Institutional Investors Want More Corporate Governance Reforms: Survey

April 29, 2005 ( - According to a survey of institutional investors, chief executives of major US companies are overpaid, golden parachutes serve no useful corporate purpose, and Directors should be held personally liable for financial scandals under their watch.

According to the poll – conducted by Pearl Meyer & Partners – investment managers expressed   widespread dissatisfaction with both the state of governance in   CorporateAmerica, as well as the cost to shareholders of compliance with Sarbanes-Oxleyand
other recently introduced reforms.

A large focus, however, has been on CEO pay, golden parachutes, and financial scandal. According to the survey, 75% of institutional investors think that average CEO pay of $10.5 million at major companies is   toohigh, while 59% oppose golden parachute arrangements and an overwhelming98% say that Directors should be accountable for certain financialproblems that occur under their watch.

Board pay drew less ire from the group, with respondents split on whether the average pay of $177,000 was appropriate. As for director accountability, a majority thought that it should be limited to a “gross lack of oversight,” while 23% favored a standard of “malfeasance” and 17% said Directors should always be held personally liable.

Looking at their own interests, 65% rated shareholder return as the   first   or second most important factor in setting CEO bonus and long-termincentivepayments; 53% thought return on capital should be used. Earnings-per-share, which is commonly used, ranked last on the list by importance.

However, government attempts to stop financial misdeeds have also come under fire from institutional investors. According to the poll, only two of six Sarbanes-Oxley provisions – real-time disclosure of insider trading and the certification of financial reports by CEO/CFO – were rated as worth the cost (58% and 53%, respectively).

Almost   80% of respondents regularly consider dilution in making their buy/selldecisions, according to the survey, and 65% consider both executive stock ownership and corporategovernance. According to the poll, 69% called for better disclosure of dilution while 64% wanted more information onequitypay practices and about half who would like improved reporting ofexecutivepay levels and of executive stock ownership.

Looking at mandatory options expensing, 73% say that the cost of option use will be a “significant” factor in their   investment   decisions; a total of 58% predicted that accounting for option use willresult in improved profit-loss statements, the survey concludes.

The Pearl Meyer & Partners survey – conducted in March – questioned   professional  money managers of equity mutual funds and institutional accounts atinvestment firms with a median of $36 billion under management.Eighty-eight investors were taken into account.