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?
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:
“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.
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.
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
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?