs, they are failing in that responsibility.
Efforts by institutional shareholders haven't done enough to improve that alignment.
Institutional shareholders should do more than vote against misaligned pay. They should vote against members on the board's compensation committee who are responsible for excessive compensation policies. They should insist on performance-based pay for most of the compensation of the CEO and other top executives. If they announced in advance their proxy-voting intentions, it might persuade other institutional investors to dissent on corporate pay policies and put more pressure on the boards of underperforming companies to better align executive pay practices with corporate and shareholder interests.
Many activist asset owners and other corporate governance activists embrace a corporate structure led by an independent chairman as a better framework for leadership, and for managing the oversight of the board and the CEO.
But both MBIA and Discovery Communications have independent chairmen, considered best practice in corporate governance.
An independent chair might be a better way to structure leadership, but it is no guarantee for better aligning corporate and shareholder interests, or in restraining excessive CEO pay.
In 2015 through July 31, 2,461 companies held say-on-pay votes, according to an analysis by Steven Hall & Partners LLC, an executive compensation consulting firm. Of those, shareholders voted against the compensation of the CEO and other top executives at 53 or 2.2% of the companies, the analysis found
MBIA and Discovery Communications aren't among them. At its May 6 meeting, MBIA shareholders ratified the pay package for Mr. Brown and other executives at the company with 76.06% of the shares voted in favor.
Discovery Communications holds it say-on-pay vote every three years, the last tally being in 2014. Shareholders ratified the pay by 58.7% of the shares voted. But the Discovery Communications board ignored the shareholder concern about pay, and shareholders won't have another opportunity to vote on the pay of the CEO and other top executives until 2017.
Say-on-pay voting is non-binding on corporate boards, but directors should heed the message that comes from a high level of dissent from boards' pay policies. n