Home Depot dumped its CEO Bob Nardelli at the beginning of 2007, just over six years after he took the position. During his tenure, the market value of Home Depot stock had fallen by 40 percent, according to one estimate. Lowe’s, the main competitor for Home Depot, saw its stock price nearly double over the same period. Yet, Nardelli walked away with $240 million for his efforts.
In principle corporate directors should be looking to hold down CEO pay in the same way that CEOs look to minimize the wages of assembly line workers, clerical workers, custodians and anyone drawing a paycheck from the company. CEOs justify these efforts by the need to maximize returns to shareholders. In the same vein, directors should constantly be asking if they could get a CEO of comparable skills for less money.
Corporate directors have badly failed in this responsibility in recent decades. As a result, the pay of CEOs and other top executives has exploded. CEO pay for Fortune 500 companies now averages over 300 times the pay of a typical worker. By comparison, in the 1970’s the average large company CEO received around 30 times the average worker’s pay.
In an effort to put some check on these bloated salaries CEPR will unveil a new website called “Director Watch”. The idea is to call attention to the directors who are not doing their jobs. This is information that the public should know. Many directors are well-respected figures with successful careers in academics, politics, business or other arenas. They are not living up to their reputations when they agree to contracts that allow poor performing executives to pilfer their companies.
Director Watch will highlight directors who get large paychecks even as the companies they ostensibly oversee are going down the tubes. For example, Erskine Bowles, who served as President Clinton’s chief of staff and president of the University of North Carolina, has made several million dollars serving as the director of companies’ whose stock price has plummeted. He was a director at General Motors at the time it went bankrupt and at Morgan Stanley when it was bailed out by the government. He was also a director at Facebook during the period when the value of its stock fell by close to 50 percent. (Click here to see CEPR’s Erskine Bowles Stock Index)
There are many other Erskine Bowles out there. Director Watch will call attention to these people. Director Watch will rely on crowdsourcing: people submitting information on directors who failed to effectively restrict CEO pay and ensure that the companies they oversaw were on sound footing, but nonetheless got rich in the process. The staff of Director Watch will verify the information and post on the Internet in a user friendly and easily searchable form.
If corporate directors are getting rich at the expense of shareholders and the economy more generally, the public should know. Director Watch will make it much easier for them to find out, serving as a resource for community and labor groups, the media and any interested member of the public.