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March 23, 2009

Big Bonuses Spur Calls for Oversight

The wages paid by a company to its employees is a distinctly private matter. Government has no competence (legally or practically) in this area, and should remain officially detached from the matter. That does not mean we cannot be outraged by the decisions executives make about wages, bonuses, retirement plans and golden parachutes. Indeed, fury is the emotion of the day and we should be surprised if our elected leaders, from President Obama on down remained silent on the matter. But outrage and calumny are poor motivations for public policy.

The current disgust is rightfully aimed at executive bonuses to failing insurance giant AIG. This company persists in offering huge bonuses even though it was among the first recipients of the ‘too big to fail’ bail-out programs begun late last year. These bonuses are doubly hard to swallow since many of them are more money than most of us will make in a life time of hard honest work. This is simply poor moral leadership from the board of directors on down. But the problem does not end with AIG. GM and Chrysler have both received huge federal bail-outs. Both firms have been driven into a catastrophic state in large measure due to labor contracts with the UAW. Company paid health care benefits and 30 year retirements doomed both companies long before the quality of their cars became a staple of late night TV jokes.

In both cases, the free markets should take care of the poor decisions by these firms. For example, the breathtaking decline in unions over the past 25 years is largely due to workers rejecting the job killing environment that comes with union membership. Indeed, if UAW membership follows the trend of the past three years it will be gone by 2012. This is the market working to clean house.

Unfortunately, the mechanism to clean up poor decisions by corporate boards is far less advanced. This despite the fact that the problem was noted as far back as the 1930s in a book and series of academic articles by two Harvard professors Adolf Berle and Gardiner Means. I think I have a partial solution tailor made for the internet age.

A private sector group, like Underwriter’s Laboratory needs to track corporate board members. Individual board member votes can be followed and reported annually (this requires a change to SEC rules). This would be a useful site for institutional investors as they pick and choose investments. Indeed, it is institutional investors as well as labor groups who should fund this effort.

Of course this process only works if poor board members – most likely a very tiny share of the total – are excluded from further membership on boards. This system won’t be perfect, we do the same for lawyers and physicians and malpractice still exists. However, this would be a huge step forward in improving corporate boards. Further, it might prevent us in future, from wasting our time and emotions on shameless fools like those currently running AIG.

Link to this commentary: https://commentaries.cberdata.org/70/big-bonuses-spur-calls-for-oversight

Tags: law and public policy


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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