May 4th is universally recognized (at least in the universe I inhabit) as Star Wars Day. According to Wikipedia, “May 4 is called Star Wars Day because of the popularity of a common pun spoken on this day. Since the phrase “May the Force be with you” is a famous quote often spoken in the Star Wars films, fans commonly say “May the fourth be with you” on this day.” Given the rejuvenation of the franchise, in the form of Star Wars VII – The Force Awakens all Star Wars fans have reason to celebrate this May 4th in a manner we have not seen for some time.
The most recent entry into the Star Wars oeuvre revolves around a young girl, Rey, a scavenger who was abandoned as a child on the desert planet Jakku. She is patiently waiting for her family to return. She is completely self-sufficient and does everything for herself, until she is drawn into the intergalactic battle. It turns out The Force is strong in Rey and at the end of the movie she returns Luke Skywalker’s light sabre to him, strong implying that he is her father. Not so has intoned director J.J. Abrams, who has said publicly that Rey’s father did not appear in Episode VII. Rey is also, as my teenaged daughter informed me, “kick-ass”.
So whether you are waiting for the unfurling of the story of Rey and her family, are cheered by the return of a beloved movie franchise from its putrid depths of Episodes 1-3 or just enjoy a kick-ass, rollicking good time; we all have great reason to celebrate this May 4th.
I thought about all this in the context of the report in the Financial Times (FT) by Richard Milne, in an article entitled “Norway’s oil fund to target high executive pay votes”. Both Matt Kelly and I recently wrote about BP and its Board of Directors’ thumb-nose to its shareholders who overwhelmingly voted against a pay raise for BP’s Chief Executive Officer (CEO), Bob Dudley. Dudley effectively received a 20% pay raise in spite of a company wide ban on salary raises during the economic downturn in the energy sector. As Houston Chronicle business columnist Chris Tomlinson wrote, in a piece entitled “Times tough at BP, so chief executive gets raise”, this raise was “in compensation for managing the company through a dramatic drop in share price, for laying off thousands of employees and endangering the company’s dividend.”
Tomlinson nailed it when he asked who does the Board represent, management or the shareholders? Now imagine a Board who is cozy with management and is made aware of a potential Foreign Corrupt Practice Act (FCPA) violation. If that Board has not shown the independence to even objectively evaluate the CEO’s performance in conjunction with compensation, what would give shareholders any comfort they would objectively investigate and evaluate such conduct? After all, any fine and penalty levied for a corporate FCPA violation will, at the end of the day, be borne by the shareholders to pay, not the culpable executives.
Moreover, how will such a Board attitude play out under the strictures of the Yates Memo and Department of Justice (DOJ) Pilot Program for enhanced credit for self-disclosure, investigating and remediation? One might hope that with criminal penalties hanging over their collective heads, Boards of Directors would follow their legal obligations and investigate thoroughly but if the Board is there to simply perform lip service to top management who knows?
This Board attitude also impacts employees in the trenches as well. While Tomlinson asks the basic question “Ask BP employees laid off in Houston if they got a big bonus and a doubling of retirement benefits”? I think the implication for a company’s FCPA compliance program may be equally troubling. I have often used the anecdote about the employee who is more worried about making his quarterly numbers than he is in following the Code of Conduct to make a sale.
Kelly looked at it from several angles in his article entitled “How BP’s Board Undermines Its Drive for Compliance”. I was particularly intrigued by his analysis through the prism of the COSO 2013 Framework. Kelly wrote, “Remember that one main message from regulators this year has been the board’s responsibility for corporate governance and ensuring that a “culture of compliance” exists at the business. The compliance officer plays a crucial role in supporting that culture, and in facilitating conversations among other parts of the enterprise so that culture thrives – but the board is the group with ultimate responsibility for putting the right elements in place.
If those elements sound familiar, that’s because they are all the same principles that go into the control environment of COSO’s framework for internal control. And that’s the key point here: a strong culture of compliance is a strong control environment. They are the same thing. Like any environment or any culture, they surround all the specific actions that transpire at your company every day. If they are rotten, all those actions become less effective.”
That is why I was absorbed when I read in Milne’s FT piece, “The world’s biggest sovereign wealth fund is launching a crackdown on executive pay, targeting high salaries at companies around the globe in an attempt to exert its influence in a debate that has been gathering pace in recent months.” As Yngve Slyngstad, chief executive of the fund, told the FT, “We have so far looked at this in a way that has focused on pay structures rather than pay levels. We think, due to the way the issue of executive remuneration has developed, that we will have to look at what an appropriate level of executive remuneration is as well.”
Excessive executive pay is certainly an issue that resonates across the globe. However now this issue has been tied to corporate governance. For if a Board of Directors, who are (in theory) in place to protect the interests of shareholders abdicates that duty to not only enrich but to protect executives, is there really any certainty that the Board will fulfill its other corporate governance duties?
One way to effect change is through enhanced regulation. Yet another effective manner is through the market. If there are large investors who believe that good corporate governance is a good business practice, this will lead the march towards more robust oversight of corporate conduct. Mike Volkov has said that he believes the increase in anti-corruption compliance programs has been one of the most significant developments in corporate governance. With the entry of the Norwegian wealth fund into a more forceful role in the corporate governance of the entities which it holds interests, how long might it be before they begin to consider compliance related issues?
With the release of Star Wars VII – The Force Awakens the Star Wars universe rejoiced. This move by the Norwegian sovereign wealth fund may equally portend a positive movement towards not only a cap on excessive executive pay but also a more rounded approach to seeing companies engage in good corporate governance.
The Norwegian sovereign wealth fund may well portend a positive movement towards good corporate governance.Click to tweet
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© Thomas R. Fox, 2016