Executive Compensation and the Economy

Even Warren Buffett didnt see this one coming. In this
difficult economy, arming yourself with an MBA and business acumen may no
longer be enough if youre a senior executive. You still need to know what it
takes to make or sell a widget if youre president of a widget company. (If
not, perhaps you need to find another line of work.) But the way you approach
the widget business is probably changing in many ways. Quicker market responses
and fully-integrated information systems may be just the start. You also need
to rethink the way to meet responsibilities to shareholders or to compensate
executives.

Who can pick up a paper without reading about the global
impact of the credit crisis, changes in consumer spending habits or a lack of
confidence in the financial markets? Most of us can recall the savings and loan
crisis and certainly the Enron collapse, but can we also count on our business
leaders to avoid the mistakes of the past?

You only need to watch the push for increased government
regulation or the Securities and Exchange Commissions efforts to maintain
integrity in the securities markets to answer that question. In spite of
mounting pressures on the executive team to meet current business challenges,
there is continuing public belief that executive compensation is out of
control. It seems that executive compensation has become one of the key litmus
tests for good corporate governance. You can almost hear Harry Truman in the
background with his buck stops here slogan.

In the public arena, there will be further demands for
transparency to shareholders as well as the prospect of new legislation
described as a Shareholder Bill of Rights. That legislation (if made law)
would affect American public companies by mandating shareholder approval of
so-called golden parachute compensation arrangements and requiring a
shareholder advisory vote on executive compensation (also known as Say on
Pay).

Even private companies will have their share of pressure
from these changes. Just as businesses that dont participate in government
loan programs may be expected to toe the line on the compensation protocols
under those programs, many private firms find themselves judged by similar
standards imposed on their public company brethren (also known as best
practices). The business community actually seems to be asking for these new
restrictions by failing to learn from the very public, and seemingly frequent,
examples of corporate folly.

Somehow, we do not gain as much insight from those
experiences as we would like. Shouldnt the $6,000 shower curtains that Dennis
Kozlowski allegedly ordered for his office at Tyco in 2002 have kept John Thain
of Merrill Lynch from apparently spending $1,400 for a wastebasket just six
years later? Successfully managing a company for the long term demands a level
of integrity and know-how one would expect from the top brass. It also requires
pure common sense. In hindsight, who among the chief executives of General
Motors, Chrysler and Ford could fail to grasp the optics of traveling on
separate corporate jets to Washington, D.C., to ask for government bailouts?
Unless and until we begin to learn from these and other examples, we seem
doomed to repeat past mistakes and should not be surprised by the regulatory
consequences.

Beyond the need to learn from others mistakes is the need
to learn from within the organization. Listening to your workforce is critical.
The strongest executives interact regularly with employees. In fact, some of
the best business intelligence is often gathered from the floor. Also, by
fostering relationships with members of the workforce at all levels, successful
executives are able to share their vision for success, help employees capture
that vision and instill loyalty throughout the organization, all while
demonstrating the importance of integrity within the culture of the company.
With that heightened level of insight into the business and the dynamic
economic climate, executive compensation and regulatory oversight issues wont
loom as large.

This is a sponsored report from Lane Powell PC. Michael E. Morgan is a shareholder at Lane Powell and
has more than 30 years of experience in representing clients in business
transactions. He regularly represents clients on corporate governance
matters and also serves as special counsel to boards and to individual board
members of many companies. He can be reached at [email protected] or
206.223.7013.