Pay for plunder

At the recent Davos meetings, religious leaders attempted to encourage CEOs to reduce their pay to multiples above the average that are, somehow, more humane. This is a peculiar endeavor that only highlights much of the misdirected attention the subject is receiving.

There is no necessary limit to executive pay on moral or other grounds, as long as it is determined and effected through a process that legitimately arises from and operates in a context of owners and their agents making independent decisions regarding their organizations. The problem isn’t absolute levels of pay, levels relative to that of other workers, or the forms this pay takes. It is that it is not genuinely determined by owners.

We have discussed periodically in these pages that the interests of managers and owners generally do not coincide, and that, indeed, they often conflict. By itself, this can be dealt with reasonably if the parties know their roles and play them with due fiduciary responsibility. Our problem is that this is not the case. Managers exert so much control within - or, at least, over - boards that they are subjected to no effective supervision. They have slipped the leash.

If the fox is guarding the henhouse, why on earth should we feign such amazement when a chicken or two turns up missing? A particularly egregious way this tends to occur is through mergers and acquisitions that are generated (sometimes secretly) by management - according to terms that are, of course, often quite generous to them - and then foisted on boards that are helpless to influence or stop them. As Dennis Berman points out in his most recent WSJ column, this is not at all uncommon.

But, the chickens may be coming home to roost. The linked article describes some ways boards are endeavoring to regain control of the situation. Another reaction to this and other forms of managerial depredation is government regulation - now being considered even of executive pay.

Critics of corporate governance reform complain that the true problem is in the radical, non-business-oriented ideological agendas of reformers, or in politically motivated government regulation. These, however, are the symptoms.

In actuality, a major part of the problem is in the self-interested behavior of managers, behavior which often crosses the line of fiduciary duty. But the other part - the core part - of the problem is revealed in how that line is drawn. It is the duty of boards to draw it, and if they don’t, they are merely opening the gates to the rioters without. Boards need to step up to their share of this shortcoming, and managers, in their largely successful efforts to co-opt boards, must step up to theirs. Otherwise, they will continue to pay, in multiple ways, for their plunder.