“Boards are more careful, given the heightened risk of discovery and revelation. But some peer selection bias still exists.”
Kimball affirms that peer group “cherry-picking” continues. “Compensation committees select what I call ‘aspirational’ peer groups composed of CEOs from companies that are much larger, have rising total shareholder returns and a more successful mix of businesses,” he asserts. “Such companies simply tend to pay [their CEOs] more, which can lead to inflated compensation.”
Yang’s current research has opened up another can of worms—a possible nexus between the charitable donations a company makes to nonprofit organizations and the compensation of its CEO. “We found that 5% of Fortune 500 companies donate to the charities of their independent directors,” she explains. “It appears that when such donations occur in a company, the compensation of the CEO is higher by about 10%.”
The donations are not disclosed in the annual report or the 10-K, Yang notes. “They’re pretty much under the carpet,” she says. “Obviously, this brings into question the directors’ ‘independence.’”
“To ordinary people, TAX INVERSIONS ARE a clear statement that a company doesn’t want to pay its fair share, even though the U.S. helped make it what it is.”
Yang and Kimball agree that high CEO compensation is not inherently wrong—so long as an outsized pay package is based on provable performance and market value. But when very wealthy people become even richer based upon manipulated data, the public is more likely to condemn the person and the employing organization.
3. Inverting Corporate Inversions
Corporate tax inversions are another dubious tactic worth a reappraisal. Last year, U.S. companies avoided paying nearly $135 billion in corporate taxes by registering their profits overseas. Yet they continue to derive the benefits of American “citizenship” by claiming that their operations are headquartered
in the U.S.
If American citizens pursued the same practices, the IRS would go after them for tax avoidance. “Corporate tax inversions produce the most significant brand and reputation risks for U.S. companies,” says Bridwell. “To ordinary people, it’s a clear statement that a company doesn’t want to pay its fair share, even though the U.S. helped make it what it is.”
Despite an anti-inversion bill passed by Congress in 2004, many companies deftly find workarounds. When portrayed negatively in the press, they blame the migrations on the country’s 35% corporate tax rate, griping that it puts them at a competitive disadvantage with businesses in areas with lower tax locations. President Trump has pledged to indirectly end inversions by decreasing the tax rate to 15 percent at home. Until then, tread lightly. “If an iconic national brand is considering an inversion to better their tax situation, expect substantial blowback,” Bridwell says.
“Just because you can doesn’t mean you should,” chimes in Jonathan Knowles, CEO of Type2 Consulting, a B2B consultancy. “Legality is different than legitimacy,” he explains. “In the short-term, it may result in lower effective tax rates and an uptick in the stock price, but in the long-term, it can erode the company’s trust, legacy and reputation. I’d be very cautious. You simply cannot get around how unfair and unethical it looks.”
4. Restricting Stock Access to Pandering Analysts
It’s hard to believe in this era of increased corporate transparency that a company would restrict its management team’s access to stock analysts who have and will most likely continue to provide favorable “buy” recommendations. Yet this shady practice was unveiled recently by The Wall Street Journal. Much of the fault lies with the analysts: they earn business from institutional investors by helping them access a company’s leadership. This results in undeserved fawning, flattery and recommendation “inflation” by analysts.