Restoring corporate responsibility and accountability

by Tom Campbell, producer and moderator NC SPIN, March 21, 2018.

I knew Lynn was good. I just didn’t know how good, until I read that Lynn Good’s total compensation package had doubled in the past two years. Lynn is the CEO of Duke Energy, the second largest electricity producer in the nation and her 2017 compensation totaled $21.4 million.

Without question she’s got a demanding job and is extremely good at it. Our concern is not so much how much compensation Good receives, but rather about a system that unquestionably out of control.

In 1965 the average CEO compensation in the U.S. was 20 times greater than the average worker’s, according to the Economic Policy Institute. The average CEO earned $843,000 compared to average worker compensation of $40,000. That ratio exploded during the 70s. From 1978 to 2014 CEO compensation increased by 997 percent, while the average worker’s rose by only 11 percent. In 2016, the average CEO compensation was reported to be $15.6 million, while the average worker got $53,300. Were CEOs’ 997 percent more valuable, smarter, productive or better leaders during this period? Correspondingly, were workers less valuable and productive? We think not. So what caused this gigantic pay gap?

Cue the corporate chorus for a rousing verse of “we’ve got to offer competitive compensation to get and keep qualified executives.” Who determines executive compensation? Corporate boards of directors, generally through a board compensation committee that frequently surveys competitors and similarly sized companies to learn what other executives receive. If this study shows others are paying more the committee will recommend executive raises. But it’s a rigged game. Company A raises executive compensation, elevating the average so that company B must follow suit in the never-ending race to the top.

During this same era we saw a dramatic change in corporate ownership. Institutional investors, namely mutual funds, pension plans and large financial managers replaced individuals as the major shareholders in corporations. These institutional investors are not interested in how a corporation treats its customers or employees, how much good it might do in the community it serves or even in the quality, safety or dependability of it products. These large investors are only interested in two things: what were the last quarter’s profits and what is the current price per share? Like major league sports franchises they will reward those who deliver and punish those who don’t.

But this is a corporate responsibility issue, most especially true for nonprofits and public utilities. In addition to generous executive compensation, Duke declared a profit last year of $3 billion. Making the optics of the situation worse, the corporate giant has received approval from the North Carolina Utility Commission to raise rates for its customers, increasing an individual’s monthly bill up to $18 per month. For those who might complain, a Duke corporate counsel has a “let them eat cake” attitude, advising those worried about how the increase impacts their monthly budget to just eliminate one Big Mac, fries and a drink each month.

Corporations are responsible and accountable to at least four stakeholders groups, including shareholder owners, customers, their communities and their employees. Executives are included in the latter group, not a separate category, yet they obviously are getting preferential treatment. It is time corporate boards show more balanced responsibility and accountability.