Sucheta Dalal :Of CEOs Masquerading As Business Leaders (21 April 2003)
Sucheta Dalal

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Of CEOs Masquerading As Business Leaders (21 April 2003)  

Some time ago, noted economist Paul Krugman wrote this in The New York Times: Twenty-five years ago, American corporations bore little resemblance to today’s hard-nosed institutions. Indeed, by modern standards they were Socialist republics. CEO salaries were tiny compared with today’s lavish packages. Executives didn’t focus single-mindedly on maximizing stock prices; they thought of themselves as serving multiple constituencies, including their employees.

In the period that Krugman describes, America’s robber barons had already amassed their fabulous wealth and their heirs were handing over the management of their business empires to professional managers. The super-rich inheritors preferred to be playboys or philanthropists who were usually visible on the society pages of newspapers or at charity galas and high-profile public events.

All that changed in the 1990s. Professional CEOs, riding on the back of a decade of economic growth and a long bull market, started arrogating to themselves bigger and bigger pay packets until they turned into, what the Securities and Excha-nge Commission chairman, William Dona-ldson, described as corporate monarchs. Many also ensured that the company maintained them in the style they had become accustomed to, well after they retired.

In another article, Krugman, quoting Kevin Phillips’ book Wealth and Democracy pointed out that in the period from 1981 (when compensation was $3.5mn) to 2000 (when it averaged $154 mn) CEO compensation has risen 4300 per cent, whi-le that of ordinary workers merely doubled.

The spate of corporate scandals in the US that continue to be unearthed have finally turned the spotlight on obscenely high CEO compensation, perks and retirement benefits. The revelation that many CEOs had bailed out and cashed in on their stock options before their companies stock price collapsed has infuriated shareholders and forced a slight downward revision in pay packets. The New York Times, on April 6, quoted a survey of 200 top companies conducted by Pearl Meyer & Partners for Money & Business that reportedly showed a 20 per cent decline in total compensation paid to corporate honchos. Jack Welch has given up some of his post-retirement perks and the CEOs of Starbucks and Ree-bok are among those who have taken pay cuts. And the trend is likely to continue.

Indian companies, too, were quick to latch on to the practice of high CEO compensation, but with a difference. Indian industrialists already behaved like business maharajas and thought it their right to bequeath their corporate empires (built mainly from bank and institutional funding and public equity) to their heirs and inheritors.

Unlike the US, India never ever moved away from promoter-managed companies. A leading industrialist tells me that for decades extortionate tax laws and abnormal restrictions on CEO compensation created a situation where industrialists had to be in charge of management to enjoy their wealth. Draconian foreign exchange rules also forced them to hang on to the reins of business, in order to manipulate project costs, dictate import pricing and siphon away money into Swiss accounts.

All that changed with liberalisation. Taxation rates have become sensible, forex rules are relaxed and wealth tax/estate duties are inconsequential. According to my source, the time is now ripe for some industrial scions to go the way of the heirs of Ford or Rockefeller and simply enjoy their wealth. But it is not yet happening.

Instead, the fact that a babu in government no longer decides CEO compensation has created another incentive for industrialists to hang on to corporate power and the designation of chairman and managing director. They simply switched from being promoter-CEOs with fabulous hidden compensation, to promoter-CEOs who flaunt hefty pay packages while employing professional managers to run the companies. That is why so many CEOs, mai-nly from the old industrial families, are featured more on the society pages than in connection with their businesses. Clearly, they would much rather be enjoying their immense wealth than go through the drudgery of managing a business empire under the constant scrutiny of regulators and investors. In fact, nobody grudges them their opulent lifestyles, polo matches, multiple private aircraft, fleet of expensive cars or them playing politician. If only they left their companies in competent professional hands and derived their wealth from the dividend that they declared. But many industrialists want to have their cake and eat it too. Fat pay packets have turned into a backdoor dividend for privileged owner-managers. Corporate aircraft are used like the family transport and exclusive guest houses and club memberships are paid for by the companies and rarely declared.

In a typical Indian twist to high CEO compensation stories, the salaries are neither linked to the bottom-line nor the share price. A recent survey of Indian CEO compensation by C&K Management for The Week reveals that barring a few infotech companies, MNCs and ICICI Bank, the high pay packets are restricted to family CEOs (only nine out of the top 25 highest paid CEOs were professional managers). More-over, the gap between the compensation of promoter-managers and their senior executives was astronomically high. And finally, the pay cheques seemed to go up even when the market capitalisation of companies declined.

Recently, NR Narayana Murthy, chief mentor of Infosys, created a stir by declaring that CEO compensation should be determined by a combination of criteria, including fairness, transparency and accountability and, if need be, voted by shareholders. Corporate India was predictably annoyed at his views and Indian investors are not adequately organised to decide on CEO compensation.

But if CEO compensation were indeed slashed and corporate perks trimmed to eliminate excess and greed, it would provide just the incentive for many of our playboy CEOs to stop masquerading as business leaders and devote their lives to full time partying, flying, hunting, politicking or whatever it is they want to do with their time. More importantly, if their lifestyles depended on the dividend declared by their companies, they would join retail investors in ensuring that competent professional managers who are forced to earn every rupee of their compensation run them.

This would ensure that executives remain focussed on the bottomline and it would be the best thing that could happen for the Indian capital market.

-- Sucheta Dalal