Testimony submitted to the S.E.C re executive compensation Feb. 2006.


The guilty have been acting guilty.


Evidence suggests the current secrecy in reporting executive compensation is partially because executives and their boards of directors sense a public perception of a moral problem.  The public, which includes investors, employees and our fellow citizens, appear worried that executive compensation is too high; few think it is too low.

There are a number of problems with high executive compensation that are important to discuss because obscurantism and secrecy are being used to avoid the serious consequences of disclosing actual executive compensation.

I personally observed obscurantism involved in executive compensation when I had the chief legal officer of a  top Fortune 100 corporation explain the correct way to calculate executive compensation. The legal officer based the explanation on data published in the annual report. The legal officer’s company had just announced an $83 million bonus award to executives of the company. The company had been in bankruptcy for two years.

I have been reading annual reports for more than 40 years, yet it took the legal officer a full hour to lead me through all the separate line items needed to calculate an approximation of the $83 million executive compensation bonuses involved. That is obscurantism. 

There was also plenty of secrecy that was relevant to calculating the executive compensation involved.  Guaranteed rates of return to the pension plan were not published but were a significant sum of money (this scurrilous practice was made public by Jack Welch’s wife in a divorce proceeding.)  Steps involved in calculating the bonus awards were not published but were important.  Key industry benchmarks relevant to calculating bonuses were not published making the bonus awards impossible for an outsider to calculate.  None of the elements of executive buy-outs or early terminations were publicly available.  All this material was secret, not available outside the circle of board members and senior executives.

Now we can ask again: “Why have public corporations elected to cloak executive compensation in obscurantism and secrecy?”

The answer is that the executive compensation data, if made public, can be harmful to the corporation and its stakeholders. Only executives and their intimate friends on the board are likely to benefit if the public finds out about the hidden data after it is too late.

There are four clear ways that obscure and secret parts of executive compensation are harmful when made public.

* Investors are harmed directly because they cannot calculate accurate earnings data for the corporation; investors consequently misjudge the value of company equity.  Disclosure of hidden executive compensation data is usually a negative shock and investors lose. 

* The company, with secret executive agreements, can end up paying surprise large sums of money to executives on no notice because of bonus awards that couldn’t have been publicly known.  The investors can be hurt by the surprise. 

  • Executives can be bought out or terminated at large cost in a surprise buy-out with no pre-knowledge on the part of investors.
  • Even worse, in the case of one of America’s largest banks, a very large secret buyout payment to the CEO, led him to sell out to a smaller bank that he should have been buying in the first place.  David bought Goliath with a secret buyout payment to the CEO.

Investors can be hurt by this type of secret executive compensation and can be hurt even more by having insiders who have access to the key secret agreements that determine executive compensation.

* When investors lose money from insiders having unique access to secret bonus calculations and secret buyout agreements, the corporation can be hurt directly from injured investor's lawsuits based on deceptive company practices.

* Investors can be hurt directly when secret agreements are discovered by entities such as unions who proceed to cancel contracts after finding out about guarantees for executive pension compensation. Such was the case with American Airlines.

* Pervasive corruption. On the face of it, the greater the discrepancy between publicly recognized executive compensation and the real compensation, the greater likelihood that managers and employees will understand their corporate environment to condone secrecy and dishonesty.  A corporate culture of secrecy and dishonesty can rapidly pervade a company and result in theft, financial abuse, loss of customers, flight of honest personnel and internal moral collapse.

Ultimately the greatest loser from secrecy and obscurantism in executive compensation is American business in general.

In the past fifteen years, since the end of the Cold War, many nations have been more willing to deregulate business and more willing to encourage market competition. 

This movement toward market competition has been beneficial to American business throughout the world. However, the flurry of American scandals surrounding secrecy in executive compensation, over the past five years, has been a step backward in this vigorous business expansion.

A lingering global distrust of business and the widespread perception of rampant corporate greed in America, has been rewarded by secrecy in executive compensation. 

To continue the forward movement of American business toward greater access to global market competition and a welcome greeting for American businesses around the world, the secrecy and obscurantism of executive compensation must come to an end.