Corporate Governance

Executive Compensation and John Thain

By J. Robert Brown

By now, everyone is aware of John Thain's dismissal from B of A last week, at least in part, according to the press, because of "poor communications" about Merrill's unexpectedly large losses in December.

As he departs, its safe to say that his press is getting worse.  This is the same person who was listed by AP as the highest paid CEO in 2007 ($83.1 million) and only a month or two ago, after a disasterous year, proposed that he receive a $10 million bonus.  Now, it turns out, that in early 2008, he had his office suite (office and conference room) redecorated.  According to CNBC, the redecoration cost $1.22 million, with the single biggest chunk paid to the interior decorator, Michael S. Smith Design, apparently the same firm used by Steven Spielberg, Michelle Pfeiffer, Cindy Crawford, Sir Evelyn de Rothschild, and, apparently, Michelle Obama.

As for the materials actually used in the redecoration, the amounts included:

• Area Rug $87,784
• Mahogany Pedestal Table $25,713
• 19th Century Credenza $68,179
• Pendant Light Furniture $19,751
• 4 Pairs of Curtains $28,091
• Pair of Guest Chairs $87,784
• George IV Chair $18,468
• 6 Wall Sconces $2,741
• Parchment Waste Can $1,405
• Roman Shade Fabric $10,967
• Roman Shades $7,315
• Coffee Table $5,852
• Commode on Legs $35,115

CNBC also noted that some who work for Thain did very well.  His driver received $230,000 for one year's work, "which included the driver's $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay."  The article noted that drivers "of top executives are often paid about half that amount."

All of this is sensational enough in an era of incredible hardship.  But the issue isn't one spendthrift CEO (one imagines that there are many other CEOs who did the same thing and are cringing at the possibility of leaks to the press about their remodeling).  It's the entire system.  We operate in a leal environment where this type of information doesn't have to be reported to the board of directors. 

Delaware courts have developed almost no standards for what must be reported to the board and have in place a legal system that encourages boards to remain uninformed.  Even if by some unexpected chance, the board learned of the remodeling, it has no duty to act and, if directors want to retain their comfortable sinecure, they have every incentive to ignore it.  The only meaningful way for directors to lose their sinecure is not to be renominated by the board.  The best way for that to occur is to irritate the CEO.  Thus, whether its remodeling the office or allowing the CEO to make personal use of the corporate aircraft, directors, under the standards put in place by the Delaware courts, have little or no incentive to deny the CEO these privileges.

And how much did the Merrill Lynch directors make in the last year reported (for fiscal year 2007)?  Between $250,000 and $280,000, a very nice sinecure to be sure.

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Full post as published by The Race to the Bottom on January 26, 2009 (boomark / email).