Franklin Strier: Stealth Compensation Examined in International Journal

Franklin Strier, professor of business law, had his article “Stealth Compensation,” published in the May issue of the International Journal of Disclosure and Governance. The article examines the issue of top executives and compliant boards of directors disguising executive rewards, a practice known as stealth compensation. In it, he describes the threat this practice poses to the corporate governance goal of financial reporting transparency.

“Corporate managers and accountants found creative ways to disguise forms of executive compensation, especially in regard to compensating CEOs,” says Strier, whose professional expertise includes his experience as a CPA at Arthur Andersen before the firm was convicted of obstruction of justice in the wake of the 2001 Enron scandal. “Some examples include a panoply of company-paid perks, accelerated vesting of pensions, corporate payment of executives' income taxes and imaginative contrivances in golden parachute plans. In shareholder proxy statements, financial statements and other reports, many of these escape easy identification-in nature and amount-as forms of executive compensation.

“In some notorious cases, CEOs have received total executive compensation packages in the eight- and nine-figure realm while their corporations were going into the tank,” Strier notes. “When Northwest Airlines tried to stay in business while it filed for bankruptcy, the top executives were awarded huge pay packages in stock options and accruals to their retirement plans worth tens and sometimes hundreds of millions each. In the meantime, the employees were laid off or, at best, took big pay cuts. The goal of financial statement transparency will be effectively circumvented since employees, investors and other corporate stakeholders will remain ignorant of actual executive compensation.”

In the article, Strier discusses new disclosure rules mandated by the U.S. Security and Exchange Commission (SEC) meant to prevent and stop stealth compensation from happening.

“Some companies have complied; others have found ways to muddy the waters and obfuscate, resulting in even greater confusion,” he says. “In the short run, the SEC will have to tweak the rules and impose penalties for noncompliance. The latter is in part a political response, and thus a function of which party holds the White House.”

Strier is the director of the Center For the Study of Corporate Governance and Business Ethics at California State University, Dominguez Hills. The center is a forum for the business and legal community, academics, practitioners, graduate and undergraduate students, and others interested in corporate governance and business ethics issues to meet, interact, learn and teach. Among its goals are to foster research in corporate governance and business ethics; provide an Internet resource for research references to other corporate governance and business ethics sites and publications; propose progressive changes in corporate structure and management through education and interaction; and foster integration of instruction in business ethics and corporate governance into the business curriculum per the new accreditation standards of the Association to Advance Collegiate Schools of Business International. The center is planning to host a conference on executive pay in the fall on the Dominguez Hills campus.

To view the abstract of the article, click here.

- Joanie Harmon-Whetmore