The Bush administration leaned toward the pure capitalists by appointing Harvey Pitt and Christopher Cox to head the SEC. Both of them slept during scandalous times, Enron and WorldCom occurring on Pitt’s watch and the collapse of the banking industry on Cox’s. They failed shareholders by allowing CEOs to run roughshod over the investors.
The Obama administration wants to intervene by setting maximum compensation levels for corporate managers and to regulate bonuses. It may come as a shock to this administration and its supporters, but neither Obama nor anybody on his team is omniscient. They just do not have a sufficient knowledge of business and economics to determine these parameters. In fact, some of the decisions already made are so faulty that one wonders just how much economics anybody in this administration understands (increasing the deficit by more than the deficits produced by all previous presidents combined and attempting to pass an energy tax during a recession are two examples).
It is no wonder the public is starting to stir over the compensation issue—some CEOs are indeed overpaid. While numerous current examples exist, my favorite illustration remains Sprint in 2003. Somehow Sprint CEO William Esrey and President Ronald LeMay finagled the firm to give, and the board of directors to approve, so many stock options that they made approximately $1.9 billion. Clearly, the two of them did not add that much value to the firm! But the question is what to do about these problems.
After lying dormant on this issue for years, the SEC on July 1 voted 5-0 to require business entities that received bailout money to permit shareholders to vote on executive pay {http://www.sec.gov/news/press/2009/2009-147.htm}. They also voted to require all SEC registrants to disclose more information about executive compensation. These issues must still be aired in public for two months before becoming final. This is a step in the right direction as it attempts to deal with the issue but without having Big Brother dictate the actual salary and bonus.
The SEC proposal is quite disappointing, however, because the vote is nonbinding. Given that, I’m not sure what the point is. It is almost as if they want to fail so that Big Brother will have to intervene and set prices for all of us.
What the SEC and Congress and the President should be doing is creating incentives and disincentives so that the economic system would function more smoothly. They should stay out of the details because they don’t have the knowledge to make the right decisions and because we would like to keep some freedoms in our society. Perhaps they should read Hayek’s The Road to Serfdom.
The central problem continues to be the enervation of shareholders by the management class. We need to rectify this imbalance and empower the shareholders to regain control over their own companies. After all, they are the owners!
The other thing to do is to put some fire under the directors at corporate enterprises. The board of directors supposedly represents the shareholders, but often belies that point by assisting mangers in their grab for power and wealth. The Congress could help by enacting legislation that would allow investors to sue directors when the directors abrogate their duties to the shareholders. (Recall that the Supreme Court greatly restricted the liability of directors in Central Bank of Denver v. First Interstate Bank of Denver.)
Of course, the impotence of most boards of directors is frequently the consequence of allowing managers to choose their buddies to be on the board. “Independent directors” is a joke; I don’t if very many of them are really independent. So another thing that should be done is to give shareholders the right to vote for the directors. And not with a manager-stacked deck of choices as if we lived in some communist country. Give the shareholders the opportunity to add candidates to the ballot. Again, they are the owners!
The executive compensation issue remains a hot-button item. But it cannot be ignored by the pure capitalists nor remedied by the governments’ controlling the price of labor. A more moderate approach is appropriate. I think the key institution in this matter is the board of directors. If empowered and if held accountable for their decisions, I think the board of directors could properly address the issue of executive compensation.
