Sunday, April 18, 2010

Buy Stocks and Enter Coal Mines at Your Own Risk

I dislike repeating the same old themes. But when they slap you in the face, it's difficult to ignore.

By now, everyone who reads this blog is all too familiar with the fact that 25 miners lost their lives in an explosion at the Upper Big Branch location of the Massey Energy Company. They also know that the mine has a record of safety violations distinguished by frequency, potentially disastrous outcomes (e.g. lack of coal dust remediation and inadequate ventilation for build-up of methane gas), and the vigor with which the company appeals the citations.

The common wisdom seems to be that executive compensation should mirror performance. It is also the common wisdom that the CEO of any enterprise is ultimately responsible for what happens. Sure, nobody can know everything; operational details frequently escape the notice of top management. But the CEO sets the tone and establishes the philosophy that guides the work of all employees; indeed, that is one of the primary functions of the position. So the logical question to ask is: How much is the CEO of Massey Energy Company compensated for setting the tone and establishing the philosophy that "violations are unfortunately a normal part of the mining process"?

According to the New York Times (4/7/10), CEO Don L. Blankenship earned $11.2 million in 2008, about twice what he earned in 2006. Apparently he's been earning quite a large sum for many years, because he spent about $3 million in 2004 to influence the outcome of one political race in West Virginia -- a judicial office!

Here's another egregious example of CEO compensation -- an illustration of how badly the system works if you believe that executive pay should correspond to long-term financial stability and profit potential. According to the Los Angeles Times (4/16/10), Kerry Killinger, the CEO of Washington Mutual from 1990 to 2008, earned more than $100 million over a period of years, including $24 million in 2006 alone. What did he do to earn this reward? He bankrupted the institution, leaving the stockholders empty-handed when the company imploded in September of 2008.

The Los Angeles Times also reports (4/17/10) that Leslie Moonves, chief of CBS, earned $43.2 million in 2009. OK, I admit it -- CBS is not bankrupt, and to my knowledge no employees have been killed in industrial accidents. But if I were a shareholder (and I probably am, indirectly, through one or more mutual funds), I would be outraged. I know a lot of people who work hard and are highly motivated to produce excellent results for the employers -- for a lot less money.

Is there a lesson in all this? I'm not sure, but I think it might be: buy stocks and enter coal mines at your own risk.

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