January 25, 2008

We've Gotta Talk

Justin Katz

Mark Patinkin makes a reasonable point — one that is often leveled in an accusatory tone at conservatives:

Stanley O'Neal, the ex-head of Merrill Lynch, was booted for losing billions betting on the garbage now known as sub-prime loans. His punishment? An estimated $161-million sendoff package. The issue isn't even that he didn't deserve it, it's that Wall Street rewards CEOs who mess up not just their own house, but the economy, which is why they don't care if they do it.

Shouldn't we demand accountability at that level of wealth and power? We on the right are properly hesitant to interfere with the operation of business, but the same argument whereby I would justify, in economic terms, government support for roadways and other infrastructure could be relevant to situations in which an upper-crust business elite rewards its own even when they play a role in disastrous business ventures that gash the global economy. If the consequence for risks gone bad is a mere $161 million severance package, then there's hardly incentive to fully vet strategies that look attractive in the short term. And as executives and board members become involved in such arrangements, the likelihood of a correction decreases.

I can hear the ghost of Milton Friedman arguing that the problem is self-correcting. The plight of Merrill Lynch will generate adjusted behavior, and future CEOs will think twice before dashing after the next subprime mortgage–type opportunity. I usually find that argument persuasive.

Maybe, amid my populist impulses, I just need reaffirmation of my faith, but I wonder. The solutions of those on the left are no solutions at all; indeed, they are apt to make the problem worse, but what would be the solutions of those on the right? If we were to decide that a problem exists, that is.

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For what it's worth, big severance packages are typically negotiated when the CEO starts in the new position. The amount is set by market forces, not the benevolence of the board. And salaries and bonuses are also set by competitive market forces. There are really only a few suitable candidates for the high end CEO positions. You can check this out by contgacting the top executive search firms.. Heidrick & Struggles, Russell Reynolds etc.
Bob Washburn

Posted by: Bob Washburn at January 25, 2008 1:30 PM

These guys who get (and give) the golden handshakes all sit on each other's boards and take care of each other. Their only accountability is to each other, not to the average folks like us who invest money with them, be it playing the stock market or through the mutual funds in our 401(k)s.
If I had time to do the research, I'd bet you O'Neal sits on other corporate boards, and some of his boardmates there sit on Lynch's board.

Posted by: rhody at January 25, 2008 1:39 PM

Conceptually, this is a problem for me as well. This is capitalism. The dollar is king. It is not consistent with that value system that someone who loses money for the company - billions, in this case - gets rewarded.

How about structuring compensation around an annual "minimum" salary of, say, $1,000,000? (Fine, two or three mill if you want.) And then every dollar above that should be tied to the performance of the company.

Having said that, however, the idea of solutions being imposed from the outside, especially by government, is a discomforting one.

Posted by: Monique at January 25, 2008 9:21 PM
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