Learning From Lehman’s Fuld: How To Answer Oversight Questions On Compensation (LEH, LEHMQ)

October 6, 2008 by Douglas A. McIntyre

Fuld_imageRichard Fuld, Chairman & CEO of what is left of Lehman Brothers Holdings (LEHMQ) is currently testifying before the House Oversight Committee.  Fuld’s answers and demeanor today may offer some valuable lessons for future CEO’s and executives who have to testify in front of oversight committees when their companies are failing or are in trouble.

We do not really subscribe to the notion that executive compensation is the major issue in troubled institutions nor do we subscribe to the notion that executives should generally be slammed over their compensation packages.  Even if our markets are arguably no longer purely free markets, we are not yet in the world of pay caps. 

Congressman Henry Waxman questioned Fuld about his total compensation of some $400 million. He noted executives taking personalhelicopters to work, a $14 million home in Florida, million dollar paintings in his collection and much more.  Fuld has blamed naked short selling and rumor mongering overleverage and regulation over the failure of Lehman.  Fuldtoday discussed selling stock and stock options and said he did not knowthe exact number of he shares currently owned.  He did note the number ofaround 8 million shares today rather than 10 million which had been discussed.  Fuld also hintedthat he had far less influence over the compensation committee atLehman than he did the 1990’s.  But even as the questionscame, Fuld seemed rather unprepared.

What is interesting here is that this new environment of Uncle Sambailing out entities is going to set the precedent for manyhearings in front of oversight committees.  Executive compensation isgoing to be a part of the new bailout package.  It seems that more andmore CEO’s of failing financial institutions are going to get to answer one key question upfront each and every time they are in front of oversight: "Sir, howmuch have you made at this company?"

This won’t come in the form of "How much are you making right now?"…CEO’s and other executives are going to have to answer for the past aswell even for when things were running great.  Frankly, the magnitudeof such issues is very scary if you believe in free markets or if youbelieve in quasi-free markets.

How far this is allowed to go is stillunknown.  We have yet to have any real government buying of securitieswith this new $700 billion off the printing presses.  So we in turnhave no real idea of what to expect on this front.  The main issueahead to be about golden parachutes for executives wheninstitutions fail or become troubled.  But if you listened toCongressman Waxman today, you might begin to wonder if things will beallowed to get much broader in scope or if this is just a sideshow before dealing with issues which directly lead to failure.

Fuld really didn’t seem prepared for some aspects of today’squestioning.  For executives of financial firms in trouble, there aresome obvious lessons to be learned from today’s testimony.   

Jon C. Ogg
October 6, 2008