Recall, Principle #1 is:
1. Treat shareholders as long term business partners; and view management as managing partners.
a. An enterprise must be managed with the perspective that investors (not management) own the assets contained within the company.
b. It is management’s responsibility to ensure all executive compensation and perks are clearly understood and approved by its investors.
Yesterday, I listed several ways that executives could game the system. I opined that the vast majority of recent executive pay debacles involved one or more of the outlined situations. I want to close the discussion of the Management Ethics #1 series by making three points.
First, let’s return to the Mike Hampton series. Like professional athletes, executives should get paid all they are entitled to. It is not government’s business to restrict this, any more than it is government’s charter to not allow Tiger Woods to have made $1B dollars so far in his career. Moreover, it is not the government’s business to “help” investors do a better job of managing executive pay. That is, the market needs to sort out how to do a better job of determining executive pay packages so as to not repeat the recent debacles. [This statement isn’t true in the extreme—as the government must play certain roles—but it should be a guiding principle. I don’t want to expound on this now but perhaps will later.]
Second, I am a director of three companies and am a member of certain compensation committees. Like the other directors, I am limited in the amount of time I can spend in these duties. As such, I know first-hand that there is a strong dependency on management when it comes to structuring and understanding executive compensation packages. The director’s role is not easy to perform. Hiring objective and qualified experts is often prohibitively expensive. Thus, the dependency on conflicted executives remains a very-real aspect of the executive compensation process.
Third is the answer to logical questions. Why does my Management Ethics principle #1 include both 1a and 1b? Why not make them two separate principles, as they both are extremely important? It is because they are so inter-related. A management team is more likely to satisfy their responsibilities under 1 b if it fully embraces that (a) their shareholders as long term business partners and (b) the enterprise must be managed with the perspective that investors (not management) own the assets contained within the company.
By the way, the extreme importance of executive compensation—and the inherent conflicts of interest—are why it is covered as part of the FIRST management ethics principle.
Zayo and Envysion employees: I’d like all of our folks to read this bearonbusiness series. Please encourage your co-workers to follow these posts.
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