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By Xavier Mohr
SLReports.net An Editorial I watched with a lot of interest this morning as the House Committee on Oversight and Government Reform interviewed economists, mortgage lender CEOs, and other experts about the subprime mortgage crisis currently being experienced here in the United States, and particularly the outrageous compensation collected by current and former lending institution CEOs right in the middle of it all. The committee was chaired by someone I consider to be a fair politician, but also a qualified leader in the ongoing congressional investigation into these issues. Chairman Henry Waxman [D – 30th District of California (West L.A., Beverly Hills, West Hollywood, Bel-Air)] is an experienced legislator of over three decades, and has always proved to be a bipartisan voice in issues both domestic and foreign. Beyond the cliché and oversimplified views on the subprime mortgage crisis brought up in testimony, however, something caught my attention: procedural matters related to real-life CEO compensation. It is something that I personally feel is directly applicable to our Second Life markets and public companies.
It struck me as interesting that – in real life – American CEOs receive much of their compensation in the form of stock. Furthermore, when a CEO leaves his position in the company, he is typically required to hold 75% of his stock and options for the long term... tying his personal financial success to the efforts he made while leading the company. As I started contemplating these facts of real-life executive compensation, I started paying less attention to the subprime testimony and began thinking more about a problem we have seen in Second Life financial markets in the past few months, and are likely to see at an increasing rate over the next year: company-dumping by bored or greedy CEOs. In Second Life, we too often see CEOs start a company, complete an IPO, head the organization for a few months, then completely sell out and disappear. I won't name names or companies, because that's not really the issue. The issue is, our lax rules with regard to virtual corporate governance foster a system where a charismatic CEO can create inflated share value via a virtual exchange listing, then resign and exit completely – capitalizing from share value of which he may not be deserving. How do we combat this? The answer would seem simple enough if we go by real life rules. In Second Life, in general, we have no rules with regard to CEO exit. Such rules wouldn't be hard to implement. As I understand it, in real life, a company's board of directors helps enforce policies of this nature according to S.E.C. guidelines. Obviously, Second Life markets are not currently under regulation from the S.E.C., and boards are often fraught with conflict of interest or otherwise haphazardly organized. However, if our exchanges were to collectively adopt a standardized, tough policy for capital gain control of exiting CEOs, I suspect we would see a lot more life-long executives committed to creating value for their company... while still allowing a legitimate exit for CEOs with more urgent matters. Obviously, we would have to adapt the rules for our fast-paced market, and the part-time nature of most Second Life businesses. Perhaps a tiered policy structure would be appropriate for former Second Life CEOs. For example: - CEO has served 6 months or less as executive
of a publicly-traded company:
75% of CEO shares are locked. This block of shares may not be sold under any circumstances until a 12-month period (after leaving position of CEO) has passed, and are not eligible for corporate repurchase (in the event of bankruptcy, business closure, or delisting) before that time has passed.
- CEO has served 6 months to 18 months as executive
of a publicly-traded company:
50% of CEO shares are locked. This block of shares may not be sold under any circumstances until a 6-month period (after leaving position of CEO) has passed, and are not eligible for corporate repurchase (in the event of bankruptcy, business closure, or delisting) before that time has passed.
- CEO has served more than 18 months as
executive of a publicly-traded company:
All shares are unlocked and sellable.
A tiered compensation system for former CEOs would serve a number of purposes. First of all, it would decrease the number of CEOs who IPO worthless companies to create fictional share value, only to resign out a few months later in order to sell shares and collect a windfall of which he is undeserving. A system like this would also encourage CEOs to stay in their positions longer, and create legitimate value for their businesses... since the ability to satisfy their own greed would be tethered to the time they spend in their position, and their success in performing their duties. Of course, such a system assumes that CEOs are NOT the majority shareholder... unfortunately, in Second Life it is more often the rule that CEOs ARE the majority shareholder. However, I believe the system still works. Why? It prohibits premature sale of publicly-listed corporations. Rather than selling their shares in a block, unestablished CEOs that are also majority shareholder would instead be required to serve as Chairmen and appoint CEO replacements whom they compensate from their own share dividends. They could still resign and get someone new in there, but they would not be "out of the picture." In the event they NEEDED to move shares, 25% could still be moved for new CEOs, and 50% could still be moved for older CEOs. A sale could even take place normally for long-term executives. But, for all non-established executives, there would be no "easy way out" without forfeiting some or all interest in the company. I think a system of capital gain and acquisition control, and CEO share movement, is long overdue for our Second Life markets. I see it doing nothing but good. It strengthens companies and punishes fraudsters out to take advantage of emerging markets. Perhaps my idea isn't perfect, but it's a start. We all know stories of fly-by-night public corporations that have IPO'd, touted massive short-term successes, then disappeared amid a flurry of executive share sales. Am I a hypocrite for proposing this? Maybe. I confess that such a system would have hindered my own sale of SL Reports last year, and perhaps it would intermittently hinder sales from legitimate CEOs selling quality companies for various reasons... however, I feel a system like this is one of those regulatory evils which in the end does more good than foul. And, nobody ever said that exchange management (or committee of shareholders) could not review potential power shifts on a case-by-case basis, either. Just my random thought for the day. :) Until next time... CORRECTION: In the list, I changed the word "assuming" to "leaving," as I made my point inaccurately in the first version.
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