Reform for Executive Ranks?

[nonesuche]

The Washington Post is noted as one of the most democratic in viewpoint in the nation. The authors of this piece are:

Rakesh Khurana is a professor at Harvard Business School. Andy Zelleke is co-director of the Center for Public Leadership at Harvard's John F. Kennedy School of Government.

I think it zooms in on the ongoing issues that must be resolved, if we are to reinvent our economy to once again support the common working person equitably. I've tried to highlight this as an issue often but this article does so, far better than I ever could.

You Can Cap The Pay, But The Greed Will Go On

By Rakesh Khurana and Andy Zelleke
Sunday, February 8, 2009; Page B01

President Obama is now three weeks into his new job -- annual salary $400,000 -- and already he and his team are working overtime to make sure that no one at the helm of a bailed-out firm will pocket much more than he does. It's time, the president said last week, for "restraint," not millions in bonuses.

The indignation over executive excess has mounted as the wretched indulgences stack up. Bank of America ($45 billion in bailout money) sponsored a five-day "NFL experience" at the Super Bowl; Wells Fargo ($25 billion in bailout funds) was planning 12 nights in Las Vegas for select employees.

With business executives seemingly oblivious to the nation's crisis, it's easy to see the appeal of capping exorbitant pay and wild spending. But corporate America's problem is more fundamental than that.

Since roughly the mid-1980s, the American public corporation has been run primarily for the purpose of creating vast wealth for its senior executives. True, executives have also sought to produce a return for shareholders and to deliver useful products or services to customers. And, of course, their businesses do provide jobs. But these concerns, for the most part, have been ancillary to the primary objective of enriching those at the very top.

Take the now-infamous example of the recently ousted Merrill Lynch chief John Thain, who not only splurged on his office decor but also had the audacity to propose a $10 million bonus for himself. In recognition of what? A year's work in which the company continued to make bad business decisions, lost about 80 percent of its value, sold itself to Bank of America to stave off possible collapse and appears to have seriously damaged its buyer's franchise? After a less-than-heroic performance, Thain's grasping for $10 million -- presumably because he thought it could be had -- represents what has come to be expected from America's business leaders.

It wasn't always this way. In 1960, the ratio of CEO pay at large companies to that of the president of the United States was about 2 to 1. In 2007, it was more than 20 to 1. In 1980, executives at large companies made about 40 times what the average worker made. Last year, CEOs made about 360 times more than the average worker. During the golden age of U.S. economic power, business schools taught future executives to see themselves as trustees of their companies and stewards of our economic resources.

But today, to the people who run them and the investors who own their stock (mostly very temporarily), public companies have become largely personal ATMs, machines from which to extract as much personal wealth as quickly as possible, within the boundaries of the law (usually). The distinction between creating something of enduring value and merely extracting as much value as possible has dissolved.

Senior executives don't simply want to be paid well. Especially in the past 15 years or so, they have aspired to personal fortunes that were previously attainable -- or even imaginable -- only by the entrepreneur who risks everything in launching the (rare) new venture that proves wildly successful. Ironically, immediately before joining Merrill, Thain had served as the rather modestly compensated CEO of the New York Stock Exchange, brought in to restore sanity following the Dick Grasso era. Grasso had secured almost $200 million in compensation from the NYSE -- a dubious windfall from an organization entrusted with a public regulatory mission.

But the grasping hand of the American executive is not confined to Wall Street. Just look at Robert Nardelli's conduct as head of Home Depot. Nardelli managed to leave his six-year tenure at the top with about $250 million in his pocket -- perfectly legally -- despite the company's lackluster performance in the stock market and against its competitors. How did these leaders, legally accountable to shareholders, get away with such excessively lined pockets? For one, few investors in these companies have cared much about the underlying company or the business it conducts. They don't stick around long enough for that.

On the NYSE today, the average share is held for less than a year, as compared to about five years in 1960 and two years in 1990. What matters isn't what the companies are actually doing but the expectation that the shares can be unloaded to a "greater fool" at a higher price. In the prevailing business culture, little has been meaningfully valued by either executives or shareholders beyond the short-term accumulation of wealth. Notable exceptions abound, of course -- think Warren Buffett. But in general, there is little evidence of concern for the long-term health of a corporate institution or the welfare of employees. Nor has there been much concern for the impact of the firm's activities on the national economy.

"This is America," the president said last week. "We don't disparage wealth." True enough. But the contemporary business culture has distorted the spirit of traditional American capitalism -- ill at ease with unearned wealth -- by rewarding mediocrity and even failure.

As a society, we have bought into a system in which we ask little of corporate leaders beyond the aggressive pursuit of short-term self-interest. For two decades, this model has formed the core paradigm taught to our business-school students. "Shareholder value" was of utmost importance. Notions of obligation to the society in which the corporation is embedded have been set aside, even mocked. CEOs loved this model, as it provided cover for their pursuit of kingly riches. And the rest of us have accepted it because it appeared, through the workings of the "invisible hand," to be consistent with a globally competitive economy.

This system -- and the predictably reckless choices made by some of its most powerful players -- has brought our economy to the brink of collapse. To scold business may feel good and may even help move legislation along. But we need much more than a good scolding and limits on sky-high paydays. We need to rethink how American business ought to be run, including changes to fiduciary duties, legal liability, takeover rules and business education, among many other areas.

We may decide, to borrow a bit from Churchill, that our current system is the worst way to conduct business, except for any other way we could try. But we still need to try. And for those on Wall Street smarting from the compensation caps announced last week, figuring out how best to move forward is the ideal course of action. As the president said: "We certainly believe that success should be rewarded."

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/06/AR2009020602794.html?hpid=opinionsbox1

[WhiskeyGirl]

Obama and riot prevention - a chart, or "Repeating The Mistakes Of Japan"

The chart depicts the Obama shotgun approach of spraying bullets in multiple directions hoping that something, somewhere hits a target. Furthermore, notice the state stabilization fund, assistance for the struggling families, and health insurance assistance for the unemployed is not even earmarked as stimulus but something closer to riot prevention.

More importantly, none of this spending can possibly stimulate anything. Take for example $62.3 billion for transportation or the $91.3 billion to renovate schools. What happens after the schools are renovated and the potholes are filled? Where will the jobs come from? Do the schools even need to be renovated?

Taxpayers will eventually have to pick up the tab, either via taxes or a weaker US dollar.

I don't see crumbling schools in my neighborhood.  Maybe that is a holdover from the Obama neighborhood in Chicago?

Dr. Ihori of the University of Tokyo did a survey of public works in the 1990s, concluding that the spending created almost no additional economic growth. Instead of spreading beneficial ripple effects across the economy, he found that the spending actually led to declines in business investment by driving out private investors. He also said job creation was too narrowly focused in the construction industry in rural areas to give much benefit to the overall economy.

He agreed with other critics that the 1990s stimulus failed because too much of it went to roads and bridges, overbuilding this already heavily developed nation. Critics also said decisions on how to spend the money were made behind closed doors by bureaucrats, politicians and the construction industry, and often reflected political considerations more than economic.

In Hamada, residents say the city's most visible “hakomono,” the Japanese equivalent of “white elephant,” was its own bridge to nowhere, the $70 million Marine Bridge, whose 1,006-foot span sat almost completely devoid of traffic on a recent morning. Built in 1999, the bridge links the city to a small, sparsely populated island already connected by a shorter bridge.

“Roads and bridges are attractive, but they create jobs only during construction,” said Shunji Nakamura, chief of the city's industrial policy section. “You need projects with good jobs that will last through a bad economy.”

Rather than acknowledge the complete failure is Japan's stimulus that has left Japan with the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy, Treasury Secretary Timothy Geithner and professor of Japanese economics at Columbia University have come to the ridiculous conclusion that Japan did not spend enough.

Neither appears intelligent enough to ask a simple question: What happens when the stimulus ends?

Obama is out of office and the nation is collapsed.  mo

http://marketoracle.co.uk/Article8767.html

I wonder how all these politicians will be rewarded for a job well done?  A job done like no other in American history?  I hope that history remembers it wasn't a cooperative effort of Democrats and Republicans, the Democrats own this one.

imho

[nonesuche]

Yes they do WhiskeyGirl and Obama's having to resort to town meetings to try to 'sell' it. I don't think using his campaign strategy will be as effective as he hopes?

This article really tells it like it is, terms the CEO salary cap as "emperor with no clothes". Due to it's length I will only post the first section:

Why the CEO salary cap is a joke

The sighs of relief -- and celebrations -- on Wall Street should tell you that the limits on executive pay at bailed-out financial institutions are all but meaningless.

By Jim Jubak
MSN Money
A $500,000 cap on CEO pay at banks that have taken billions in taxpayer money?

It's not enough.

"Off with their heads!" yelled Wonderland's Queen of Hearts. Why isn't there ever a bloodthirsty sociopath with dictatorial powers and no regard for legal niceties around when you need one?

And heads do need to roll. Not just to satisfy a widespread desire for revenge on the masters of the financial universe who got the world into this mess -- although that's certainly a plus. But because the greedy, shortsighted and, in some cases, downright crooked people must be punished this time. That includes everyone from middle-class speculators who lied to get mortgages they couldn't afford to CEOs who took extreme risks because they thought they'd be out the door before the pyramid collapsed.

And I mean punished by more than just a slap on the wrist. If they aren't, we're just asking for a replay of this mess in five to 10 years, and, worse, we're telling the investors of the world that they shouldn't trust the U.S. with their money. Those aren't good messages to send when you plan to borrow $1.5 trillion to $2.5 trillion this year alone, as the U.S. Treasury will do.

The emperor has no clothes
The Obama administration's plan to cap CEO compensation at $500,000 got its share of headlines. With the Treasury about to unveil Troubled Asset Relief Program II, a second $350 billion-plus (hundreds of billions of dollars in "plus," in my estimation) plan to bail out the financial system, the move is an attempt to build political support for a deeply unpopular effort. The White House and Congress are being buried under a mountain of protest at any further bailout.

But the deeper I dug into the details, the more inadequate the cap seemed. By the time I'd finished, the plan was insulting, a paper cut delivered when Madame Defarge is demanding the guillotine. Here's why:

The cap won't apply retroactively. If your bank has already received its $45 billion in taxpayer money, there's no cap on pay.

The cap won't even apply to all banks that take taxpayer money in the future. A bank that takes billions in "normal" bailout money from TARP II could get around the cap by disclosing pay and by holding a nonbinding shareholder vote on the pay. (It's nonbinding, so why wouldn't a company that wanted to pay more hold the vote? Because they'd be too embarrassed to pay the higher salary if they lost the vote? These companies, embarrassed? Remember the Citigroup (C, news, msgs) $50 million jet?) Only if your bank took "exceptional" assistance from taxpayers in the future would the cap be mandatory. It's not clear how the proposal would separate "normal" from "exceptional" bailout billions, but however the term is defined, the cap clearly affects fewer companies than it seems.

The cap doesn't apply to all compensation -- just to salaries. Banks could still give CEOs huge bonuses, but the bonuses would have to be in the form of restricted stock that couldn't be sold until after the company had repaid taxpayers.

And finally, and this is perhaps the most troubling, the cap, if finally triggered, would apply only to the top 25 or so executives at any bank. In other words, some Wall Street rocket scientist in charge of slicing and dicing subprime mortgages could make $5 million as long as he or she was far enough down the corporate ladder. Makes a lot of sense, right?

 But don't take my word for it. Consider that Wall Street breathed a sigh of relief after the Obama administration announced the plan: "It's not as bad as we thought," one banker told the Financial Times. "We were all fearing a comprehensive cap on all bonuses."

That's it? That's the punishment for the reckless risk taking that pumped up the housing bubble, turned a decline in home prices into a global financial crisis that could shake banks and governments to the core, set off a credit crunch that brought the global economy to a standstill and has necessitated a tidal wave of taxpayer bailouts that will saddle generations to come with a mountain of debt and lower economic growth?

Doesn't somebody in the new administration know that this crisis has severely damaged global confidence in U.S. financial markets and that we have to take extraordinary steps to restore confidence in the system? (Certainly, no one in the previous administration acted as if they understood that.)

Continued: The view from outside

http://articles.moneycentral.msn.com/Investing/JubaksJournal/why-the-ceo-salary-cap-is-a-joke.aspx

[WhiskeyGirl]

It starts at the top...

Obama helped with campaign finance reform, and then said it was flawed and didn't want to participate.

Where did all his contributions come from?  What special interest groups are at the top?

Stuff rolls downhill. 

change we can believe it

mo