Corporate Governance

Shameful

By J. Robert Brown

When would one imagine a president of the United States describing executive compensation using the word "shameful"?  President Obama did so on Thursday.

It came after a study was issued by Tomas P. DiNapoli, the NY State Comptroller, indicating that $18.4 billion was paid in bonuses to financial executives during a time when the economy was plummeting downward.  The bonuses were apparently the same size as those paid in 2004 when matters in the financial markets were substantially better off.  President Obama had this to say:

• “That is the height of irresponsibility,” Mr. Obama said angrily. “It is shameful, and part of what we’re going to need is for folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.

• “The American people understand that we’ve got a big hole that we’ve got to dig ourselves out of, but they don’t like the idea that people are digging a bigger hole even as they’re being asked to fill it up,” Mr. Obama said, adding that “there will be time for them to make profits and there will be time for them to make bonuses. Now is not that time.”

The Executive Branch is in the eye of the executive compensation storm.  It is Treasury that has adopted rules designed to implement the compensation provisions in TARP.  We will, over the next couple of days (Friday and Monday), look at the federalization of compensation decisions.  There are a few observations, however, that can be set out right now.

First, the anger and frustration is over a system governed by Delaware law.  The courts have interpreted fidicuary duties in a way that puts no real limits on executive compensation.  We see the results of the Delaware system daily.

Second, it goes well beyond ordinary compensation.  Compensation raises concerns over money or assets that ultimately benefit the CEO (and other top officers) personally.  They include such things as country club dues and personal use of the company's private aircraft (for officers and family members).  But even where it's for business use, management has become profligate.  Ownership of private jets for business use, expensive remodeling of offices, highly paid private drivers, are all expenses ostensibly designed to benefit shareholders.  Yet one cannot help but think that in fact the decisions are based less on the interests of shareholders and more on the interests of management.  

Third, Treasury's efforts so far are weak.  TARP only applies to companies that accept bailout funds.  In other words, whatever abuses Treasury seeks to stop, they are still allowed to remain in place in other, non-bailout companies.  Moreover, Treasury had done little except to adopt vague admonitions that call for compensation committees to pay attention.  These requirements are not enough.

Will explore some of these matters in upcoming posts.

Full post as published by The Race to the Bottom on January 30, 2009 (boomark / email).