Well, the BP disaster, in particular the intense press coverage of this week, appears to have provided the Administration with some very useful air cover, by diverting public attention from the final rounds in the battle to reform Wall Street.
One of the common arguments against the need to create mechanisms to moderate corporate and in particular financial services compensation levels is that that burden falls on shareholders, and they don’t seem to be doing much about it. That’s a major misconstruction.
Public companies represent a major agency problem. How, exactly, are fragmented investors supposed to discipline managements that overpay themselves? It isn’t as if this is a new problem; then star Wall Street analyst, Sallie Krawchek, remarked in the early 1990s, when bonus levels were much tamer than now, that it was better to be an employee than a shareholder of an investment bank. Pay for performance is also a myth. Numerous studies have found that correlation is negative, and particularly highly paid executives are typically at companies that underperform.
Why does this situation persist? Investors have the deck stacked against them. Merely making noise has no impact; for instance, unhappy institutional investors met with Goldman last year to protest its expected record 2009 bonuses, to no avail. Mounting a battle to install new directors is costly and almost always fails (virtually all companies have staggered director elections, so even a successful campaign one year, a rare event, is not sufficient to change how the board votes. It’s cheaper to sell shares than fight, and with most equity investors having to be diversified by sector (and often having specific sector weights), institutional investors can’t escape practices they deplore once they become well entrenched.
And don’t fool yourself: management has stacked the deck in its favor. Board rely on compensation consultants, which are recommended by the human resources department, which reports to the CEO. For reasons I cannot fathom, most boards have been persuaded to set the target pay for their CEO in the top half, sometimes the top third or quarter, of their peer group. This assures constantly escalating pay. When companies drops into the bottom half, they must raise pay levels, which moves the average for that group up, which will put some other firm(s) in the bottom half, who must raise pay, again raising the averages…..
Huffington Post today describes how Team Obama threw its weight behind the financial oligarchs:
The White House is intervening at the last minute to come to the defense of multinational corporations in the unfolding conference committee negotiations over Wall Street reform.
A measure that had been generally agreed to by both the House and Senate, which would have affirmed the SEC’s authority to allow investors to have proxy access to the corporate decision-making process, was stripped by the Senate in conference committee votes on Wednesday and Thursday. Five sources with knowledge of the situation said the White House pushed for the measure to be stripped at the behest of the Business Roundtable. The sources — congressional aides as well as outside advocates — requested anonymity for fear of White House reprisal…..
The White House move pits the administration against House Speaker Nancy Pelosi (D-Calif.), who told Barney Frank (D-Mass.) to stand strong against the effort.
“I met with the Speaker today and she said, ‘Don’t back down. I’ll back you up,’” Frank, the lead House conferee, told HuffPost. “Maxine Waters is very upset, as are CalPERS and others.”
Advocates said that the corporations fought the issue primarily over executive compensation concerns. Given proxy access, investors could rein in executive salaries. The Business Roundtable is a lobby of corporate CEOs…..The investor-protection language was stripped and replaced by an amendment from Sen. Chris Dodd (D-Conn.), who leads the upper chamber’s negotiations in the conference committee…
The SEC is planning to issue rules related to proxy access. Those rules would be made meaningless by the language currently being pushed.
Yves here. I suggest you read the entire piece. This conduct is a disgrace, and should settle any doubts as to whose interests Obama really serves. Hint: it isn’t yours and mine.
Originally published at naked capitalism and reproduced here with the author’s permission.
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