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.

Michael Perelman on the Bubble and the Bailout

(((Nice rant; physicists can't make something out of nothing, but financial whiz-kids keep trying, and the rest of us pay when they fail; all that is solid melts into air.)))

Michael Perelman has a great, succinct rant on the sorry, avoidable mess we're in.

Skilled physicists do not know how to take nothing and turn it into matter and antimatter, but finance behaves as if it had the capacity to do something similar. Imagine a simple market economy about to create a bubble. I want to tell the story of this bubble, only to put the current, crazy stimulus package into perspective.

Somebody says to me they have a piece of paper worth $1 million. I can buy for half the price. I borrow the money to cover most of the cost. People are willing to lend me the money confident in the belief that my paper will increase in value. Other people are engaging in the same transaction, spreading confidence that these papers are now increasing in value, say to $600,000.

The seller of the paper now has a half-million dollars, having given up nothing but blank piece of paper. I have a capital gain of hundred thousand dollars. My lenders have a credit with a half-million dollars. We are all better off, even though nothing has been produced. [snip]

At some point, people realize that this paper is nothing more than a blank sheet of writing paper. The bubble may have stimulated some investment that is capable of producing real economic benefits, but mostly it has induced people to consume and commit themselves to pay back debts.

Quote of the Day: Mao Inspired W?

(((Sardonic Economist article on management lessons to take from Mao; helping bad managers stay at the top; getting away with having no idea what you're doing and driving a company/organization/country into the ground)))

Yeah, the article has its irritating aspects, but there is this sort of bizarre but interesting tone of genuine admiration that doesn't quite seem reducible to grudging respect for a ruthlessly efficient dictator, which is about all one would expect from the Economist. Curious. But maybe I'm misreading it. In any case, there's this gem, which remains a gem whether one likes talking about Mao this way or not . . .

Perhaps for the struggling executive, this is the single most important lesson: if you can't do anything right, do a lot. The more you have going on, the longer it will take for its disastrous consequences to become clear. And think very big: for all his flaws, Mao was inspiring.

Mission accomplished!

I loved the punchline to the first part of the same paragraph even better, but I can't be the least bit ironic about it:

Under Mao, China didn't drift, it careened. The propellant came from the top. Policies were poor, execution dreadful and leadership misdirected, but each initiative seemed to create a centripetal force, as everyone looked toward Beijing to see how to march forward (or avoid being trampled). The business equivalent of this is restructuring, the broader the better.

Yep.