Surf music is certainly an under-rated rock and roll genre. One of my favorites is The Trashmen’s Surfin’ Bird. It reached Number 4 on the Billboard Chart in 1963. I happened to hear it recently when I was reading about some interesting corporate governance issues and how they relate to anti-corruption compliance.
Sometimes it really is unbelievable how tone-deaf companies can be at the highest level. While the Board of Transocean awarded bonuses to top management for safety the same year as the Transocean drilling rig Deepwater Horizon caught fire and sunk causing the largest oil spill in recorded history and 10 dead or missing. BP had its share of tone-deafness in and around that tragedy too but the company has recently been back in the news for a different tone-deaf act.
Last week the Board of Directors of BP awarded a pay raise of effectively 20% to the Chief Executive Officer (CEO) Bob Dudley. This was 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.” Brooke Masters writing in the Financial Times (FT) column The Top Line, in a article entitled “BP chief’s pay rise is maladroit and out of step with Europe”, said the pay raise was after the company ran up a $5.2bn loss in 2015.
All of this is rather amazing in light of the BP shareholder near revolt over this pay raise. As Tomlinson noted, there was “a nonbinding vote where 59 percent of those shareholders said Dudley shouldn’t get a raise.” As Master noted, “The only time a UK pay vote has come out worse was in 2009, when shareholders in part-nationalised Royal Bank of Scotland slammed the decision to pay a £703,000 annual pension to Fred Goodwin, the man who drove the bank into the ground.” BP’s response to this criticism? Masters reported that the company “argues Mr. Dudley met all is operational targets and should not be blamed for falling oil prices, or a $9.8 bn charge to settle claims related to the 2010 Gulf of Mexico oil spill.”
Yet it really even gets better (or worse depending on your point of view). Tomlinson reported the Chairman of BP’s Board of Directors said about the shareholder vote “Let me be clear. We hear you.” That is about as close to flipping the proverbial (surfin’) bird at shareholders as one can come. Tomlinson wrote, “Apparently the board can hear but doesn’t care what shareholders think.” Finally, Tomlinson wrote, “What makes Dudley’s compensation hike even more outrageous is that his salary was frozen along with other executives. To get around the companywide policy, the board boosted his bonus 40 percent over last year’s and doubled the payment to his retirement fund.”
Tomlinson raises all of this in the context of just who does the Board represent? In the case of BP, he asks “are they the management team’s peer who run their companies and want the board deferential to them.” Masters focuses more on the optics of the pay rise, arguing “BP’s move seems particularly maladroit at a time of rising anxiety about income equality.” Couple BP’s move with the concerns raised by the release of the Panama Papers and you can see that BP has a very awkward public relations issue on its hands. (Or perhaps, see [Surfin’] Bird, above.)
The only other commentator who consistently ties questions about compensation to corruption is Richard Bistrong. He writes about incentives and how those issues impact employees ‘on the front lines’ of Foreign Corrupt Practices Act (FCPA) compliance. Yet the actions by BP’s board raise some equally troubling issues about compensation at the very top of an organization.
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 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.
Yet here, the Board would seem to be saying it does not really matter what you do (or don’t do). When you are at a high enough senior management level, we are going to reward you. If all that stands between an employee being laid off, without the packages mentioned by Tomlinson, what financial incentive do they have if senior management will receive a pay raise no matter what the individual employee does going forward?
In the area of executive compensation, Tomlinson believes greater government oversight is the answer. Masters, perhaps taking a more English view, hopes Boards and senior management will actually think about not only the consequences of their actions but the optics as well.
On that final note, perhaps an acknowledgment to Volkswagen (VW) might be in order. Last week, VW agreed to cut the bonuses of its top executives. This was done at the request of the Chairman of the Board on down. Too bad there is no cross-fertilization from the VW Board to the BP Board.
For a YouTube version of Surfin Bird, Click here.
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