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Executives Again Treating Corporate Treasuries as Their Money

A huge problem with current practices at American companies is that senior executives believe they personally are due what the company earns. The repeated ethical lapses perpetrated by the senior executives and supported by their well paid board continues to undermine the economy of the country.

Two events last week illustrate the level of disconnection with reality the current crop of ethically challenged senior executives.

First, we have the senior executives at the too big to fail financial institutions that did fail and were bailed out by taxpayers. We all know the economic calamity caused by these executives, throwing millions of people out of work, adding huge burdens to already overburdened future taxpayers with the huge spending governments engaged in, in order to successfully avoid what would have been a depression. Fewer people realize the government has been systemically transferring money to these large, too big to fail financial institution from millions of savers with policies directly providing billions in profits to all the large financial institutions that had failed.

So what did the senior executives that failed as spectacularly as anyone has ever failed economically in history do last week? They paid themselves tens of millions of dollars, paid for by all those who have received artificially lowered rates (through action by the Federal Reserve in order to save the economy and reward their member banks) on their savings which provided billions in profit to the failed large financial institutions. Just like 5 years ago, as they were doing their best to take such detrimental actions that would cause a depression (but for the government saving us from that outcome) they again use the excuse that they are just doing what all their colleagues are doing.

The lack of honor of these men is amazing. And the lack of honor of those who continue to treat these people as anything but pariahs is amazing. That we continue to pursue policies that enable and enrich too big to fail financial companies on the backs of those that save and in so doing provide billions in profits for the executives to treat as their personal bank accounts is sad.

The compatriots of those senior executives at Transocean showed the same disregard for honor, accuracy and truth. First, who is Transocean?

A presidential commission concluded that the explosion [in the Gulf of Mexico last year] had been caused by cost-cutting and directly blamed Transocean, BP and Halliburton for the disaster.

So with what was one of the worst (if not the worst) economic safety failures ever and 11 deaths in the explosion, this is what Transocean senior executives say, in their SEC filings:

“Notwithstanding the tragic loss of life in the Gulf of Mexico, we achieved an exemplary statistical safety record as measured by our total recordable incident rate and total potential severity rate,” the report says.

“As measured by these standards, we recorded the best year in safety performance in our company’s history, which is a reflection on our commitment to achieving an incident free environment, all the time, everywhere,” it adds.


Transocean Execs Get Bonuses after ‘Best Year in Safety,’ Despite Gulf Oil Disaster

Eleven people were killed, including nine Transocean employees, in the April 20 explosion and collapse of the rig, which gushed crude oil into the Gulf of Mexico for 86 days.
…
In the proxy, Transocean’s directors also ask shareholders to shelter “the Board of Directors and the executive management From liability for activities during fiscal year 2010.” The company is being sued by some shareholders for failing to monitor risk leading up to the spill.

The problem with most news coverage is they see Trsocean as a special cause. The act of Transocean’s senior executives is entirely consistent with the actions of other senior executives. The details in the case of Transocean are a bit more sensational but the attitude that senior executives are owed exorbinant pay no matter what the results are in the standard practice. If results are bad, companies routinely revalue options to reward senior executives. When times are good senior executives are lauded as visionary, brilliant, decisive and responsible. When times are bad senior executives are lauded and performance is excused as beyond their control and certainly their rewards should not be limited due to bad results.

The amazing scope of the pleas of ignorance that the senior executives at financial service firms made were, in my view, unique. Often executives that had no problem taking tens or hundreds of millions due to their critical role in the hundreds of millions their company made, plead ignorance to any situation that leads to trouble. But they generally have very limited please of ignorance. And they argue that ignorance certainly doesn’t mean that they are not due millions. I am perfectly willing to accept some ignorance. But if I am paying someone tens of millions that willingness disappears. If you want to take pay as though you are super human you can’t then say well what do you expect I am merely human.

But the utter ignorance expressed by senior executives at the large financial firms was shocking. They testified they had no knowledge of most of what went on in their organizations. And now, after a few years of billions of taxpayer funded profits (even in the years they had losses those losses were muted by billions of profits from taxpayer funded activities), they again are saying they are due tens of millions.

Citi claims ignorance on risky investing

Rubin insisted that no one brought potential problems on Citi’s balance sheet to his attention. So, more than a year-and-a-half after the financial crisis, where exactly does the buck stop?

Taking tens of millions for something or other seems sensible to Rubin. Actually knowing what is going on in his company doesn’t seem to be one of those things he should do for the tens of millions he took.

Moral Hazard and the Crisis by James Surowiecki

In a way, the moral-hazard argument ascribes far too much foresight, intelligence, and rationality to the banks. It assumes they were coldly calculating the chances and consequences of failure and forging ahead nonetheless, when the reality seems to be that for the most part they were blissfully ignorant and arrogant about the flaws in their lending and investment strategies.

The acceptance of the horrid behavior by senior executives is threatening the future success of the country. Unless we stand up to the repeated ethical, moral, financial and leadership failures of these people we will continue to suffer.

As an investor all of this is critically important. a huge problem is you need to find companies that have honorable senior executives (nearly impossible) or companies where the taking by senior executives can be supported by the profits of the business and still be a wise investment. This is possible when times are very good. Unfortunately the senior executives have become increasingly greedy over the decades. And they have learned to just gamble, and when they gambles pay off, they take huge portions of the profits for themselves and a few others and when it fails plead ignorance or inevitability and if that doesn’t work just move on to some other company to start taking the cash out of its treasury. The problem, is just like all those that brought about the credit crisis, senior executives just look at colleagues and say – how can anything be wrong with me taking so much from the companies treasury all of us are just taking more and more so you can’t blame me for just going along. And how does such “wisdom”, justify being paid millions?

Related: Can Bankers Avoid Taking Responsibility Again? – Preaching False Ideas to Men Known to be Idiots – Another Year of CEO’s Taking Hugely Excessive Pay – CEOs Plundering Corporate Coffers

April 3rd, 2011 John Hunter | 6 Comments | Tags: economy

Comments

6 Comments so far

  1. Maslow on Dealing with Authoritarians » Curious Cat Management Improvement Blog on August 8, 2011 6:17 am

    “The correct thing to do with authoritarians is to take them realistically for the bastards that they are…”

  2. The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects at Curious Cat Investing and Economics Blog on August 18, 2011 10:14 am

    […] next decade. In fact I am happy to own them. Frankly the biggest worry I have is that the senior executives will loot the owners profits with exorbitant pay (this is not a worry at Toyota and less of one at Amazon). I would worry more about owning index […]

  3. Massively Unjust Executive Compensation Damages Companies and Investments » Curious Cat Management Improvement Blog on March 13, 2012 2:56 am

    As an investor, one of the big risks that has to be evaluated is how much of the business profits executives will divert to their personal bank accounts. And investors also have to worry about the risks executives take to reach huge incentives which then greatly damage your investment…

  4. More Evidence of the Damage Done by Kleptocrat CEO Pay » Curious Cat Management Improvement Blog on April 21, 2014 9:30 am

    Today I see many CEO’s are acting as kleptocrats do – taking food out of others mouths to build their castles…

  5. Peter Drucker Advocated a Ratio of 20 to 1 for CEO to Average Worker Pay « The W. Edwards Deming Institute Blog on February 9, 2015 2:10 pm

    “If someone wants a lot of money to lead your organization and they are qualified, fine. If they won’t run your organization for less than a king’s ransom find someone who is more interested in leading your organization than in treating it as their personal bank account…”

  6. Buybacks, Giveaways to Executives and Non-GAAP Earnings at Curious Cat Investing and Economics Blog on April 22, 2016 5:54 am

    […] When you call attention to spending over $2 billion in the quarter to buy back 3.2 million shares it seems silly to then claim that the stock you gave away shouldn’t be considered as an expense. […]

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