Comment on – MARKETS; Merrill CEO Departs With $160 Million; His Compensation Receives Scrutiny After He Becomes A Casualty Of The Sub-prime Crisis

A few footnotes to the Merrill Lynch / O’Neal story…and CEO compensation in general…


As founders and the founding families of today’s giant, modern corporations — the Merrills of Merrill Lynch, the Rockefellers of Standard Oil (ExxonMobil) and the Fords of Ford Motor Company – gradually were being replaced by hired agents (those we know by the title of corpoate executives and senior managers today), the separation of ownership and control was thorougly explored by two leading authors / academics who were looking ahead to possible changes in the way large shareholder-owned companies would be run.


In the landmark work, “The Modern Corporation and Private Property,” authors Adolf A. Berle Jr. and Gardiner C. Means (both of Columbia University) in 1932 wrote…


“…In the corporate system, the “owner” of [industrial] wealth is left with a mere symbol of ownership, while the power, the responsibility and the substance which have been an integral part of ownership are being transferred to a separate group in whose hands lies control…” and “…where ownership is sufficiently sub-divided (as though broad-based and dispersed shareholding), management can become a self-perpetuating body even though its share in ownership is negligible…”


And so seven-plus decades later we see what the directions taken were — directors on self-perpetuating boards appointing “their own” circle of contacts or a tight-knit universe of candidates to the highest positions.


Guess who mostly benefits from “control” (vs. ownership) — right, generously paid CEOs. Where there is real performance there is often little beefing about pay. Where there is poor performance there is the charge of “pay-for-pulse” or pay for failure and shareholders raise their voices while editors flail away at what they see as excesses in the corporate world.


While top managers are “agents” of the owners (the shareholders), in effect they are really the controlling interest, even to the point of determining their own compensation. (As governance guru Bob Monks points out, no where in all of the market mechanisms does the buyer let the seller determine the price, conditions, etc. as though no competition existed — except for the CEO position.)


You can hear the sigh of relief of an important “owner” of the enterprise in this quote…””He’s walking away with the generous compensation that he’s mostly already earned,” said Ed Durkin, director of corporate affairs for the United Brotherhood of Carpenters, whose affiliated union pension funds own 875,000 Merrill shares. “At least they didn’t give him more. Although given what’s transpired, it would be a stretch to justify anything else.” (Carpenters Union)


So — despite your raised eyebrows at the numbers, the going away package here is not unusual. Way way back in the depth of the Great Depression even two bright guys like AA Berle and Gardiner Means would not have been able to forecast where all this separation of ownership and control would lead.


And today — in this 7th year of the 21st Century — can we (you, me) forecast what’s ahead for the relationship between owners and agents (top management)? Who will determine CEO pay in 2010? We’ll see…CEO comp may be the biggest debate (and focus of shareowner ire) in the coming 2008 proxy season. And Mr. O’Neal will be among the examples held up of failure of boards to appropriatel reward executives…notice that Michael Eisner of Disney is still an example cited (here in this story).


Hank Boerner


Editor – A-C