Opinions of Peter Belmont
Speaking Truth to Power
| Should Shareholders Control Corporations (and Banks)? |
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by Peter A. Belmont / 2009-02-24
The banks (let’s just look at banks for a while) went overboard investing their shareholders’ money in well-disguised toxic mortgages. Was this the proper behavior of a fiduciary to the shareholders? Or was this a private club rewarding itself with the shareholders’ money? Wall Street income levels normally elicit about the same level of low-intensity criticism as do the salaries of professional athletes, Hollywood actors and rock stars. When, however, their employers and clients are losing the fortunes they are hired to enhance, the high intensity protests are more than justified. But to expect more than a handful of them to anticipate the result of changed circumstances and to alter their behavior responsibly is totally to misjudge human nature and its sense of entitlement. The cure, at least in many instances, is far greater shareholder rights and controls over total executive compensation. The banks’ directors set up systems of remuneration for officers and high-level employees which rewarded them for short-term activity, including short-term activity which lost vast amounts of money. Were the directors acting as “fiduciaries” for the shareholders when they established such compensation policies? Or was this the behavior of an “old boys” network? If the shareholders had reasonably thought of themselves as in some fashion both responsible for the running of the banks and also capable of influencing the direction of the banks, would they not have intervened at some point? They might, of course, have missed or refused to be bothered by the signals (“scare talk” from a few radical economists) about the housing bubble, mortgage melt-down, and Ponzi schemes (after all, there are always nay-sayers crying out that the “End of the World is Nigh”). But isn’t it at least possible that the independent economists who advise the pension funds and the mutual funds would have raised some red flags and at least got a discussion going? And, surely, they could have refused to OK the compensation plans, so clearly independent of the long-term interests of the shareholders. As matters stand today, the banks are “regulated” by the directors, who are in the CEO’s pockets, by the CEOs themselves, and by federal and state regulators, who—thanks to our money-speaks political system—are also pawns of the CEOs. The CEOs use corporate money to pay lobbyists (and to make political donations whether directly or indirectly via salaries and bonuses), with no effective feedback or control from shareholders. The interests of the shareholders need not be, and may very well not be, the same as those of the CEOs. Why assume otherwise? Shouldn’t the shareholders have more voice in the policy discussions than they do today, even if not necessarily an immediately determinative voice? With the banks being nationalized or otherwise bankrupted in droves, perhaps some shareholders—as they prepare to paper their walls with valueless share certificates—will consider whether there was a better way. For next time. One question that should be settled by shareholders is the question of the delay built-in to the feedback-loop in executive performance bonuses (paid as a rule in cash and/or company shares via “stock options”). My sense is that performance bonuses (whatever a manager is paid over a reasonable wage for hours worked) should be determined by the effects of that manager’s efforts (or the efforts of “management” as a whole) on the value of the company as measured by the company stock price—where those effects are measured over a fairly long time span, say five to ten years. This five or ten years is the feed-back delay. What I mean is that a manager’s currently earned performance bonus should not be currently measured and should not be currently paid. The shareholders should determine how long a delay should be incorporated in the performance bonus compensation system. And the US tax system should treat delayed bonuses the same as immediate bonuses so that there is no tax reason to lead the company to prefer one to the other. Shareholders which are basically quick-in and quick-out speculators would wish the delay in computing and paying managerial performance bonuses to be very short indeed, measured in months, days, or hours. This would reward managers for contriving short-term stock-price gains and would clearly benefit the speculators. This would lead to every sort of tricky business practice, managerial “hyping” of business prospects, etc. Shareholders which take a long-term view (intending to hold a good stock for the long haul) will desire managers to take a similar long-term view and will wish to impose a long delay on the computation and the payment of managerial performance bonuses. The stock-price used to determine the bonus will be a daily average over the entire delay-period, thus removing any incentive for the managers to induce “spikes” in the stock price. If a manager anticipates a substantial performance bonus in 5 or 10 years, then her efforts will be directed to increasing the company’s value from the present day forwards for 5 or 10 years, quite a different incentive from the manager whose performance bonus is measured on the basis of short term “spikes” in stock price. Indeed, under a “delayed” incentive plan, a manager’s efforts today will help to build the company stock price over the years in which last-year’s bonus is computed as well as this year’s. Some people argue that managers should work for the pleasure of their work for a flat salary which is neither excessive nor keyed to company stock-price or dividend performance. Such managers would have no personal incentive to influence the company’s stock price, certainly not in short-term ways. But, in any case, managers who try desperate and ultimately failed gambles—whether legal, quasi-legal, or flat-out illegal—in order to increase the company stock price in the short term should not receive performance bonuses today just because those gambles appear to have worked—today. |
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