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In terms of corporate governance setting executive compensation to align the employee's incentives to the financial interests of the company even beyond his or her term of employment, it is apparently quite easy to go overboard. This can include severance packages for top managers--packages that may not reflect the performance of the executive. At the very least, it would appear that corporate lawyers are not writing very good contracts. Worst yet, insider board-management friendships may mean that the gap between achievement and severance pay may be intentionally wide. Sadly, the innocent non-management investors whose interests are not adequately represented in the board room pay the price, even if they don't perceive it on an individual level.  Even so, the lack of fairness alone calls for an end to the insider luxuriating.  The case of BP, whose rig exploded in the Gulf of Mexico in 2010, provides a good case study.

BP’s CEO Tony Hayward lost his CEO position—or he wanted out—at the tune of $1.6 million per year to be a non-executive board member at BP’s Russian joint venture. In addition, he could draw on his pension valued at over $17 million  and could keep all of his BP stock options that could be worth millions if BP bounces back. At the time of the announcement of his stepping down and BP’s 2010 second quarter loss of $17 billion, BP Chairman Carl-Henric Svanberg said in a statement: “The BP board is deeply saddened to lose a CEO whose success over some three years in driving the performance of the company was so widely and deservedly admired.”  The statement evinces either an attempt at PR or a state of denial.  Hayward became CEO promising to put safety first.  To say that he succeeded in his own priority would be to ignore facts.

In testifying before the investigative subcommittee of the US House Committee on Energy and Commerce a month after the explosion, Hayward stuck to his script in saying he is for safety.  “Since I became CEO, we have made a lot of progress [on safety],” he said. ”We have focused like a lazer on safety.”  When asked about the reports from company employees of unsafe corner-cutting at Deep Horizon, Hayward replied that the company’s investigation is in progress. ”I haven’t drawn a conclusion,” he said to Rep. Waxman the full committee’s chairman. Waxman replied, ”you are stonewalling and evading responsibility.”  Challenged by Rep. Peter Welch to point to even one bad decision made by BP, Hayward said, “I’m not able to draw that conclusion at this time.” Asked by the subcommittee’s chairman, Rep. Stupak, if it was improper for BP to have overruled the contractor’s recommendation that BP’s intended changes to the blowout preventer not be made because, as Hayward himself had written, the equipment is the failsafe mechanism (i.e., if it fails, nothing else can stop the oil from gushing out), Hayward replied, “the blowout preventer is the failsafe mechanism.”  In spite of BP’s role in the disaster, Hayward wasn’t giving anything away in his testimony even though being more forthcoming would have helped the committee write legislation to prevent such a disaster in the future. Another representative asked Hayward for his opinion on skipping tests at Deep Horizon. Again, he said he could not answer the question until his company’s investigation was complete because he wasn’t there.  “Because you lawyer told you not to answer?” the representative asked in reply. It is not beyond reason to suppose that Hayward’s lack of opinion on matters pertaining to his business is part of a larger effort of the people at BP to evade the charge of negligence, which would increase the company’s financial liability. In other words, BP’s management was still acting in their own interest, as well as that of the BP stockholders—even in the midst of culpibility for a major disaster. This can be seen in the red-tape in BP’s claims process.  In spite of the company’s role in the disaster, the management was oriented to determining “legitimate” claimants.

Such conduct is similar to that of the banks that fought more regulations in the wake of the bank’s own culpability in the financial crisis of 2008.  Even amid the culpability, the banking lobby owned Congress (according to Sen. Dick Durbin).  In treating the fiduciary duty to the stockholders as absolute, the banks and oil companies evince not only a reductionism in the face of a larger business environment, but also an apparent selfishness that borders on a personality disorder.  Even if such managers are vaunted by their stockholders, there is the question of whether corporate governance has a susceptability to rewarding managements that screw up.

Hayward claimed at the hearing that he set the tone from the top at BP (in stressing safety). Given the pattern of continued safety violations, including those at Deep Horizon, his function doesn’t appear to matter much.  Accordingly, one representative asked him what his bonus would be for 2010.  Apparently his bonuses were not always in line with the profitability of the company.  Having made safety his priority is particularly telling, given BP’s continued track-record. In terms of corporate governance, if a management of a company under which shirking safety has resulted in a disaster even as the CEO has made safety his priority is not removed by its board, the owners of the company have a legitimate grievance against their board members. It is difficult to say whether Hayward was pushed out or wanted out. He had become public enemy number one in the US.  Even if he was ousted, the financial conditions of his ouster were out of sync with the results of his “leadership” (e.g., a $17 billion loss, and a huge contingent liability in the Gulf).  The disjunction between executive compensation and the executive’s results reflect very badly on corporate governance itself.   For any BP stockholders bemoaning the drop in the company’s stock price and the deminished or delayed dividends, removing the strong bias in corporate governance itself that is in favor of incumbant managements (e.g., proxies, proximity to the board, the business judgment rule) might well be a priority in the wake of the disaster in the Gulf of Mexico.

Source: http://www.msnbc.msn.com/id/38423486/ns/business-oil_and_energy/