Business porn

Posted by Marc Hodak on July 1, 2007 under Executive compensation | Comments are off for this article

For those of us who study executive compensation, you’d think that the new disclosure rules would have been a boon. It’s not. In fact, I am becoming convinced that the only beneficiaries of the the new disclosure rules are the story writers of our so-called business press.

As I predicted in my note to the SEC (pdf file), the new rules provide very little for the serious analyst that wasn’t already provided under the old disclosure rules. I was particularly skeptical of the need to disclose specific perks down to $10,000 when the total value all perks was already required to be disclosed. At the time I wrote that:

greater detail in the disclosure of perks would serve little purpose beyond the voyeuristic interests of those opposed to executive “privileges” of any sort.

I doubt my note would have been cited so often by the SEC in their final rules if I had included the term “business porn,” but I can see now how Larry Ribstein, who coined that term, got it right in characterizing the new rules.

Yesterday’s front page story in the WSJ, for example, notes that the CEO of Occidental Petroleum “received compensation last year valued at $416.3 million.” It makes no mention about what the shareholders got for this pay (in other words, the business story). No, this front page story is about $0.06 million of that amount for his wife’s flights on the corporate jet.

The critics ask, couldn’t someone who makes $416.3 million pay for his wife’s use of the jet? Of course he could. But that would mean taking the time to perform an actual administrative process that wouldn’t normally be necessary when simply using an existing corporate asset, like paying to use the bathroom on your floor. Of course, administrative costs are borne by pulling together all this tedium for corporate disclosure. It’s hard to see how the shareholders benefit from any of this, until one accepts that the shareholders were never intended to be the real beneficiaries of such disclosures.

I think a more interesting story is how Journal author JoAnn Lublin arrived at the $416.3 million she says the CEO got “last year.” The new disclosure rules properly distinguish “granted” versus “realized” compensation. Equity granted in prior years would not be counted as “last year’s” pay. Prior year grants that were realized last year would merely be a reflection of company performance under the CEO over the period from grant to realization. If that number is large, it’s a reflection of the terrific job done under that CEO.

Someone like Lublin who has covered business and compensation issues over the years–she is, in fact, the Journal’s main writer on compensation issues–would, one might think, avoid the error of counting realized income as “last year’s” pay. And under no circumstances, one might think, would she count both realized (i.e., historical) and unvested (i.e., future) compensation as “last year’s” pay–a double counting flaw intended to be corrected by the new compensation disclosure rules. Alas, one would be bitterly disappointed. Lublin counts all of it as “last year’s” pay. Why? Because that makes the number as BIG as possible, which happens to serve the interests of story writers.

Fortunately, there are no disclosure rules for journalists.