And This Is Better, How?

Critics of high executive pay on the soft-core / moderate left (as opposed to the hard-core socialist left) often argue that they are not against large incomes per se.  However, they argue that high executive pay is often the result of a failure in the structure of corporate governance, where a group of cozy insiders on the board and management hand each other compensation packages to which the rank and file of shareholders would be opposed  (a subset of the agency cost problem).

I am somewhat sympathetic to this argument, as I have personally observed instances where I thought boards and management were too cozy by far.  However, no one has really succeeded at proving this hypothesis on executive pay, and in fact shareholders when they have had a chance to vote on such packages have never really made a meaningful dent in them, and one can find a number of private companies where such governance issues presumably don't exist but high executive compensation packages can exist.

Just as an aside, a classic example of this can be found in the fabulous book "Barbarians at the Gate" about the RJR Nabisco takeover fight.  The book does a great job of portraying a company with horrible corporate governance issues that seemed to be used to enrich managers with both salaries and perks, but then observed that the new private owners of the company gave their new CEO a compensation package that might have made the previous executives blush.

Anyway, I am yet again off the point.  My point was to observe that the mainstream left seems to believe that there are corporate governance issues at large corporations that disenfranchise the majority of shareholders vis a vis key decisions involving the company executives.  So I have to ask myself, if this is a real fear, then how does one justify having the President of the United States effectively fire the GM CEO, without any vote or substantial input from shareholders?

Postscript: It is all well and good to be cognizant of agency costs.  Everyone should understand when an employee (or contractor or whatever) has different incentives than they themselves possess.  For example, on my recent backyard renovation, I always kept in mind that my architect wanted to create a showplace that would advance his business and possible get into a magazine.  In general, this alligns our interests, but there were times he pressed for things I did not value and I had to be insistent we were not going to do those things.

However, many folks seem to want to run off to government to do something about agency costs whenever or wherever they are found.  This is hugely dangerous, as Congress tends to have the highest agency costs one will ever be likely to find.


  1. GU:

    Yes, I always think its funny when leftish individuals point out the (real) principal-agent problem that plagues corporate governance, but then turn to government for all their policy solutions. Representative government has arguably the highest agency costs of any principal-agent problem around.

  2. EvilRedScandi:

    My first personal take is that most shareholders are lousy owners. How many know anything about companies they're holding other than the share price? How many actually bother to vote their shares? I love asking these questions of my lefty friends... then I explain to them that they're asking the government to babysit their investments because they're too lazy and useless to do it themselves. I then inquire as to whether or not they need an agent of the government to clean their bottoms after relieving themselves (albeit phrased less delicately), or give them a bottle and tuck them into their cribs for beddy-bye time.

    As a business owner, I often wonder how much value some of these executives actually contribute to their organizations. My guess would be not nearly as much as they're paid. Decisions to hire them (along with most decisions to spend large amounts of money) tend to be based more on avoiding blame in the case of potential failure than in actually getting the best person or the best value. There are, of course, plenty of exceptions. Steve Jobs is worth every penny. Mostly, though, I'd say that the average CEO is worth maybe 10% of his or her salary when you consider job performance vs. a lower-priced alternative (or primate from your local zoo). But, hey, that's not my problem. I don't own any significant amount of stock. If people want to invest in these companies then they're 100% free to do so. Some are run by morons, but do well anyway. Some are even well-run.

    The real concern of your average lefty, however, isn't based in economic theory. After a few drinks, they'll admit it comes down to jealousy. They see some schlup beating the system and scoring a fat paycheck that they don't earn. They want mommy and daddy Obama to come and bring the Chickens home to Roost. Because life has to be fair (they learned this in public school, apparently while I was sleeping in class). The irony, of course, being that government deciding who earns what will be far less fair but if they had those "thinking ahead skills" they wouldn't be lefties, would they?

  3. the other coyote:

    I think you must be talking about that rare bird, the lefty who understands that evil corporations actually have owners, known as the shareholders. Most of the ones I hear talking say "the corporations" this and "the corporations that -- as if they exist in a vacuum. I think some of them think that the CEO owns the corporation. My husband's relatives are the worst; they think it's just terrible that CEOs make more than the working stiff, and it's just not fair. When I point out that it is none of their business, unless they are a shareholder, and if they are, they are free to vote the bums out, they look at me like I flew in from another planet.

    Of course none of them even realize that they ARE shareholders of ExxonMobil... since their teacher pension fund and 401k mutual funds are the largest shareholders ....

    Of course thinking back, I think I had a similar reaction twenty years ago, when a professor informed me that a corporation's only duty was to make money for its shareholders. After 12 years at a "rich" white suburban public school, I was under the impression that corporations were supposed to give away money and keep people employed.

  4. tomw:

    The real reason for the gross overcompensation of board members is that a very high percentage of stock is held by retirement groups such as CALPERS. The bureaucrat mentality of CALPERS, or perhaps its ignorance and hesitancy, prevents it from voting its shares in opposition to the recommendations of the board. They CAN'T on their own, oppose the board, and they own too much stock for the individual investor to out vote them.
    There is no external pressure on pension fund managers to resist the will of the board members. And, the board knows this. They can pretend to have 'compensation committees' that compare their packages to others, but the all do the same thing, which is to vote the members all the perks they think they can get away with. c.f. Fannie Mae and Freddy Mac, Raines, et al, futzing with the accounting rules as Rahm Emanuel looked on, and voting themself inordinate pay.

  5. m.jed:

    In addition to many of the good points presented above, I have repeatedly asked those with left-leaning politics as to why it's "worse now". CEO pay to average pay has increased steadily over the past several decades, coincident with more accounting oversight, shorter average tenure of CEOs, greater equity culture (the Friedmanesque view that the only responsibility of corporations is to generate a return on shareholders' investments), greater intervention of activist and private equity investors, and more recently, more independent Boards. When pointing this out, and noting that at a minimum less independent Boards that were prevalent in the "lefty utopia" that was the economy in the 50's and 60's, I've failed to hear a sufficient explanation as to why current Boards are so much more likely to shower the CEO with riches than were Boards that were much more of an "old boys club".