The latest development is the

Dan Pedrotty is one of the main voices behind organized
labor's agitation for improved corporate governance.

He is the director of investments of the Washington-based
AFL-CIO, the largest umbrella group for organized labor
unions in the country, and has been vocal in recent years on
executive pay and the composition of boards of directors.

Pedrotty's message isn't the "soak the rich
and tear down the walls" theme that some people
identify with organized labor from history lessons about the
19th Century. Rather, his position is that labor unions need
the stock market to succeed to generate income required to
pay the pensions of retired workers. He doesn't mind if
executives get handsome cash salaries or if companies earn
big profits.

He does have a problem with stock options and what he
calls a "mindset problem" - that what many people
know as the economy has been self-defined by financial
elites to favor trading, investing and money-lending over
working and saving.

There are, he said, people, corporations and institutions
that make a lot of money from low wage growth because they
can borrow money cheaply from the government, lend it out to
strapped wage earners living off of credit cards, and have
Uncle Sam guarantee the losses.

"The economy we are in was built on speculation and
borrowing, not a rise in wages," Pedrotty said.
"It was fundamentally unsustainable from the
start." Are companies starting to get the message on
executive pay, aligning it better with the fortunes of
shareholders and employees?

Certain ones. It's tough to get it right and we
understand that. Basically, cash is not a bad form of
compensation, far better than stock options. Actual shares
of stock that have to be held over an executive's whole
tenure are much better than stock options. That's what
we are: patient capital. We can't sell every time
shares go up or down $5.

Any examples?

Sun Microsystems is one. Silicon Valley is the cult of the
stock option, where everyone says you won't get the
entrepreneurial commitment without the promise of the stock
option upside. But Sun Microsystems listened.

What is the problem with stock options in your view?

We don't think it aligns management with
shareholders. Options motivate a short-term burst in the
stock price, then you unload. A lot of the executives for
these failed banks we have seen recently had huge options.
They adopted risky strategies and made risky investments at
the wrong time to raise the stock in the short run. As
institutional investors, we want a long-term view.

So you are saying that anyone who says organized labor is
hostile to a growing stock market is mistaken?

Absolutely, from both a business standpoint and a capital
markets standpoint. From a business standpoint, the worker
has no better friend than a healthy business. From a capital
markets standpoint, we manage pension funds to pay for the
retirements of our members, and those pension funds are
heavily invested in the stock market. Our members care
deeply about these matters.

Corporations will respond to most questions about
executive pay by saying top managers have scarce skills,
that the market for them is very competitive, and that they
are simply paying the going rate for the best talent.

That is the same rationale used when these banks hired the
CEOs who destroyed them. Compensation is a key factor in
these bailouts we are hearing about. And if it is all just
about talent, what about Europe? There, the ratio of CEO pay
to that of the average worker is about 15-to-one. Here, it
is 360-to-one.

What's driving it?

The boards of directors aren't doing their jobs. The
compensation committees aren't striking arms-length
bargains with the CEO. It's not like a sports agent and
a team owner, who are engaged in an adversarial negotiation.
The board members are conflicted, serve on each other's
boards, play golf with the CEO, have all sorts of conflicts
that prevent them from thinking critically, undermine the
process and ensure shareholders don't get the best
deal. The latest development is the "golden
coffin." You have heard of the "golden
parachute?" Well, the golden coffin awards payouts to a
CEO's heirs if he dies in office. Comcast CEO Brian
Roberts has one worth more than $200 million, including five
years of salary worth $60 million. That's what I call
pay for no pulse.

What solutions might be on the way?

I think the independent chairman, common in Europe, is set
to take off. When you are CEO and chairman, you are
essentially overseeing yourself. Non-binding shareholder
votes at the annual meeting are a good idea, an advisory
vote on executive pay that says we think you got it right or
we think you got it wrong. See, all we have now are blunt
instruments of protest - vote against the management slate
of board candidates or sell your stock. That's why
non-binding advisory votes are a useful tool of
communication.

To get to the top of Corporate America, it seems you have
to start young, make the right alliances along the way and
work 18-hour days until you are 50 or older, with the hopes
of one day gaining the keys to the palace. Does that lead to
an ownership mentality for some people once they get to the
top?

It can. Politics is certainly a key factor in advancing in
a large company, both at the management and board levels.
They all tend to have the same world view. They don't
question each other aggressively. They don't tend to be
wired for that, they tend to be wired for conformity.

How can you encourage some critical thinking?

Equal access to the proxy ballot. Now, you can't
change the board unless you put up your own candidate and
run an expensive proxy fight, which can cost $20 million.
The incumbents, meanwhile, have the corporate treasury
behind them. Equal access to the proxy means a significant
body of shareholders can get their candidates on the ballot
without a proxy fight. The way it is now, it is like the
incumbent in a democratic election getting to decide who the
opponent is.

E-mail: rhubbard@bhamnews.com