Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

How AT&T Inc. (T) Squanders Your Investment

Want to destroy billions in shareholder value and still get 75% of your bonus? Consider working at AT&T Inc. (NYSE:T), or another company with combined CEO and chairman roles.

In its 2013 proxy, AT&T argued that allowing Randall Stephenson to continue serving as both chairman and CEO creates a “bridge between the Board and management.”

While this “bridge” sounds nice in theory, shareholders should remember that bridges can make it easier for management to loot the companies we own by pushing for their own preferences, even when they are against the best interests of shareholders.

For these reasons, I believe shareholders were right to push for an independent chairperson at AT&T Inc. (NYSE:T), and that the proposal’s defeat is bad for investors.

Conflicts of interest
Clear procedural concerns arise when the CEO and chair roles are combined due to the fact that that the board evaluates the CEO, approves executive compensation packages, and chooses new board members. As chair, a CEO can be empowered to fill the board with members he (or she) expects to rubber-stamp his management decisions, evaluate him favorably, and approve excessive compensation packages.

Compensation concerns at AT&T
In a 2013 proposal calling for an independent chair at AT&T Inc. (NYSE:T), the proponent pointed out that corporate governance guru Nell Minnow’s independent research firm, GMI Ratings/The Corporate Library, has given AT&T a “D” grade every year since 2010 and marked it as “High Concern” for executive pay.

In 2011 Stephenson made $18.7 million despite his botched acquisition of T-Mobile, which cost AT&T Inc. (NYSE:T) $4.2 billion, but only cost the CEO 25% of his bonus. In 2012, Stephenson’s pay went up to $21 million.

AT&T Inc. (NYSE:T)The shareholder proposal argues that Stephenson’s pay was not sufficiently tied to performance, and the highest-paid executives received equity compensation that “simply vested after time without performance-contingent requirements.” Like the proponent, I believe that this compensation system is “difficult to justify in terms of shareholder value.”

Don’t believe an independent chair would decrease executive compensation concerns? Consider this.

According to a recent study conducted by GMI Ratings, the median summed cost of employing both a CEO and an independent, non-executive chair is only about 57% of the cost of the combined roles.

Expensive risk-taking
GMI Ratings’ study also points out that companies with dual CEO/chair roles pose greater risks in two categories.

First, their accounting and governance risk, or AGR, tends to be higher. AGR is calculated by identifying “accounting items that might signal fraudulent financial statements” and “governance characteristics associated with firms prosecuted by the U.S. SEC for accounting fraud.” According to the study, businesses with combined CEO/chairman roles are 86% more likely to be categorized as “Aggressive” in GMI’s AGR model.

Second, companies with dual CEO/chair roles tend to have higher environmental, social, and governance risks, or ESG. ESG is calculated by noting the number of “red flags” a company has, including “significant votes against pay policy, over-boarded directors and the presence of a poison pill.” According to the GMI Ratings study, companies with combined CEO/chairman roles are almost twice as likely to earn an ESG score of “F.” In fact, the study indicated that AT&T Inc. (NYSE:T) earned a failing ESG grade in 2012 when the study came out.

Other large companies called out by the GMI Ratings study for having failing ESG scores have also seen their shareholders push for independent chairs. For example, Wells Fargo & Co (NYSE:WFC) had a shareholder proposal in its 2013 proxy (link opens PDF) pushing for an independent chair. Also, Goldman Sachs Group, Inc. (NYSE:GS) tried (and failed) to gain SEC approval to keep a shareholder proposal calling for an independent chair off its 2013 proxy. Later, the company managed to get the shareholder group to withdraw its proposal in exchange for Goldman’s agreement to increase the outside lead director’s authority.

The GMI Ratings study also suggests that companies with divided CEO and chairman roles produce long-term (five-year) returns nearly 28% higher than the returns at companies with the same person serving in both roles.

The Foolish takeaway
In AT&T Inc. (NYSE:T)’s case, I suspect an independent chair would have contributed to a better system of checks and balances. While it’s difficult to speculate on whether such a governance change would have prevented the costly botched acquisition attempt of T-Mobile, I believe splitting the roles would reduce the risk of costly missteps in the future.

As a shareholder, I hope to see a renewed push for the split next year.


The article 1 Way This Company Squanders Your Investment originally appeared on

Motley Fool contributor M. Joy Hayes, Ph.D. is the Principal at ethics consulting firm Courageous Ethics. She owns shares of AT&T. Follow @JoyofEthics on Twitter. The Motley Fool recommends Goldman Sachs and Wells Fargo. The Motley Fool owns shares of Wells Fargo.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.