Board compensation datapoints of the day

March 11, 2011
Duff McDonald's October profile of Rajat Gupta:

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Should there be some kind of cap on director compensation? The question arises in Duff McDonald’s Fortune profile of Rajat Gupta from October:

His long career as a well-connected corporate consigliere made Gupta highly coveted as a director. Between 2006 and 2009, Gupta picked up seats on the boards of five public companies — American Airlines parent AMR, global outsourcer Genpact (of which he is also chairman), Goldman Sachs, audio equipment giant Harman International, and Procter & Gamble. He also joined the supervisory board of Russia’s Sberbank and the board of the Qatar Financial Centre. Altogether, those positions paid him more than $3.2 million in 2009.

Gupta has drawn criticism for his hefty board income. He left his position with Sberbank in June. But in 2008, he was paid $525,000 — more than he made for his Goldman board seat — to sit on the board of the bank, the largest in Russia and Eastern Europe by assets, while the next-highest-paid director earned only $110,000. The question of whether he could actually be “independent” while being paid $525,000 was a serious enough one that RiskMetrics, the corporate-governance watchdog based in Washington, D.C., advised minority shareholders to vote against his nomination in 2009. He was reelected anyway.

If a director is being paid half a million dollars a year by a company, that seems to me a pretty effective way in which the management of the company can capture the director. And earning $3.2 million in one year from non-executive board positions alone is just bonkers.

But wait a minute, Gupta has a rival in the insane-board-remuneration stakes! Step forward Cathie Black, who contrived to take home $3.3 million from IBM last year. Admittedly, that wasn’t all for one year’s work: she retired from the board and cashed in all the shares she held in the IBM Deferred Compensation and Equity Award Plan, under which her $260,000 annual director’s fee gets paid out in stock and held by the company.

I do understand that board members of big corporations are often very wealthy people, and that therefore it takes large sums of money to so much as get their attention. But that’s not always the case. Here’s Warren Buffett, in his latest annual letter:

The directors who represent you think and act like owners. They receive token compensation: no options, no restricted stock and, for that matter, virtually no cash. We do not provide them directors and officers liability insurance, a given at almost every other large public company. If they mess up with your money, they will lose their money as well. Leaving my holdings aside, directors and their families own Berkshire shares worth more than $3 billion. Our directors, therefore, monitor Berkshire’s actions and results with keen interest and an owner’s eye.

I’m particularly impressed, here, by the lack of D&O insurance — although I suspect that the directors might just buy their own insurance personally. But this, to me, is pretty much the ideal board, comprised of real owners of the company, who don’t need to be attracted with quarter-million-dollar annual retainers or Deferred Compensation and Equity Award Plans. As an individual shareholder, I’d be much more comfortable being represented by a Berkshire-style board than by the kind of people who feel the need to charge $525,000 a year for their services.


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