Experts in the way companies are run point to two main causes of excessive executive pay. One is a reality of corporate life: The CEO is, almost always, also the chairman of the board. Board members set the level of CEO pay, yet they report to the chairman, which means they have to rein in their own boss’s salary—an unenviable and perhaps impossible task. The second cause of overly high pay is that on most boards few outside directors own more than a handful of shares. Therefore, the argument goes, they’re often asleep at the corporate-governance switch.

Well, if the experts are to be believed, then Sterling Commerce ought to be the best-run company around. Since October 1996 the Dallas-based software maker has had a chairman who isn’t its CEO, though he used to be: Sterling L. Williams. In that role Williams can presumably ride herd on his successor as chief executive, Warner C. Blow. Moreover, two of the company’s outside directors, brothers Sam Wyly and Charles J. Wyly, Jr., both own a lot of Sterling Commerce stock.

Alas, in terms of pay versus performance, Sterling Commerce isn’t well run—not hardly. Within eleven days of resigning as CEO and taking over as chairman, Williams received an option on 1 million shares of stock at $25.50 a share. (As of January 27, 1999, he had not exercised those options. On April 1, 1999, when Sterling’s stock price was $30.06, Williams’ profit on paper would have been $4.56 million.) That came on top of a salary for the 1997 fiscal year (which ended September 30, 1997) of $650,000 and a bonus of $250,000. Indeed, during fiscal year 1997 Williams made more than Blow—who earned $550,000—even though Blow was running things. And during that same fiscal year, the Wyly brothers were also granted large stock options of their own: 1 million shares for Sam and 500,000 for Charles (the share price of those options was not made public by Sterling, though more than likely it was the same price that Williams was offered). These munificent grants came on top of their usual fee for serving as an outside director. Curiously, no other outside director received such special treatment.

Outraged? It gets worse. In fiscal year 1998 Williams negotiated a consulting contract that entitles him to an annual fee of $800,000 for presiding over board meetings and assorted other duties. He also gets to continue receiving incentive bonuses, certain employee benefits, and an office staffed with secretarial help. Moreover, anytime Williams wants to lay down his heavy burden, he is eligible to receive at least $800,000 a year for seven more years. By contrast, Williams’ “subordinate,” CEO Blow, received a salary of only $700,000 in fiscal year 1998.

With all that overhead, you might expect poor performance. And you’d be right. Between March 8, 1996, when the company went public, and April 1, 1999, when the research for this article was completed, a Sterling Commerce shareholder would have earned a compounded annual total return (counting both stock-price appreciation and reinvested dividends) of a scant 1.2 percent a year. By contrast, an investment
in the S&P 500 Index would have yielded a compounded return that was more than 23.7 times higher, or 28 percent a year. Compared with the companies that make up the S&P 500, Sterling Commerce’s performance would have ranked it in approximately the twenty-second percentile of the distribution, meaning that 78 percent of the companies in the index outperformed it. Face it: An investor in Sterling Commerce would have earned twice the return by investing in risk-free T-bills.

So maybe the experts are wrong. Maybe it doesn’t take a non-CEO chairman and stock-stuffed outside directors to govern a company well. Maybe it just takes people who understand that when you pledge to look out for your shareholders, you’re obligated to do just that.