(Commentary by David F. Larcker, James Irvin Miller Professor of Accounting, Director of Stanford Graduate School of Business Corporate Governance Research Program, And Brian Tayan, MBA ’03, Stanford GSB; Date: 8-9-2010)
Last week, Forbes published a list of the “20 Most Responsible Companies” based on ratings provided by GovernanceMetrics International (GMI). While the list contains many well-regarded companies—such as Colgate-Palmolive, Dover, and PepsiCo—it also has some questionable picks.
The most notable is Occidental Petroleum. Oxy is notorious among shareholder activists for the generous compensation awarded to CEO Ray Irani. Irani was ranked third on a list compiled by the Wall Street Journal of the highest paid CEOs over the last 10 years, bringing in a cumulative $857 million. While Irani has overseen tremendous shareholder value creation during his tenure, many have questioned whether this level of pay is excessive.
For example, the Teacher’s Retirement System of Louisiana has long lobbied to reduce his compensation. Proxy advisory firms RiskMetrics Group and Glass Lewis routinely recommend a vote against the company’s equity plans. Prominent journalist Geoff Colvin of Fortune has called Irani an “excessive-pay hall of famer.” In May, shareholders handed the company defeat in its first advisory vote on compensation (“say on pay”). And just last week, shareholder activist Ralph Whitworth of Relational Investors and the California State Teachers Retirement System launched a proxy fight to gain access to the company’s board. Whitworth described Occidental’s board as “ossified and entrenched” and was critical of the company’s compensation and succession planning.
All of this makes you scratch your head over why GMI would place them on their top 20 list. The only explanation that GMI provides is that Oxy is “responsive to shareholder initiatives, such as special meetings.” We doubt Mr. Whitworth would agree.
Even The Corporate Library (TCL) has been pulled into the fray. TCL merged with GMI last month. In a recent blog posting, TCL wrote: “Several observers have noted the fact that TCL has criticized some firms GMI rates highly, and have asked us how we plan to reconcile the differences. Our answer could apply to any good marriage: we’re going to discuss, explore, and learn more about each other’s points of view, and then decide what to do.”
Sounds like code for: “We have no idea where they came up with this one.”
For our purposes, it gets to the fundamental question: if the so-called experts can’t agree on what constitutes good governance, how can shareholders be expected to rely on their judgment?
- GMI, “Beyond the Balance Sheet: The 20 Most Responsible Companies,” Forbes, August 3, 2010.
- Geoff Colvin, “As Executive Compensation Becomes Topic A (Again), the Real Outrage is How CEOs Are Paid, Not How Much,” Fortune, May 3, 2010.
- The Corporate Library (TCL) Blog, “A Marriage of True Minds,” August 5, 2010.