Thursday, April 16, 2009

Activist Judges Threaten CEO Compensation

(((Richard Posner as "activist judge;" the market is structurally incapable of setting CEO compensation and mutual fund fees; and this according to none other than Posner.)))

Eliot Spitzer (srsly?) has a piece in Slate examining Chicago School free-marketeer Richard Posner's comments in a recent decision:
In an opinion dissenting from the "denial of rehearing en banc"—a sequence of words only a lawyer could love—Posner wrote that there are growing indications that CEO compensation "is excessive because of the feeble incentives of board of directors to police compensation. … Directors are often CEOs of other companies and naturally think that CEOs should be well paid. And often they are picked by the CEO." He then examined the conflicts inherent in the process of CEO compensation determination, concluding that "[c]ompetition ... can't be counted on to solve the problem because the same structure of incentives operates on all large corporations and similar entities, including mutual funds" [emphasis added]. [ . . . ]
In other words, there is precisely no check within the market, because the people deciding how much the CEO should make are the same people who stand to gain if CEOs are highly valued, or -- dare I say it? -- overvalued.

Spitzer continues:
Posner concluded that while judges shouldn't directly review corporate salaries, evidence of unreasonable compensation could be evidence of a breach of fiduciary duty. Yes, these are legal words, but they reveal a remarkable conclusion—courts should take a hard look at private-compensation issues—and demonstrate how far, and rapidly, the world has shifted.
So in other words, the solution is for courts to keep an eye on the situation and to consider compensation and fees in the context of, or as aspects of, the fiduciary duties of governing boards. So here come the activist judges once again threatening the American way of life, at least, if that's understood as the right to marry only someone of the opposite sex, or the right to make as much money as you can legally convince someone to pay you.

Isn't it ironic, though, that the activist judge in this case is Judge Posner? It sounds so Adam Smith, so old school capitalist, so . . . moral. So much of the socialist objection to capitalism is the tendency to socialize costs while privatizing profits (see the bailout), but here's Posner acknowledging that it's not all about how much money you can make.

The Wikipedia page on the Chicago School quotes this interesting little snippet from Posner: "[the central] meaning of justice, perhaps the most common is – efficiency… [because] in a world of scarce resources waste should be regarded as immoral." We don't have to agree with this conception of justice to see that, in its terms, CEO compensation and mutual fund fees have become essentially wasteful and, hence, immoral. And that the inability of the market to account for this means that the market is, to that extent, inefficient and, well, yeah: immoral.

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