Fighting excessive pay

What with being responsible for a giant labor organization’s legal matters, sitting on committees and performing a glut of other duties, the job of general counsel can sound positively exhausting. So why take on such a labor-intensive role? Well, if you’re Damon Silvers, associate general counsel for the AFL-CIO, a federation of labor unions, it boils down to a passion for governance.

Though he has occupied his current role since 1997, Silvers recalls how his work as a law clerk in the Delaware Chancery Court and interactions with its chancellors ‘deeply shaped my understanding of corporate law and of the balance that has to exist among different interests and considerations in the governance of corporations.’

This spirited approach spurred Silvers to take on a diverse array of responsibilities upon joining the AFL-CIO. Working in the general counsel’s office, he also sits on two advisory committees at the US Department of the Treasury, one on the future of the auditing profession and the other on hedge funds. He also works closely with the offices of investment, responsible for advocacy and relationship to workers’ retirement savings and pension funds.

In spite of all these disparate duties, Silvers considers himself basically a business lawyer, ‘representing the labor movement of American workers in areas like securities law, pension law, corporate law, regulation of capital markets, bankruptcy issues and a range of other matters involved in the functioning of our economy.’

But one element of his multifaceted career that is particularly relevant right now is his involvement in the AFL-CIO investment office’s website, PayWatch.org. The annually updated site reviews the biggest executive compensation topics of the year. In 2007 these included the new SEC executive compensation disclosure rules, stock options backdating and spring loading. This year bank CEOs in the sub-prime crisis will be spotlighted.

Governance growth spurt

Speaking recently from San Diego, where he was attending an AFL-CIO meeting, Silvers reveals the motivation behind the website and his larger role.

 ‘The American labor movement has become a much more important force in the capital markets and in corporate governance,’ Silvers comments. ‘I’ve certainly gotten much busier over the past few years.’ With a growing focus on corporate governance, he says, the AFL-CIO ‘has grown in sophistication and nuance… In particular, our advocacy has become much more clearly focused on our members’ interest as long-term investors.’

PayWatch was in part a reaction to this greater emphasis on governance. In existence since 1997, the website is popular as a research destination with AFL-CIO members as well as a wider web audience. But Silvers notes the sometimes disheartening lack of real outside impact: ‘In the 10 years that PayWatch has been a project of the AFL-CIO, one thing that has been constant is that executive pay abuses continue in a sort of staggering way. And so in a certain respect, there’s a consistency to PayWatch that unfortunately comes from the persistence of problems of excessive executive pay.’

But PayWatch is making headway as an informative tool for boards and investors, focusing on prescient issues from options backdating to pay for failure to corporate scandals indirectly related to pay like those at Enron. It’s important to note the affect good or bad pay practices can have on the entire business, Silvers says: ‘This year we’ve certainly seen the executive pay excesses being paired with just catastrophic management behavior in a number of areas.’

Where’d it all go wrong?

For Silvers, there are two main negative outgrowths of excessive CEO pay: ‘Firstly, it’s a waste of our members’ money as investors. We’re paying someone hundreds of millions of dollars to do a job, which could be done effectively for much less… Secondly, it’s fundamentally damaging both to the fabric of business and to the fabric of our society for the ratio between average CEO pay and average worker pay to be three to four hundred times.’ There is also a third big problem: CEO pay structure doesn’t promote ‘behavior that is in the long-term interest of the business,’ Silvers adds.

sues, the AFL-CIO, together with the Council of Institutional Investors and the Business Roundtable, among others, created the Aspen Principles, a guide for long-term value creation for corporations and investors. ‘It’s all about focusing CEO pay on rewarding long-term value creation and not on short-term stock market movements,’ observes Silvers.

This growing investor focus on the basis for CEO pay should come as no surprise, with the SEC making performance metrics top-of-mind for corporate secretaries this year. Silvers thinks confusion hinges on the regulator’s permission for companies to withhold disclosing metrics if they cause competitive harm. ‘Most performance metrics aren’t competitive secrets,’ he says, adding, ‘It wouldn’t be a bad thing if some of them were competitive secrets, because at least it would show that they were really business-focused metrics.’

The road ahead

As for the impact on companies, Silvers says, ‘Certainly our goal is to reform CEO pay and to end this era of excess. I think the PayWatch website has been extraordinarily successful [as a tool].’

Silvers says PayWatch is also focused on reworking boardrooms with ‘measures designed to give investors a greater ability to elect genuinely psychologically independent board members,’ which should further ‘a really meaningful counterbalance to the power of the CEO.’

The forecast is getting brighter, with boards heeding shareholder concerns. ‘I think the say-on-pay efforts [put forward by the AFL-CIO] which … won at Apple … are an effort to create a meaningful accountability mechanism around executive pay,’ Silvers says. But it’s not quite so simple, he adds: ‘The reality is that a good executive pay package should be somewhat complicated and really you need a strong board to deal with it.’

Chain reaction

PayWatch’s annual release came out mid-April to coincide with the issuance of CEO pay data. That was after this article went to press. However, an earlier AFL-CIO statement promised new information including ‘a comprehensive database of CEO pay figures which expose the CEO pay packages that helped create the sub-prime mortgage crisis,’ with case studies showing how pay led to ‘risky business at firms including Countrywide, Citigroup, Washington Mutual and others.’

Increased interest in this area will ensure PayWatch continues to be a go-to research hub for shareholders and companies alike. Hearings held recently by the House Committee on Oversight and Government Reform looking at severance packages and executive pay that were, according to Silvers, ‘associated with some of the most egregious sub-prime-related catastrophes,’ gave a window on how the pay problem created ‘situations that were disastrous for everybody.’ 

The credit market crisis will be a strong focus for the AFL-CIO, which is examining ‘what needs to be done at the large number of public companies that have been significantly affected in the financial services sector and the housing sector,’ continues Silvers.

Silvers points out that the sub-prime crisis has launched important discussions around governance: ‘There are dialogues going on right now between a number of companies and investors who are concerned about what happened to them.’