Barron's Online -- April 13, 1998
Ties Among Corporate Directors:
The Missing Link to CEOs' Fatter Pay
By GENE EPSTEIN
Some corporate CEOs are paid too much. We all know that.
But in an era where just about everything else has been
downsized at least once, why have the paychecks of even
mediocre corporate bosses been enlarged time and time
again? For a number of them, the reason harks back to a
buzz phrase popularized by certain muckrakers of yore:
"interlocking directorates."
It turns out that when an executive of company A serves on
the board of company B, and when an executive of company
B serves on the board of company A, the CEOs of both reap
a special benefit. According to the findings of Kevin Hallock,
an economics professor at the University of Illinois, their
compensation runs 14%-17% higher than it otherwise
would. With those in charge of fully 123 of the very largest
publicly traded companies blessed in this way, the virus of
crony capitalism seems to have infected some of those
stocks we love to hold.
I would gladly divulge exactly which stocks and which CEOs
(I was even planning to run their photos) if it weren't for the
unfortunate fact that Hallock's research is drawn from
1992 data. Since a lot of those interlocks could have been
unlocked since then, it would be unkind to smear some
unlucky corporate captain who had suddenly gone straight.
Moreover, our economist's case should be regarded as
strictly circumstantial, based as it is merely on an
examination of who sits on what board and which CEOs earn
what sums. Because he couldn't spy on the meetings where
the final decisions were made, and doesn't even know who
served on the compensation committees that served up the
recommendations, we can only speculate as to what kinds
of smoking guns we'd find if we really could be a fly on the
wall.
No doubt, a lot of different kinds. Hallock points out that
even where the reciprocity doesn't involve the chief
executives themselves, there might still be a subtle
conspiracy among the subordinates to boost their chiefs'
pay. Take a situation in which a senior VP from company X
serves on company Z's board and a senior VP from
company Z serves on company X's. The two might have
powerful incentives to link up and boost the fortunes of their
respective masters. When the top dog benefits, the lesser
hounds eat better, too, not to mention the fact that they
probably each hope to someday sit in his chair. At the least,
they can earn points by providing information to their boss
that might help him elicit higher pay.
Among the 123 firms he isolated, Hallock found that the
CEOs' interlock-related premium ran 14%. But then he
asked: Would the premium be even higher for those firms
that displayed prima facie evidence of a cronyism born of
true intimacy? Among 69 of the 123, the interlock between
firms was associated with a business relationship, usually of
the supplier/customer sort. However, among the other 54,
there was no business relationship, a sure sign that
something special had to have occurred for the interlock to
have formed. Maybe two CEOs play golf together or work
out in the same health club or were boys together in
B-school or slept in the same bunkhouse way back when at
summer camp. Out of this past or present association, one
of them starts serving on the board of the other's firm... . In
any case, Hallock found that, for these 54 corporations, the
interlock-related premium did go up, to 17%.
As for why the information dates back to 1992, our
economist began the research in early '94, when he was a
graduate student, and a staggering amount of time and
effort was required to pull the information together.
Working alone, he began with lists of the Forbes 500 that
are assembled according to four criteria: sales, profits,
assets and market value. After eliminating overlaps among
these categories, he came up with 773 companies. He then
had to match the names of the people who served on their
boards with those of their past and present officers. In the
end, he found that reliable information was available for 602
of the companies on the list (9,804 director seats in all,
held by 7,519 individuals). Out of these 602, 123, or about
one-fifth, turned out to be interlocked in the sense that
current or former employees were mutually serving on the
boards of paired firms.
Hallock then found the "return to interlock" by first
controlling for all the other factors that affect the
differences in CEO compensation: size (large corporations
pay better), industry (financial firms pay more, regulated
companies less), CEO age (older ones get more), and stock
performance (the better the shares have been doing, the
better the CEO normally does). Compensation was defined
as salary and bonus, plus fringe benefits such as
savings-plan contributions and companysupplied insurance.
Data on the bestowal of stock options were too hard to
come by at the time.
The young professor's findings were good enough to be
published last September in the Journal of Financial and
Quantitative Analysis, where they've been virtually buried
ever since.
Finally, a puzzle: Hallock found that interlocked CEOs tend
to run the larger firms. He can't explain why.
Otherwise those who demand to know why CEOs get paid so
much might just as well wonder why Tom Cruise earns $20
million to act in a movie or why any number of athletes draw
at least that much to play a season. Or even why, as
reported in the New York Times last week, Columbia
University could pay economist Robert Barro a cool
$300,000 a year, plus incredible perks (a free Manhattan
apartment larger than most houses, a job for his wife) to
get him to leave Harvard.
This era of superpay cuts across all lines of work and it's
rooted in the cult of stardom, in the myth of the
indispensable man, which has overshadowed the ideal of the
group. Along with athletes and movie stars, our industrial
captains have attained larger-than-life status. There's the
CEO as savior-Lee Iococca as Chrysler's Churchill, Louis
Gerstner as IBM's de Gaulle; the CEO as empire
builder-Michael Eisner as Disney's Alexander; Bill Gates as
Microsoft's Napoleon; and the CEO as
mega-merger-makerSanford Weill as Travelers' Julius
Caesar, John Reed as Citicorp's Marc Antony.
So what if they're all paid magnificently? However great a
sum it is, they have to be worth at least twice as much.
Follow-ups:
Regarding my article on the individual investor's long-term
trading habits ("Don't Buy It," March 30), more than a few
readers asked: If he really has been loading up on stock
through this bull market, just whom has he been buying
from?
Well, the defined-benefit pension plans, for one, have to be
huge sellers. DBs, in which companies promise to pay
employees specific sums after they stop working, are
becoming extinct as DCs (defined-contribution plans, in
which companies merely promise to put certain amounts
into an employee's pension fund before retirement) become
the only pension game in town. Since most DBs are more
than fully funded to meet their obligations, they must be
rapidly divesting as they go the way of the dinosaur.
A related question was: Since everybody seemed to be
buying through the 'Fifties and 'Sixties, who could have been
selling to the individual through those decades?
Answer: No one. All investors were buying out of an
expanding supply of stock, which grew by more than 50%
from 1950 through 1960 and by another 85% from 1960
through 1972.
Finally, several readers wondered whether 401(k)
contributions are included in the savings rate tracked by
the Commerce Department. They suspected it wasn't,
which caused them to question whether the rate was really
declining ("Why They Get Richer," March 30).
But not only are these contributions included, whatever the
employer throws in also is counted in personal savings.
Confusion on this point arises from the fact that 401(k)
money comes out of pre-tax income, while saving is defined
as the difference between after-tax income and
consumption. Readers interested in how this works
arithmetically can E-mail me for a full explanation.
E-mail:[EMAIL PROTECTED]
Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.
=============================================
High-tech workers allege
work environment hurts
health
April 11, 1998
Web posted at: 8:30 p.m. EDT (0030 GMT)
>From CNN Correspondent
Rusty Dornin
SAN FRANCISCO (CNN) --
Some former employees of
IBM are alleging that their
high-tech work
environment has led to health problems.
The employees at International Business Machines
worked in "clean" rooms, sanitized chambers where
disks and other high-tech equipment are
manufactured. The workers usually handle solvents
and other chemicals.
Lee Leth worked for IBM in clean rooms for 27
years. Two years after retirement, he contracted a
rare form of bone cancer.
"There is a real strong likelihood that this type of
cancer is caused by industrial or environmental
toxins and poisons," Leth said.
Leth is one of a growing number of former IBM
employees who blame Big Blue for exposure to
cancer-causing chemicals. The families of five
workers who have died have filed a wrongful death
suit. Leth and three others are suing IBM, and
another suit is expected to be filed next week on
behalf of 20 more.
All believe the high-tech environment gave them a
false sense of security.
"People don't necessarily understand that, and go in
there thinking they're being protected and they're
working in the most advanced possible environment
and therefore no risk," said attorney Amanda Hawes.
IBM declined to comment
because of ongoing
litigation. Another suit
pending in New York
involves 100 former
employees.
A trade association says
that millions of dollars are spent on worker safety
and minimizing contact with chemicals.
"To our knowledge, there is no scientific evidence
that suggest 'cancer' is a specific problem among
workers in the semiconductor industry," said a
statement released by the Semiconductor Industry
Association.
The first scientific study of cancer rates among
workers in the high-tech industry began last year
involving state and federal health officials and the
industry.
Four months into the study, industry participants
pulled their backing and the study was canceled.
====================================
Domestic Partners Ordinance Limited
By Mark Evans
Associated Press Writer
Saturday, April 11, 1998; 4:49 a.m. EDT
SAN FRANCISCO (AP) -- Both sides are claiming victory
after a federal court ruling on an ordinance that requires
companies doing business with the city to offer the same
benefits to their employees' unmarried partners as they
provide to spouses.
U.S. District Judge Claudia Wilken ruled Friday that San
Francisco may not force airlines to comply with most of
the ordinance. But the city may still be able to demand
that hundreds of other businesses do.
``On it's face, it's a mixed ruling,'' said Kelli Evans, an
attorney for the American Civil Liberties Union. ``While the
airlines may have won this particular battle, the city has
really won the war for fair treatment.''
At issue was a suit brought by the Air Transport
Association challenging San Francisco's attempt to force
the roughly 6,000 companies doing business with the city
to comply with the ordinance that went into effect last
June.
The city is the first to craft such an ordinance. It covered
both gay and straight domestic partners.
Brendan Dolan, attorney for the 22-member airline
association, had argued that the ordinance was in conflict
with federal law and illegally attempted to regulate
interstate commerce.
City attorneys countered that local governments should
be allowed to put conditions on how public property is
used -- including San Francisco International Airport -- and
to ensure that private companies do not discriminate.
In Friday's ruling, Wilken said that the city's ordinance
interfered with congressional authority, as well as several
federal laws forbidding local regulation of employee
benefits, airline prices, routes and services.
``We view this really as a complete victory,'' Dolan said.
``We accomplished everything we set out to do.''
Air Transport Association spokesman David Fuscus called
the ruling a ``clear, undeniable victory for the airline
industry'' and an embarrassing day for the city of San
Francisco.
But city officials -- pleased that the judge didn't toss out
the entire ordinance -- were anything but embarrassed.
``We didn't win everything. But the law and history move
one step at a time, and we have just taken one giant
step,'' city attorney Dennis Aftergut said.
Although the suit was brought by the airline association, it
was the contract of two members, United Air Lines and
Federal Express, that raised disputes over the ordinance.
United has signed a new $13.4 million, 25-year lease at
the airport and promised city officials to develop a policy
on domestic partner benefits in the first 24 months.
FedEx has been negotiating a $2.1 million-a-year contract
to move into a new airport cargo facility.
© Copyright 1998 The Associated Press
