Professor Bainbridge...on law, politics, religion, culture & food

If I strip down your argument correctly, it goes like this:

Premise A) There is evidence to suggest that there is no executive pay vs. stock performance problem

Premise B) Even if the problem should exists,it shouldn’t be handled at the federal level, because this violates a longstanding federalism tradition

Premise C) Obama sponsored a bill in the Senate adressing the purported problem.

Conclusion: Obama is failing on this issue as a legislator

I have no problem with premise B and C, as I respect your authority on this, as suggested. However, premise A seems rather weak in the face of the examples that have been reported in the news.

And although I have great reverence for the longstading priciples of federalism, as a layman, I am rather puzzled by the suggestion that if this issue is indeed existant, it would be best to adress it at the state level, given the size and nature of modern large-cap corporations.

In our federal system, issues of corporate governance, including both executive compensation and the substance of shareholder voting rights, traditionally have been the province of state corporation law rather than federal securities law...

In our “federal system”, the states were EXPLICITLY FORBIDDEN to alter the contracts which bind corporations to their shareholders:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

And, of course, the Federal Congress was not explicitly forbidden to alter the contracts which bind corporations to their shareholders PRECISELY BECAUSE IT WAS GRANTED NO AUTHORITY WHATSOEVER to stick its nose into questions of corporate governance.

Not that anyone gives a rat’s ass about the Constitution anymore.

This is rhetorical slight of hand (tongue)?  Your title is “Judging Obama on his legislation,” then you assert your ability to judge matters of “corporate law and governance.” But then you review a single case, and sum up with giving him “a failing grade on this issue.” The only issue you could possibly mean is the Frank Bill, but the title and prelude makes it sounds you’re judging his whole career on corporate governance issues.  Clearly you aren’t, since you give no sign you’re aware of anything but a single bill.
if it shows a trend, fine—give us the other data points, even in summary.  If not, don’t use language that will allow sloppy bloggers elswehere to trumpet this as a general indictment of Obama on corporate issues by a respected voice.

You want to do a thorough review, including his years in the Illinois Legislature, you’re entitled.  But don’t cherry-pick one bill that didn’t go anywhere and claim it proves anything.

William F. Buckley thinks it’s a problem:

We learn from Viacom’s SEC filing that its chief executive, Sumner Redstone, who is 81 years old, is presumably guarding against the hazards of senior-citizen penury. His salary was $4.97 million, and he received a bonus of $16.5 million. We think we see traces of sibling rivalry in the picture, because one of Viacom’s co-presidents, Tom Freston, received only $16 million in bonus. Viacom’s other co-president, Leslie Moonves, has got to have done something truly humiliating, because his bonus was only $14 million.

Why does capitalism tolerate such institutional embarrassments? The answer has to be that embarrassment simply isn’t being felt. Consider excruciating, but apparently tolerable, incidentals. Mr. Freston is based in New York. But from time to time, business requires him to be in Los Angeles — where, as it happens, he also has a home. On those nights does he take hotel rooms? Ample hotel rooms, understand. No. He just charges the company what he thinks is appropriate to pay him for using his own home. In 2004, this amounted to $43,000. He is evidently a man with simpler habits than the Los Angeles-based Mr. Moonves’s. He does the same kind of thing, he has his own home in New York, but what he charged the company for the nights he spent in New York was $105,000.

Once again, there is a muted reproach from the corporate world, assessing this kind of thing. It is the voice of Graef Crystal, who is styled as “a longtime compensation expert.” Mr. Crystal says of Sumner Redstone that he “certainly qualifies for the ‘unclear on the concept award’ contest for paying himself $55.9 million in a year when the company lost $17.5 billion.”

Here and there efforts are being made to impose correlations of some sort between executives’ compensation and stock performance. “The secret to linking pay to performance remains elusive,” writes Claudia Deutsch of the New York Times. “Net income at Eli Lilly fell 29 percent and its return to shareholders dropped 17 percent last year, but its chief executive, Sidney Taurel, saw his pay go up 41 percent, to $12.5 million.” There doesn’t seem to be anything elusive about that: the boss aggrandizes.

Also, your real problem with Barack Obama is his insufficient commitment to federalism? Really?

I don’t have any comment on the substance of your arguments here, but I have a question as to why you think corporate governance for public companies (or even non-public companies if they operate across state lines) is necessarily a state-level issue.  Why couldn’t we have a federal-level corporation statute?  (I can understand arguments why we shouldn’t—competition among the states, etc., but is there any constitutional reason we couldn’t?) Because, if we could under the Constitution, it seems to come down to an argument over whether the “market” for state-level corporate governance law is efficient and leading to a race-to-optimality or characterized by a market failure leading to a race-to-the-bottom.  And on that I’ve seen evidence pointing both ways.

Anecdotal evidence aside, there is plenty of feedback in CEO compensation without any intervention. Pay too much, the company suffers, the company does worse, they find a new CEO or pay less or do worse, etc. It is self-regulating.

The problem I have with Obama and any other Lou-Dobbsian-us-versus-them moron is that I see huge opportunity in giant paychecks, and they see someone stealing from the common man. I want unlimited upside, they want a common mediocrity. There’s no bridge between the two. They are socialists and I am not.

Ask Ben and Jerry how the whole fair-pay-for-the-CEO job search went. Quality CEOs are well worth what they are paid. As are quality athletes or anything else, which reminds me, are Obama and the rest going to try to do anything about athlete’s salaries?

Obama and his cohorts want to “fix” the problems with “excessive executive compensation.” I agree with Professor Bainbridge that this should be a non-starter, but I disagree on the underlying reasoning.  This “problem” was addressed about the time I first started practicing law.  Although the proper title for the legislation “fixing the problem” was The Tax Reform Act of 1976,” many of us called it the Lawyers’ and Accountants’ Retirement Act.  Deciding that CEOs and the like were getting paid too much, our genius legislators tied corporate taxes to salaries versus compensation.  To reduce taxes, the corporation merely had to reduce salaries and base the major part of CEO compensation on “profits.” No compensation was too high if tied to profits, they said.  So we all went into high gear re-defining “profits.” Then the accountants did their magic in making paper appear to be money.  Voila--huge profits and huge compensation.  Each time the non check balancing Congress decides to fix this “problem,” they make it worse.  Even social engineers like Obama finally have figured that scam out.  So now they’ll fix it with another idiot idea--corporate mobocracy.  They’ll just never learn.  The adage is simple:  There is nothing that big business can do that big government can’t make worse.  For example:  Enron bad, Sarbanes-Oxley worse.

Well, we all know how well the “over $1mm” in pay law worked for Bill Clinton… it set off a rush of executive pay escalation. Federal intervention in exec pay has a clear record of failure and demonstrating the law of unintended consequences.

Thanks for the reminder that “Of particular relevance to Frank’s bill is the Supreme Court’s reminder that it is state law that determines the rights of shareholders, “including … the voting rights of shareholders.”

“Net income at Eli Lilly fell 29 percent and its return to shareholders dropped 17 percent last year, but its chief executive, Sidney Taurel, saw his pay go up 41 percent, to $12.5 million.”

And what happened in the markets that Eli Lilly was in that year? What are its prospects for the future? Did they spend in advance of coming problems, did they make competitive advances that cost short-term money for long-term gains? Did they survive a stiff competitive threat? Those numbers say nothing.

How would a corporation in a declining market compensate a CEO if it needed to be pegged to profit change or any other tiny indicator? What skilled CEO would work in those conditions and not bail to greener pastures?

Legislation has the subtlety and finesse of a brick wall. I don’t care that it’s WF Buckley saying there’s a problem, he hasn’t made the point. And any legislation would be even less capable of addressing any ‘problems’ that are really better considered ‘ignorant outrage’.

Does anyone seriously believe that anything positive could come from legislation that panders to that “let’s get back at those cigar-smoking fatcat CEOs” mentality of the average SEIU member?  This country NEEDS the best business minds it can get.  If we start screwing with their compensation, they’re going to find opportunities elsewhere.

Leave the compensation decisions to those most qualified to make them:  The boards of directors of the companies they work for.

quo vadis --
“This country NEEDS the best business minds it can get.  If we start screwing with their compensation, they’re going to find opportunities elsewhere.”

So basically you are conceding that a significant number of the best business minds are unpatriotic, disloyal people, willing to capitalize on their citizenship when they are young and abandon it when the highest bidder comes along later, who have taken all the credit for their own success and thus feel entitled to a luxurious lifestyle that trumps any sense of duty to the nation that gave them the opportunity to succeed in the first place.  You have basically proved that a certain number of rich people are flaming jerks who send poor kids off to die in the name of national security when they themselves will sacrifice nothing because they have become so convinced of their importance.  The sacrifice I am speaking of is the difference between disposable incomes of millions instead of tens of millions of dollars.  Wow.

Do you know any SEIU members?  What do you know about the lives of working-class people?  Populist demagoguery makes me ill, too, but revenge is not the motive when folks question the distribution of wealth and income.  For the most part, these are human beings who want their children to have a better life.

As for “leave the compensation decisions to those most qualified to make them,” I agree there is no top-down or legislative solution.  However, you must admit that board members and CEOs are often part of a common social network and that objectivity, transparency, and vigorous oversight has been lacking on many corporate boards.

It’s easy to say that the market will self-correct; lousy performers will be let go eventually to be sure (although the golden parachutes can be downright obscene).  However, decent but potentially underperforming executives who know a firm inside-out are able to leverage the risk that comes with choosing to replace them.  This leads to some crazy outcomes.  Think of this way: if a OK Java programmer has finished a project and goes to his or her boss and demands a raise, they might get it, but they probably won’t; the firm could go out and hire another programmer the next day as there are plenty of people in the market with the skills in question.  With top execs, there are people with the skills out there but an OK exec can negotiate a high raise not based on their performance so much as the fact that someone objectively better suited for the job cannot be slotted into the job without significant costs.  They aren’t irreplaceable because of their talent (which is worth paying for) but because of the nature of their position and the scarcity of supply.  (Labor market monopsony?)

Another issue is how options really pay the current execs through dilution that trickles so slowly into the market price that it is functionally invisible, especially since today’s shareholders might not be the same people who hold the stock when the execs in question cash out the stock they bought at pennies on the dollar. 

I question whether the titans of today are worth so much more than the titans of the past.  I’d also question the shift in our culture such that hyper-materialism is no longer crass but celebrated.  Again, as above, this isn’t about government policy so much as leadership.

It would be nice if someone — presumably a national leader with respect and oratorical gifts—was able to start a conversation about self-restraint.  There is something deeply troubling about the sense of entitlement to the labor of others that many people that were lucky enough to be endowed with intelligence and opportunity have these days.  CEO compensation would not be attacked if it wasn’t in the context of unbridled luxury combined with little sense of obligation to the commonweal.  Consider the reputations of Larry Ellison and Bill Gates in this regard.  It shouldn’t be necessary for the government to step in on executive compensation.  The executive class needs to step up and become community leaders in addition to business leaders.  Class warfare?  Just say no.  But it takes two to fight.

I just finished John Bogle’s book, “The Battle for the Soul of Capitalism.” Bogle’s basic argument is that capitalism has mutated into an unhealthy form in which managers run corportations for their own benefit rather than the benefit of the shareholders. 
This has been allowed to happen because ownership has diffused into mutual funds, and fund managers buy and sell so frequently they have no long term interest in any one company.

Bogle believes that CEOs are grossly overcompensated, and their compensation is unrelated to any meaningful measures of performance.  Compensation “...should not relate to evanescent stock prices but to the creation of corporate value...”

The folks like Cong. Frank and Sen. Obama who want to stick the Federal nose into executive compensation decisions have short memories.  Let me refresh your recollections.

Once upon a time, Congress got itself into a dither about executive compensation.  So it passed tax legislation making it uneconomic to pay executives big cash salaries.  Of course, Congress can’t repeal the laws of economics, so corporations that were competing for scarce executive talent found other ways to compensate them:  stock options and other incentive-based formulas.  The end result was that executive pay went up substantially from what it was before Congress got involved.

The only reason for Congress to get involved now is to make the socialists and other income re-distributors feel like they are accomplishing something. I, for one, don’t see the public interest in how a privately owned corporation chooses to pay any of its employees, whether executives or line workers.  It’s none of the public’s business.

Just to clarify, a corporation that is owned by shareholders is a private corporation as opposed to one that is owned by the Government, like the Metropolitan Transit Authority or the Federal Reserve Bank.

I’m curious how the great populist RonPaul voted on the Frank bill.

"So basically you are conceding that a significant number of the best business minds are unpatriotic, disloyal people, willing to capitalize on their citizenship when they are young and abandon it when the highest bidder comes along later, who have taken all the credit for their own success and thus feel entitled to a luxurious lifestyle that trumps any sense of duty to the nation that gave them the opportunity to succeed in the first place.  You have basically proved that a certain number of rich people are flaming jerks who send poor kids off to die in the name of national security when they themselves will sacrifice nothing because they have become so convinced of their importance.  The sacrifice I am speaking of is the difference between disposable incomes of millions instead of tens of millions of dollars.  Wow.”

Um, no he didn’t say anything like that outrageous rant, you did.

It is not hard to conceive of executives nominally going to work for the Australian branch of a corporation so they can be free of America’s arbitrary restrictions on labor market compensation.  That does not make them anything like what your ugly slurs.

Incidentally, you also essentially argue that the old boy’s network permits these pay packages.  (”...board members and CEOs are often part of a common social network and that objectivity, transparency, and vigorous oversight has been lacking on many corporate boards...") This argument is old, old, old and typically unaccompanied by any empirical data or even testable model.  It is usually asserted as though undeniable and beyond proof.  Nice to see you uphold the tradition.

And to use your own rhetorical red herrings against you, do *you* know any such CEOs or board members?  Absent your familiarity with this crowd, what makes you an authority on such people.  Apparently no one can speak of SEIU absent personal familiarity.  Why is that rule not employed for CEOs?

"Incidentally, you also essentially argue that the old boy’s network permits these pay packages… and to use your own rhetorical red herrings against you, do *you* know any such CEOs or board members?”

My impression about social networks was confirmed in a discussion at which a board member and chair of a very prestigious economics department with more connections than I can fathom cited at least one example and admitted that this still happened —not as much as some people might think, but it was still at least a small part of the explanation for the substantial rise in executive compensation over the years.  This discussion took place at a workshop and I believe the topic came up because another guest was a former top executive at the NYSE and was asked about the Grasso incident.  I think it would be crass to name-drop and I have qualified his comments conservatively but the jist of it was admitting that there had been a lack of separation between ownership and control on a widespread basis.  I also have enough of a private school education to have a sense of how it is, at least sometimes.

As for “It is not hard to conceive of executives nominally going to work for the Australian branch of a corporation so they can be free of America’s arbitrary restrictions on labor market compensation” I just love your use of the word arbitrary.  If taxes are arbitrary, doesn’t that justify offshore tax shelters and other ways of maintaining a technically legal but functional evasion of US law?  Because we all know this happens and it isn’t just an outlier or two.  Hiding income because your ideology says it is OK to cheat the law is unpatriotic.  And yes, uprooting yourself to work overseas to make extra millions is clearly putting acquiring wealth over the needs of your country, not to mention your family.  The post I responded too basically stated that trying to cap executive pay would backfire because the talent would leave the country.  This threat is trotted out in every tax discussion, as if an increase in marginal tax rates would destroy entrepreneurship.  What baloney (see: the early 90s tax increases.  Good for the budget, and wow, the elite sure did suffer! Its a wonder they didn’t leave for greener pastures!)

That being said, while our collective, interdependent national future is going to require some “sacrifice” on the part of high income earners in some form or another (I’d prefer a consumption tax system even at the risk of a transitionary recession), the populist demagoguing of the issue is weak.  Calling anyone who dissents from 8 or 9 figure compensation packages being appropriate a “socialist” is just about on the same level.  That one goes in the strawman hall of fame.

And just to pile on, please consider the old adage that “freedom isn’t free.” I believe this is true in foreign/military matters AND economic ones.  Those who amass great fortunes have a moral obligation to use their power in constructive, not just consumptive ways.  Feel free to have a yacht and 3 homes if you must, but I’m not going to respect you if you don’t also put that money to work for the betterment of others.  Those who get on their free-market ideologue pose on in response are using a big-picture truth about the success of markets to justify anything and everything.

If using the government to redistribute income is so objectionable, I’d love to see some more attention to the corporate welfare and special interest lobby corruption mess in Washington.  That isn’t capitalism, so why aren’t capitalists objecting?  Because many people who cite the genius of markets chapter and verse are really pro-business more so than pro-competition.  If wealthy corporations appeal to the government for subsidies and other uncompetitive (but profitable) assistance, then why shouldn’t every other interest have equal legitimacy at the trough?  Put another way, if Halliburton gets transfer payments, why shouldn’t those human beings with less opportunity also get transfer payments?

@ScottS

Don’t make any assumptions about who I am.  I grew up with ‘working class’ people and worked alongside them as a member of the Glaizer’s union in my youth.  My “cigar-smoking fat-cat CEO” quote was just that: a direct quote from one of my former co-workers.  It illustrates an all too common divisive, class-obsessed view of management and a lack of appreciation of the role of management in the success of an enterprise.  Since that time I’ve had the opportunity to work alongside CEOs and corporate directors, so, yeah, I know both sides of the matter intimately. 

I’ll leave you to defend the rest of your rant as it has nothing to do with anything I posted despite of your ham-fisted attempt at attribution.

It is great when you see someone quote WFB to refute this argument!

Oddly, Barney Frank’s “Shareholder Vote on Executive Compensation Act” (HR 1257) does not call for what Professor Bainbridge refers to as “federal regulations limiting executive compensation,” but rather shareholder approval of executive compensation.  What’s more the legislation includes the language, “The shareholder vote shall not be binding on the corporation.” What good a “non-binding” law does is beyond me, but it certainly does not do what the good professor is implying that it does.

I suppose he may be raising a general protest of government regulation of corporations ala the way it was in October of 1929. 

More facts here:
http://thomas.loc.gov/