October 20, 2013
Re. CEO pay ratio disclosures:
CEO pay ratios can raise a warning flag to investors that (a) the corporate Board of Directors may possibly be insufficiently independent or insufficiently diligent regarding investor interests, (b) that the leaders of the company may be short-changing long-term planning and investment over short-term gain, and (c) that the CEO conflict of interest regarding short-term gain may extend to distorting other aspects of reporting, i.e. that the "greed" element may translate into Enron-like stock manipulations and Xerox-like income-cooking.
I worked for Xerox when Paul Allaire was CEO. His personal greed resulted in the stock price dropping from $60 to $6 within weeks when the SEC caught him out for fraudulently enhancing reported income, to increase stock value and thereby his own wealth. The company and thus the investors were forced by contract to pay his legal fees, and thousands of employees lost not only their jobs but also the value of their Xerox-stock-based life savings. He ruined the company and ruined people's lives. The company has never fully recovered.
It is important to figure out how to flag when a CEO goes off the rails out of personal greed, and when the Board lets him get away with it. Both employees and investors suffer when things go south.
Even if there's no fraud, excessive CEO income should be viewed as lost opportunity in corporate investment: in R and D, and in recruiting, training and retaining competent and innovative employees that actually produce corporate profit. (Xerox engineering employees knew for years that things weren't right, that there was inadequate R and D and no advanced products in the pipeline, at the same time that stock prices were high and stock options were being paid out like candy.)
Reporting the CEO pay ratio is an important tool to both the investors and the government, and the SEC should get on with implementing it.