economic-systems
Whether Gretchen Morgenson has stepped near the edge or over it in her recent column Memo to Shareholders: Shut Up seems to be triggering a debate. Brad DeLong introduces it in his blog - Gretchen Morgenson Has Eaten Her Wheaties, and Tears into Marty Lipton… with: “Marty Lipton has driven the New York Times’s Gretchen Morgenson into shrillness:”
Gretchen says that efforts by shareholders to make directors more accountable to owners seem to be working. The proof is that Martin Lipton, the country’s premier takeover lawyer and inventor of the poison pill, is complaining that many board of director candidates are declining to serve. He claims that the activists are “destroying the role, focus and collegiality of the board of directors” and that it is “time to recognize the threat to our economy and reverse the trend.” Morgenson argues that if this were really a problem, the costs of directors’ and officers’ liability insurance would be skyrocketing. But instead, these costs have plummeted by almost 40% in 2005 and another 10% last year. She ends by saying “Mr. Lipton’s fear-mongering . . . won’t stop the train.”
I hope she is right, that the worm is turning, that publicizing the undeserved rewards given to executives even though they have clearly screwed up will curb the behavior. I also hope that board members are forced to take their responsibilities more seriously.
But anyone who has been a CEO, worked alongside one and/or been married to one knows how difficult, lonely and all-consuming these jobs can be. While there certainly are CEOs that take the money and run, or coast along comfortably, those that actually succeed - especially those that successfully transform mediocre organizations into high-performing ones deserve to be rewarded handsomely for that success.
This is the other side of the story: transforming an organization from mediocrity to excellence requires top-down control by a CEO who knows what excellence involves and demands excellence from everyone. This cannot be a democratic process. Until the organization is fully transformed, in fact, democracy and equality are the enemy of excellence. Not only are there individuals who will actively fight this process before they are won over, but there will be many who will have to leave because they are just not capable of contributing to excellence. That can make the job of the CEO particularly arduous, lonely and all-consuming. Anyone who has been a CEO, worked alongside one and/or been married to one knows this very well.
Let’s not let this movement to curb undeserved rewards turn into anti-executive populism. If we do, mediocrity will drive out excellence.
When George Bush starts complaining about executive pay - Bush takes aim at executive pay - you know it’s got to be bad. How can we call this a merit system when executives can brazenly take advantage of their power to extract undeserved rewards?
I emphasize undeserved. Recently it was reported that Robert L. Nardelli - Nardelli article - is expected to exit from Home Depot with a package worth more than $210 million (added to his more than $10 million per year while he was there) even though the company’s stock has fallen by roughly 20% during his tenure.
A month before that it was reported that Hank McKinnell, previously head of Pfizer, recieved a $200 million exit package (see McKinnell article). This package included a pension of $6.65 million a year for as long as he lives (worth $82.3 million), $78 million in deferred compensation, and an estimated $18.3 million in “performance-based shares.” As Gretchen Morgenson, author of the article points out, “perhaps it would be more accurate if these were identified as failure-based shares”, given the fact that Pfizer shares dropped from $46 to $26 a share under his tenure.
Unfortunately, there are lots more examples. Mostly because “incentive” compensation plans pay off no matter what - even if stockholder value has been destroyed.
What to do about it? Will Congress fix it or make it worse? I will certainly come back to that.
If you have read About Centrarian.com you know that politics cannot be centered without also centering economics ― which means correcting the economic system so it lives up to the claims of conservatives, namely that it efficiently allocate resources and approximate a merit system. The purpose of this page is to outline what is needed to accomplish this.
Private Property: Prevailing definitions of private property allow individuals to collect, not just merited compensation for their own labor, ideas and contributions to the economy, but unmerited shares of natural resource rents and output produced by people now dead. This needs to be corrected by having a new form of private property which allows individuals to claim their equal share (equal since no one individual has any greater right to a share than any other) of these non-individual sources of income). This would provide a base income for everyone, making the system both more equal and more of a true merit system.
Externalities are side effects whose costs or benefits are not included in decisions because they affect other parties without adequate compensation. The classic example of a negative externality is pollution generated a company affecting the health of people living downwind. An example of a positive externality is the increased selling price nearby home owners receive as a result of having a store or a mall being built nearby. Mechanisms need to be found to “internalize” such externalities so that when economic decisions are made they consider all the effects.
Uncompensated public costs and benefits are externalities that affect the general public rather than, or in addition to, private parties. These include environmental, economic, educational, and social effects of actions. As with externalities that affect private parties, mechanisms need to be found to internalize uncompensated public costs and benefits so that economic decisions are made with all of the effects being properly considered.
