War on CEOs Won't Fix Economy: Something this administration and Congress should learn

I ran across an article in The Australian a few days ago and it sounded so familiar to the occurrences in the US in reference to how Congress and this administration have chosen to treat CEO’s and paint them all with a broad brush in an attempt to make them out to be as irresponsible as a very few. Of course the Democrats and this administration will find this to be of little interest since it would destroy the only defense they have against incompetence, outright corruption and the cover up of both. It seems the Rudd government in Australia is having the same problems and like their counterparts here in the US are desperately seeking someone to blame thus they have declared war on CEO’s just as has been done here in the States. Meanwhile in this country the “tax evader in chief” of the Treasury is seeking the power to seize private corporations that he deems in danger because of in his estimation of the evil CEO’s who are paid waaaaaay too much according to his thinking and the thinking of this administration.

The legislators and leaders of both countries have seemingly forgotten that executive remuneration should be transparent to shareholders. Directors should be accountable for the decisions they make on behalf of shareholders, including executive remuneration. If the Government thinks there is lack of transparency to shareholders in executive remuneration arrangements, this is a failure of its corporate regulatory framework, which it should amend not seize the corporation on pretense of it being in danger.

The problem with the Government is that it is not motivated by concerns about transparency. It is another childish attempt to blame our economic problems on executive greed. In the case of the US it was the failed attempt to steer the blame for AIG bonuses being paid away from corrupt politicians, namely Chris Dodd and the Treasury ‘s incompetent and corrupt Tax evader in chief among other cover ups and failures they have been involved with including Fannie and Fred’s failure which of course is in great part due to Barney’s attempt to defend the policies set forth under Carter and extended under Clinton and bullied through by Frank and his gang. But that is irrelevant according to them. It is all the fault of greedy CEO’s.

By linking executive remuneration to class war and broader economic problems, Swan is following in Kevin Rudd's ideological footsteps. Just as this administration and Congress who asserts that "the largesse of the last decade has been a slap in the face of many working people" and that many recent payments to executives have been viewed as obscene. It is divide and conquer pure and simple. While the public has every right to be outraged by the bailouts and the AIG fiasco among others is an entirely different situation. These outrageous payments involved taxpayer funds as part of government-orchestrated bailouts. But, government bailouts aside, whether an executive's remuneration is considered obscene by the community is largely irrelevant to the directors and shareholders of the company. The responsibility of company directors is to act in their shareholders' interest.

It may be true that many people are angry about executive salaries but that doesn't provide grounds for the Government to engage in a general attack on chief executives and the corporate sector. This is particularly unhelpful at a time when the Government should be strengthening business confidence which certainly this administration has not attempted to do but instead has done everything within its power to weaken this confidence all in the name of “Never let a crisis go to waste”—White House Chief of Staff Rahm Emanuel.

This administration and it’s “economic clueless guru’s” seems to think the interests of the broader community and the individual shareholder are one and the same. They are not. Shareholders want their companies to do well. Often this is at the expense of other companies and their shareholders. The community, on the other hand, wants the best and cheapest products. Workers want their firm to survive and provide job security. Their job security and wages, despite union attempts to take wages out of competition is often at the expense of either profits or competition.. These are the fundamental tensions in the economic system. It is this creative destruction that provides our enviable standard of living. The sooner the Government wakes up to this, the better off we all will be.

Company directors must secure the best executive team to guarantee the prosperity of the firm. The challenge for directors is to ensure that remuneration packages align the interests of management with that of the shareholders. This is not easy. A whole body of economics has developed around resolving this agency problem. The core concern is that management can capture company directors and operate the company in their interest rather than shareholders' interest. When this happens, management is in a position to extract an economic rent from the company, reflected in excessive executive compensation. Maximizing executive compensation, not shareholder value, becomes the focus of the company. This is of little comfort to shareholders. The directors failed to provide executive incentives that balanced the short-term remuneration objectives of executives with a longer-term interest of shareholders. Better-quality directors, not government regulation, are the solution to this problem. Recent research suggests that directors would achieve better performance from executives by altering remuneration packages to place greater emphasis on a combination of share price and earnings performance.

But even with the best endeavors of the most diligent directors there is no guarantee that companies won't fail, which is what generates the higher rewards of those that succeed.

Highly skilled executives command large salaries. Just because governments and sections of the community believe these salaries to be excessive or obscene doesn't mean they are wrong. Morality has nothing to do with it.

Many in the community regard the salaries of Hollywood actors and sports stars as obscene. That doesn't mean the government should hold an inquiry or attempt to regulate them. Oh but they have tried this earlier and no one seems to ask how that worked for them so now it’s on to warfare on corporate Exec.

One of the most misleading ways of assessing executive salaries is by comparing them with the pay of workers which has been a favorite of the Democrats and even more so in this class warfare administration claiming only to want to level the playing field. The Economist claims that in 1980 the average pay for chief executives in the biggest companies in the US was about 40 times that of an average production worker. In 1999, it had increased to about 85 times and was estimated to be more than 400 times during the recent asset price bubble. This may be true, but it is irrelevant. The market for chief executives is not the same as the market for production workers but once again that factoid is beyond the scope of the “progressive mindset” and is used as a tool and calling card for income redistribution in the name of leveling the playing field.

Many factors explain the growth of executive salaries and the relative decline of production workers' salaries, including their relative supply and demand. Executive remuneration cannot be effectively regulated by governments. It would be foolish to try but then don’t try telling the current administration and is clueless economic advisors nor Congress such. Evil Exec’s and their huge remuneration packages must be controlled and only government can do that …well according to them and we know what their agenda is.

Hat tip for statistics and idea :Michael Costa writer for The Australian