Friday, March 27, 2009

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


14 comments:

Anonymous said...

Saw something ( can't recall where )that likened this administration to the Vito Corleone and his family. Obama and his gang are truly dangerous people.

Fred Gregory

Mustang said...

Fred, Glenn Beck did a parody on that yesterday; funny stuff, but all too true. Today, bankers groveled at the feet of the Big O, which illustrates how spineless they are. And yet once again, I ask why the hullabaloo over $165 million, which is less than 1% of the taxpayers’ money AIG squandered on foreign banks.

I wonder if it is possible to find out how much money professional leagues pay in salaries to over-sized drug users; and I wonder why the American people aren't pissed off about that. Next, we could tackle congressional and cabinet level salaries and perks, and wonder why that isn't a concern; we could wonder about the $31 million of our money that went to Acorn.

Finally, I should like to observe that the only difference between a former convict and a member of congress is that the member of congress is awaiting trial.

Jeff Dreibus said...

Mustang,

"And yet once again, I ask why the hullabaloo over $165 million, which is less than 1% of the taxpayers’ money AIG squandered on foreign banks."

Because our taxpayer money is being used to reward abject failure, a policy to which the big-money shark boys have long reacted with outrage. I don't like the idea of our freshly-minted "funny money" being parceled out to the foreign financial institutions, either, but there is no other way to view it than as an injustice and an obscene wealth transfer when it is goes to reward our very own home-grown screw-ups.

It is a slap in the face to every American taxpayer.

Jeff Dreibus

Mustang said...

Jeff, Jeff, Jeff ...

but there is no other way to view it than as an injustice and an obscene wealth transfer when it is goes to reward our very own home-grown screw-ups. It is a slap in the face to every American taxpayer.

What about the obscene transfer of $170 BILLION? Or $10 TRILLION? My only point is that by diverting our attention away from the REALLY BIG BUCKS, Congress once again avoided a confrontation with voters. We're all pissed off at the CEOs ... and I cannot understand why we aren't enraged with Congress who created the circumstances that led to greedy CEOs.

Congress did not allow AIG to go bankrupt. Why not? Had AIG been allowed to go the way of all failed companies, it would have been broken up into about sixteen smaller companies, ten of which would have survived, and the other six would have collapsed. Isn't that the ultimate consequence of a failed company?

Final point: The $165 million was not paid to any senior executive responsible for AIG's capital mismanagement; those guys left the company last year. But once again, WE THE PEOPLE allow congress to manipulate us, and as a result of that the capital building is not a mere smoking remains.

S/F

Ticker said...

'WE THE PEOPLE allow congress to manipulate us, and as a result of that the capital building is not a mere smoking remains.'

Exactly the point of the article posted. I wished to show just how "We the People" have been manipulated into being mad at the wrong folks.

Jeff Dreibus said...

Look, for the record I do NOT believe that the "special" 90% tax bracket created exclusively for AIG execs is the way to go. That still doesn't stop me from being pissed that it is OUR money which is going to reward failure -- and that it is going to the very hypocrites who have historically decried rewarding failure. I believe that we should publish the SOBs' names, addresses, phones and e-mail and give the public an opportunity to tell them exactly what they think of their hypocrisy.

Yes, by all means stop payments to foreign banks. Hell, let's cut off ALL foreign aid, for that matter. We can't afford it now, and obviously have not been able to do so for some time.

Now, how do we go about that? It is nothing we can blame on "the last two years of Congress" or “the last eight years of Bush" or any other time period which suits one's narrow little agenda, so we might be in trouble. It has been going on for over 200 years, as nearly as I can tell. Our politicians have been betraying us almost since the beginning -- and our corporate entities for just as long. It took 'em 133 years to break the system the first time, and another 80 to do it again -- perhaps now for good.

So while we are busy looking at the big picture, the scoundrels who contributed to the financial disaster should be ignored while they continue to rob us blind -- great. Does it occur to you that perhaps citizens prefer to take things in "digestible" $165 million bites? Maybe that represents misplaced priority to you, but it IS a bit more "do-able" than stopping the foreign-aid-and-bailout juggernaut.

I’ve made my phone calls to “representatives” to oppose the bailout plans. Have you? Did it do any good? Hell, no. So: who, then, will meet me in Washington for a big, angry, noisy demonstration against all of the runaway spending BESIDES the AIG taxpayer rip-off? Beuhler? Beuhler? Anybody? Didn't think so. So what right do you have to judge US just because we are not, in your opinion, pissed off at the "appropriate" thieves? Hell, they're ALL thieves! Perhaps if we start small and have some impact, Americans will then be emboldened to "take it to the next level". We had better get our minds around the idea of getting out into the street and opposing ALL injustices, even when it doesn’t happen to fit conveniently into our little partisan box. Otherwise, we will all be royally screwed – and perhaps we already are.

Jeff Dreibus (who has not had a very good evening)

Jeff Dreibus said...

Ticker,

Go ahead and delete the foregoing post if you don't feel that it fits Jus’ Sayin’s "forum decorum"; I won't be mad.

But I sure was mad a few minutes ago . . .

Jeff Dreibus

Ticker said...

It fits right well and is very appropriate.
In the post reference was made to just exactly what you are saying.

"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"

Unfortunately legislators want to become involved "after the fact" rather than being aware of the situations before they reach epidemic proportions. the next part of the paragraph goes on to discuss the further.
Now that the "legislators" have allowed the situation to deteriorate because of their own less than forthrightness and oversight they now need someone to blame so the CEO's are put into the barrel. Some need to be, some don't but the legislators don't seem to differentiate between the two groups.

This blog was created as a place for folks to express opinion and to rant and rave if they felt so inclined. The post will not be deleted or changed. Thanks for your participation.

Ken said...

By my calculations, the bonus money was less than 1/1000 of the AIG bailout money, just 0.1%. Please correct if my figures are in error.

The Logistician said...

We as a society have to take responsibility for where we find ourselves today. By recognizing that, we can potentially turn it around.

We have a tendency to forget the BASIC, big picture stuff and then we complain when things are in a state of deterioration.

Things on this planet Earth are actually quite simple:

1. Innovation and technology, leading to building and creating "things," determines EVERYTHING in a civilized society. (If you don't personally know a scientist or inventor in your neighborhood advancing society's interests, or some kid who WANTS TO DO SO, you have a long term problem.

2. New technology, followed by production of things encompassing the technology, generates JOBS, JOBS, and JOBS. The tax revenues derived from those technological enterprises determine what government ultimately can and can not do. No innovation and no production of things, no tax revenues.

3. It has been shown throughout history that the more hours that one works the more that one produces, up to a point, of course. (We do not want people collapsing from exhaustion. However, exhaustion is WAY, WAY, WAY, beyond 40, or 60 hours a week. Take a break, or seek relaxation, and you fall behind your competition.

4. When the vast majority of society's time is spent trying to generate food to eat, that society is in trouble. Food production has to be relegated to the few, so that the others can engage in the advancement of innovation and technology, and the trade and exchange of the products produced.

5. The simplest way to reduce rising health care costs? Stop eating crappy and fatty foods, smoking, and drinking alcohol, and begin to exercise vigorously. You'll see a dramatic reduction in illness and disease.

6. Retirement, when you still have talent/skills and the ability to contribute, kills your society and generates all sorts of other problems. People who work until the day they die, assuming that they are still capable, are more productive members of society, physically and mentally.

7. As a general proposition, war does not generate income. There are very few positive economic ramifications flowing from war. It is a resource drain, totally apart from the fact that it kills potentially productive members of society, and makes people angry at you.

8. When you treat a certain segment of society unfairly, they become less motivated, and less capable, to work in concert with you to pursue long-term societal interests.

If one looks back in history, these factors repeat themselves. It's simple COMMON SENSE.

A society which seeks the easy way out, and seeks more leisure time, is ultimately doomed. It might ride its success for a relatively short period of time; however, it can not do that for very long.

Plain and simple.

We, as a society, are talking all around the points that matter. We're fooling ourselves by engaging in the debates in which we find ourselves. It's like a boat sinking because of a leak, and the sailors are all arguing about how to dump the water out of the vessel.

The Logistician said...

By the way, really liked your response on the North Dakota flooding. Nice, well thought out answer. I can live with that even if I disagree with some aspects of it. Always good to hear from you. The person who suggested the question about the private sector and disasters actually had some other questions associated with it.

Jeff Dreibus said...

Ticker,

You are indeed a gentleman for exhibiting tolerance toward a bona-fide grouch.

Thank you.

Jeff Dreibus

EDGE said...

Ticker,

Hope you are doing well! Great post!

Jeff Dreibus said...

Logistician,

Okay, let's assume for the sake of argument that your analysis is correct and that your Eight Simple Rules are indeed constants. How do they square with the concept of advancing a free society? The freedom precept, you will recall, is central to the American experiment.

To elaborate, I can see some weak points in your reasoning. I detect subtle elements of forced labor, collectivism, pacifism and "managed" personal behavior hiding amongst those rules. Such traits are also generally incompatible with a civilization's longevity . . . are they not?

Jeff Dreibus