Investors must also monitor CEO wages

Lim Say Boon, Director, OCBC Investment Research, The Straits Times, Asia News Network, Singapore

The attention given to the renumeration of CEOs is in danger of degenerating into a media circus.

At one level, it is understandable that minority shareholders are outraged at the staggering sums paid out to the CEOs of companies that have seen earnings reversals or worse, losses or bankruptcy.

But beyond a sort of voyeuristic salary-envy, minority shareholders need to address their own responsibilities in moderating management.

They need to understand the excesses of bubbles, the limits to which it is productive to regulate the risk-reward dynamics of the capitalist system, and their own culpability if they allow management to reward itself however it wishes.

The row over CEOs' renumeration -- especially the issue of share options -- is by no means an American phenomenon. Eye- popping packages have been rewarding the good, the indifferent, and the ugly alike elsewhere.

Sexy headlines get investors indignant, but they do not necessarily advance the cause of corporate governance. At best, they gloss over significant differences between CEOs and the real issues involved in renumeration. At worst, they feed a hysterical "they're all blood-suckers" attitude among small investors.

So there is a bit of emotionalism -- muddled thinking, even -- on this issue, and populism, too. Calculations have been made on how long it would take cabbies to earn what Prime Minister Goh Chok Tong would make in a year.

So how much is enough for CEOs? If it is good enough for the head of a sales department to have his renumeration decided by the market, why isn't it good enough for a CEO's salary to be determined by the same?

After all, the board of directors would have presumably consulted with a headhunter to determine the price it would have to pay for the person they wanted. Remember that it is the board's job to oversee the CEO. But more importantly, it is shareholders' responsibility to keep an eye on the board.

And that is the one element that seems sadly missing in much of the current discussion on executive salaries. After all, it is not difficult to work out how much the CEO makes.

And if shareholders -- especially institutional shareholders who are presumably better-informed than your mom-and-pop investors -- do not query directors on CEO renumerations, the alternative would probably have to be the heavy hand of bureaucracy.

At one end of the spectrum, you have the law. A chief executive who helps himself to company money outside the board's knowledge and approval is in danger of running into charges of misappropriation of funds.

Corporate governance is something else -- it covers issues of ethics within the realm of legality. And moral suasion has been shown to be clearly insufficient to ensure good corporate governance.

The alternative would then be to set bureaucratic guidelines. But there are simply so many permutations in the world of business that setting guidelines on renumeration would be like programming a computer to imitate the complex decision-making of a human.

Indeed, some commentators are now suggesting that CEO compensations be benchmarked as a multiple of the average worker's salary. United States magazine Business Week noted that the average CEO's compensation in 1980 was 42 times that of an average worker. In 2000, it was 531 times.

Yes, these are interesting statistics. But what do you then do with those numbers? Who will set the arbitrary level at which CEOs' compensation packages are to be benchmarked against? Some bureaucrat, an academic or a trade unionist?

More importantly, the multiple tells you nothing about the value created or not created by a CEO.

The concept of economic value-added, or EVA, has strangely not featured much in discussions of CEOs' renumerations. It is a company's net operating profit after tax minus its net assets multiplied by its weighted average cost of capital. In simple English, it is the value left after the claims of capital.

Why deduct the cost of capital, and not use the earnings before interest, tax, depreciation and amortization so favored in the 1990s? Simple: The latter is open to manipulation, and it tells you absolutely nothing about value in the real world. You can literally "buy" the earnings by borrowing for acquisitions -- even if the cost of borrowing outweighs the earnings "bought". You can even "buy" net profit by simply raising heaps of capital.

To put it another way, if the returns on your equity are lower than the cost of your capital, you are destroying value.

You would be better off sticking your money in a risk-free bank deposit.

But EVA hardly featured in the go-go years of the 1990s -- either in Asia or in the U.S. The reason is as plain as it might be difficult for shareholders to swallow: Investors were swept up by the greed of the 1990s and in many cases abdicated their responsibility to check the board of directors.

Instead of looking at economic value, they looked at share prices. And share prices in the end proved to be as distantly related to real value and as easily manipulated as earnings.