Headlines have been reporting the civil charges brought against Bank of America executives for their Merrill Lynch purchase. The story is that they did not fully disclose to shareholders the extent of losses at the investment bank before the shareholders voted on the purchase. I truly feel back for shareholders of public companies. The misalignment of incentives between shareholders and managers is stark; and the information asymmetry between shareholders and insiders is difficult to overcome.
Most events that drive shareholder returns happen behind the corporate veil. The secrecy is necessary for competitive reasons. However, there is a strong potential for managers to have different incentives – occasionally even contradictory incentives – from the owners. As a result of this recent crisis, large financial institutions are revamping their pay policies. For example, the CEO of Goldman Sachs – Wallstreet’s most profitable and influential securities house – is receiving an all-stock bonus. With the proper restrictions in place, this should align his interests with other long-term investors.
Is it enough to pay the top executive in all restricted stock? When a company has tens of thousands of managers and pays billions of dollars in compensation, isn’t his bonus little more than populist appeasement? Deutsche bank has gone even further, with 75% deferred stock and 25% deferred cash payouts this year. That seems like better alignment for the organization.
Did Bank of America / Merrill Lynch get the point? Kinda. How about Morgan Stanley? Not really. JPMorgan followed suit. I would love to hear how Citibank is handling this bonus season…
Let’s not forget that this is only in the financial services industry and only after significant political pressure, regulatory outrage and populist outcries. The rest of the corporate world is continuing on with business as usual: managers paid for today’s performance, in cash, every year (with the exception of a few CEOs who take home huge piles of restricted stock). I can say first hard, it is great for the manager – not necessarily so great for a shareholder.
Finishing off this post with a ‘Thank you’ to Judge Rakoff, who refused to allow the SEC and Bank of America to settle the SEC lawsuit over Bank of America’s non disclosure of Merrill Lynch bonuses prior to the merger. How much pain did the SEC want to extract? $33 million. It is better for shareholder’s everywhere for our legal system to show that light still is the best disinfectant.
