Corporate Governance

Shameful (The Growing Consequences)

By J. Robert Brown

The fallout from President Obama's reference to the payment of bonsues as "shameful" is already being felt.  Claire McCaskill, Senator from Missouri, has already introduced legislation that would limit salaries of all company officials to no more than the salary of the President of the United States (which is $400,000 by the way).  And if you didn't get the message, the bill is titled "The Cap Executive Officer Pay Act of 2009").  As noted in the WSJ:  "In 2007, Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein earned that much in about two days."  The bill likely has no chance of passing but it is a reflection of the growing frustration being felt with executive compensation issues in Washington.

The anger, however, is focused on companies receiving TARP funds.  The problem is broader than that.  Apparently excessive compensation is not tolerable when the money is from the public but is tolerable when the funds are from shareholders.  This approach will result in no lasting impact.  Once the current turmoil passes and the TARP funds are repaid (or preferred shares repurchased), the same practices will return with a vengeance.  Indeed, even among financial institutions, many are rejecting TARP funds and, therefore, will be free to pay whatever comensation they want.

This is an opportunity to continue a systematic reform that will have permanent impact on executive compensation, not just those receive TARP funds.  The answer is not a cap but process reform.  It means overturning the system of determining compensation that has been put in place by the Delaware courts. 

The solution can be found in the article, Returning Fairness to Executive Compensation.  The most immediate thing that can be done?  Access.  With shareholder representatives on the board of directors (or the threat of shareholder representatives), "independent" directors may be inclined to take a more realistic view towards executive compensation.

Full post as published by The Race to the Bottom on January 31, 2009 (boomark / email).