Why are the same people still in charge of banks they destroyed?

The House Financial Services Committee held a hearing yesterday, Compensation Structure and Systemic Risk.

Contained within the Q&A is this fantastic question by Representative Alan Grayson (D-FL-8th): How do we hold these executives accountable when they have destroyed their own banks?

 

Contained within is a mention the SEC can ban someone as unfit to serve. The details are not clear, possibly gross incompetence needs to be proved ..

Instead of debating how filthy rich an incompetent CEO should be....wouldn't it be so nice to plain not have the same incompetents running again and again our corporations (as well as our government)?

(let us look at the new GM in another post shall we?)

There was another bombshell in this hearing. Harvard Law Professor Lucien Bebchuk's testimony, (a 56 page document), details how executive compensation is structured to create systemic risk. Bebchuk also wrote Pay without Performance and is an expert on executive compensation.

Standard pay arrangements reward executives for short-term results even when these results as subsequently reversed. The ability to take a large amount of compensation based on short-term results off the table provides executives with powerful incentives to seek short-term gains even when they come at the expense of long-term value, say, by creating latent risks of implosion later on.

An analysis of banks’ financing structure and compensation arrangements shows that bank managers’ incentives have been tied to a highly leveraged bet on banks’ assets.

The crisis has not eliminated the incentives of bank executives to take actions that are beneficial to common shareholders of the bank holding company (or holders of options on such common shares) but are costly to bondholders, depositors, and the government as guarantor of depositors.

Opponents of pay regulation in banks will argue that the government does not have a legitimate interest in telling bank shareholders how to spend their money. But it does. Given the
government’s interest in the safety and soundness of banks, government intervention here will be as legitimate as the traditional forms of intervention, which limit banks’ investment and lending decisions.

Bebchuk suggests only institutions who pose systemic risk should have "cash out black out" of vested shares, timed at fixed intervals. While Bebchuk's recommendations seem exceptionally promising to align the interests of the business with the interests of lining one's own pockets, I must disagree these rules of executive pay should only be done with the too large to fail institutions.

Executive compensation in the United States is structured so poorly, while other companies did not cause an economic collapse, CEOs and executives assuredly did not act in the best interests of shareholders, employees and the nation, often by similar incentives described in Bebchuk's testimony and book.

Since executive boards are some sort of incestuous round of golf boy's club, instead of oversight teams, the government does need to force an executive pay restructuring of these business entities.

Here is an interview with House Financial Services Chair, Barney Frank. Frank suggests much more government regulation of executive pay, again along the lines of restructuring, is needed than put forth by the Obama administration and the U.S. treasury.

 

My question is can the United States government, actually get this one right? Let CEOs get stinking filthy rich. Simply align that prospect with what is actually in the best long term interests of the company and this nation.

So far, the government has meddled and it continues to rhyme with muddled. Can we get very specific policy based on statistics, analysis, fact, that doesn't game the system by some special interest group in some way? That doesn't make the situation worse?

A more in depth piece, Corporate Citizen, an Oxymoron has additional references to align corporate behavior with the national interest, and yes that includes the interests of making everyone a lot of money, long term.

Meanwhile BoA CEO Ken Lewis brazenly denies the sweet fix was in the Merrill Lynch takeover deal before Congress.

The entire hearing (link enables transcript search).

Meta: 

Comments

Two things on executive compensation

First, democratize the corporate governance system. I believe that is what the Administration is proposing. Right now, the system favors entrenched CEOs, who are typically the chairman of the board - an inherent conflict of interest, because it is extremely difficult to mount any opposition to CEO/chairman.

Second, I working on this topic right now, institutional investors failed to fulfill their obligation as shareholders because they simply don't care about the long-term prospects of corporations. They don't own the corporations stock long enough to care. So, increase the cost of speculation - increase the short-term capital gains rate.

Regulations of executive compensation will be ineffective. Democratize corporate governance and increase the cost of speculation.

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Ketchum Goals

Ralph Gomory, Ketchum Goals.

Ralph Gomory has also looked into corporate governance, trying to realign it to America's interests with the above.

His think tank, Horizon Project.

Diverging Interests: Company & Country at a Crossroads.

The key is to not make the system worse or to enable even more methods to game the system to line one's own pockets with short term, agendas that harm the U.S., consumers, workers and the shareholders.

I need to read more on various proposals but the good news is the House Finance committee is aware, at least in part, of some of these.

Although they seemingly have not invited Ralph Gomory or Baumol to testify and I think they should.

But it is encouraging to see Barney Frank discuss and realize how compensation systems are so out of line, so out of control the government probably needs to step in.

Question is can they craft a policy that truly aligns the national interests with the CEO's quest for greed, money, power?

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Robert please

do not type this mans name Barney Frank . He is the same cloth as Dodd, the I didn't know it was in the bill....oh yes I did know it was in the Bill man.

Not sure if I could pick a name in the Feds at the moment that isn't a scoundrel.

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Barney Frank, Barney Frank, Barney Frank! ;)

I agree with you on that score, Tweedledee & Tweedledum.

But this is why I added it. For Frank to "get it" and actually consider moving any legislation forward is very important to get anywhere. He is the House Finance Committee Chair and to me at least, he's doing a better job than Dodd (of the dueling Tweedle agenda).

I just posted a massive "Ron Paul" post and the reason is his bill and on this specific issue, i.e. we need transparency on the Federal Reserve is dead on.

So, when they done good, I will cover it, for like it or not, the current situation is these Congress representatives have the power.

I was just watching the votes on e-verify. Now this is a system to verify social security numbers to make sure a prospective employee is authorized to work in the U.S.

Ok, so we had all sorts of Democrats run on reducing illegal immigration pound on how we needed workplace enforcement and that was the answer....so they turn around and vote to gut it. Now whether one is for amnesty or not, that's just one very obvious bought and paid for vote and has to do with making sure Americans get those jobs. It's just unreal considering the unemployment rate.

One Freshman Senator who really is going against their campaign is Jeff Merkley. He ran against TARP, bail outs, for workplace enforcement, claimed to be for workers, and so on and so far he has voted against all of these campaign promises.

So, I guess what I'm trying to point out is one needs to focus in on what these bills actually do and focus on getting good legislation passed, even when representatives have horrific voting/legislation records.

Of the actually good Congress representatives, all around consistent, clearly not bought and paid for, representing their constituents, doing a good job and so on...

I think I can could them on my fingers and I might have some left over.

I'm not a Ron Paul fan either but a good bill is a good bill.

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I'm not sure that is right

My question is can the United States government, actually get this one right? Let CEOs get stinking filthy rich. Simply align that prospect with what is actually in the best long term interests of the company and this nation.

I'm not sure that there is any way to align the prospect of a small minority of the population getting sinking filthy rich off of the backs of the majority of the population, and what is actually in the best long term interests of the company and this nation.

Here's the main reason why: Money is power, and power corrupts. When you let a minority gain too much money, they WILL use that money to bribe politicians to oppress other minorities in an effort to gain more money and power. Their group sees the rest of the country as competition to be eliminated, instead of as people to cooperate with.

And that's the end of democracy, right there. Unlimited compensation, unlimited property rights, creates tyranny, not democracy.

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Maximum jobs, not maximum profits.

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Maximum jobs, not maximum profits.

Not under "capital rules"- laissez faire

To change that focus, you have to go Platonic (or is The Republic also now considered Economic Fiction?) and institute a maximum wage defined as the maximum spread between the rich and the poor that you wish to tolerate- otherwise it just becomes an inflationary race.

Either that or end up with such a hodge podge of regulations that you effectively end up in the same place- like with the 95% tax bracket of the 1950s.

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Maximum jobs, not maximum profits.

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Maximum jobs, not maximum profits.

I have less and less respect for our elected officials

Did I just read about the inspector general that was investigating corruption in a non-profit. Apparently the non-profit is one of the Presidents supporters. Instead of allow the truth to be found, the inspector general was removed.

America has adopted greed as their way of life. The CEO's get a large payout but that does not mean there are many in the other classes that aren't expecting a payoff.

Look how many people are buying lottery tickets and hope to hit the jackpot. So many people can't just be satisfied with living a normal life.

I want to run and hide.

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There's a reason they can't be satisfied with a "normal" life

Because if you define normal the way the staticians do, The United States is a banana republic.

Greed has been the defining way of life since 1980. It is in fact what Reagan was elected to do- change the value system of the country.
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Maximum jobs, not maximum profits.

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Maximum jobs, not maximum profits.

Naked Capitalism insights on Exec. Pay in practice

The irony of the current arrangement is that these fancy incentives intended to align executive pay with shareholder interests were meant to solve a principal-agent problem. That is, the concern was that CEOs would take advantage of their position and pay themselves well but not work very hard, hence they needed equity based incentives to make sure they did a good job. That view means that the CEOs were presumed to be less than trustworthy.

Yet who was in charge of recommending the compensation packages to the board? Well, outside comp consultants, engaged by the HR department, which of course means the fees are paid by the company. And even if the board hires a comp consultant, the board is nominated by management and the fees of the consultant are still paid by the company. In other words, the people whose possible abuses were supposed to be curtailed are still ultimately in charge of the pay packages. The foxes still are in charge of the henhouse, but with a few intermediaries in between to make it a tad less obvious. So it is any wonder pay skyrocketed?

Who would have guessed the parasite chain in determining the actual packages and also a method to hide the inside game.

Entire article: Geithner's Plan on Pay Performance Sorely Lacking.

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