CEOs Push for Lower Accountability, Higher Pay

| About: Eaton Corp. (ETN)

That should have been the title of a recent Wall Street Journal article entitled "Provision in Bill Lets SEC Offer Investors More Boardroom Clout".

The article discusses a provision in the financial overhaul bill that would allow investors to have their board nominees included in proxies provided that the investor owns 1% of the company's shares. This rule would apply to companies with market capitalizations in excess of $700MM. This provision is a good first step in re-establishing a voice for the most important constituents of public companies - the shareholders. However, rather than applaud this provision, corporate CEOs are working hard to prevent this from occurring.

Indeed, the Business Roundtable - the "voice" or shill group of CEOs - has indicated it will fight against this provision. This isn't much of a surprise because CEOs and Board members have one of the easiest jobs around relative to risk and reward. The financial and economic crises have demonstrated that while the rank and file suffer the most, CEOs and Board members are above the fray, accountable to no shareholder or law, primarily because they have their own "union" which makes implementing changes at their level virtually impossible.

For example, Eaton Corp's (NYSE:ETN) CEO Sandy Cutler indicated that he would fight for the Business Roundtable's stance that shareholders should not have the rights offered in the provision. Sandy has every reason to want to fight for reduced shareholder power as do the majority of CEOs who in many cases are replaceable by any rank and file worker. For example, Lehman Brothers employed Matthew Lee at one point, who was a senior vice president in the Finance Dept. Lee made a fraction of what CEO Dick Fuld made yet it is likely that Lee could have done a far better job running Lehman Brothers than Fuld.

In the case of ETN, Cutler pulled in $16MM in 2007, $10MM in 2008, and $9MM in 2009. In addition, ETN's Board of Directors pulled in anywhere from $179,000-$213,000 for 2009. The role of CEO and Board member is as close to a free lunch as possible considering there has been rampant looting of the US taxpayers through outright bailouts, massive, hidden industry subsidies (O&G industries, telecom, defense, aerospace, healthcare, etc), and outright fraud by CEOs and corporate executives across industries for decades, yet only a handful of criminal actions against the executives or the Board members who have a fiduciary responsibility to shareholders.

This is the main reason the Business Roundtable wants to eliminate the chance that anyone, specifically motivated investors, can crash their private party. On Page 19 of ETN's proxy, we see that Cutler's base salary is determined by the "market median" of peers. So basically if its peer group is paying its CEO an insane amount, ETN will match it. It's also very likely that pay continues to escalate due to the Board composition for corporations across industries.

All one needs to do is review ETN's Board and it becomes clear. ETN's Board includes the CEO of Sherin-Williams, former CEO of Pitney Bowes (NYSE:PBI), former CFO of Eli Lilly (NYSE:LLY), CEO of Ernie Green Industries, CEO of Lennox International (NYSE:LII), CEO of Cargill, and former CEO of Motorola (MOT). This group is likely a mutual admiration club, typical of board rooms across the US. As a result, it's impossible to expect them to police themselves effectively.

As fiduciaries to shareholders, one would think CEOs and Board members would be open to actions that allow investors to have a larger stake and influence in the companies that they invest in. Unfortunately, fiduciary duty be damned when it comes to lining one's pockets.

Disclosure: None.

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