Coke Plan Leaves Some Dry

Corporate executives are widely criticized on Wall Street for being richly rewarded for poor performance, but the main criticism of directors is their level of independence. Paul Hodgson, a senior research associate with governance-information provider the Corporate Library, found in a recent survey that only around 2% of the 2,000 largest public companies have adopted some sort of bonus or incentive plan for their directors. He doesn't expect that figure to grow anytime soon.

"This isn't a trendsetter," says Hodgson. "Earnings per share strikes me as not really the business of the directors. It's an operational management target, rather than a board-level target. Total stockholder return over three years might be a more appropriate measure than earnings."

He suggests that a plan such as Coke's may end up aligning its directors' interests with those of the company's management, hurting their ability to remain independent and serve the interests of shareholders.

"If you're a director, you're supposed to be focused on long-term strategy," says Hodgson. "Making decisions that grow stockholders' wealth over the long term can often hurt earnings in a particular year. If you're a director, and you're thinking about meeting a profit goal rather than making the best decision for stockholders, then you might [have incentive] to make the wrong decision."

Lee Winfield, a Coca-Cola spokeswoman, expressed confidence that the company's board of directors would maintain the proper level of independence from management under the new plan.

"We have the highest faith in the integrity of our directors and that they're among the best and most ethical leaders in corporate America," says Winfield. "We certainly have full confidence that they would do the right thing by the business over the long-term. The board believes that this is an innovative plan that aligns their interests with both shareholders and management. All three should be working together."