After the Bell: Steinhoff, KPMG, VBS and the art of arse-covering

If you were to ask the question, “What has been the most egregious example of unintended consequences of regulatory reform in modern history?”, what would that be? 

I think you would find lots of great examples, but the one that sticks out for me concerns the publication of CEO salaries and share options. The expectation was that the earnings of CEOs of large companies in particular were getting out of hand and the best thing to do was to insist that all of these extraordinary but secret packages be revealed. The result would be a shocked public, and a humbled remuneration committee, and some sense of proportion would be regained. Throw them into the light, they said. Sunlight is the best disinfectant, they said. 

The result was precisely the opposite. Compensation in the US for top CEOs of S&P 500 companies increased by 940.3% from 1978 to 2018. Salaries of higher-paid workers increased with them, but over the same period, mid-level and shop floor workers saw very small real increases. How did this happen?

Transparent pricing usually brings prices down. But in this case, something weird took place. First, there was the ratcheting effect; CEOs could now compare their packages with their competitors’ so the tendency was to level up towards the highest paid, to which recruiters and head-hunters can attest. Further, in situations where performance is critical, often the rational actor doesn’t want the lowest price, they want the highest. Would you want, for example, the cheapest heart surgeon operating on you? The phrase “if you want monkeys, pay peanuts” quickly makes the rounds.

So now, this is going to make me terribly unpopular, but there is another possibility, which is that we had been paying the CEOs too little over the years.

I know, I know. Horrors. But you know, in a hierarchical organisation, there are some crucial decisions only the CEO can make, and you want the CEO to a) make them, and b) make the right ones. It turns out that CEOs who do make the right decisions can make a huge difference to the future, and even the existence, of the company.

That doesn’t mean there isn’t lots of abuse here, such as CEOs getting huge bonuses even when the share price of the company declines, flaccid remuneration committees and complacent shareholders. But generally, I find having a great CEO is absolutely crucial and is usually worth paying a lot to secure. And doing so helps not only the CEO (obvs) but also shareholders, and weirdly, employees.

I remember the time when executive remuneration was secret and the people who opposed the publication of CEOs’ pay packages were worried that the public would totally misunderstand and that even the lives of CEOs might be at risk if people knew how much they earned (kidnappings of CEOs’ children did rise for a time in some countries, but that seems to have exited the front pages). 

The reason I’m raising this all again is that this week opposition to transparency is still irrationally rampant. Two examples of questionable efforts at hiding the truth have been highlighted in the press this past week. I find I have to struggle with my journalistic instincts here; I’m naturally biased in favour of transparency. I think in both of these cases, those trying to maintain secrecy are doing so in violation of common sense and public interest. 

Steinhoff

KPMG