Here are two provocative takes on the issue of trust in corporate governance.
One comes from Jim Peterson at the International Herald Tribune; the other from the multi-talented Ben Stein (yes, that Ben Stein).
Peterson, in Can Shares for Directors Fill In for Virtue? takes a side swipe at the prevailing wisdom of compensation consultants, board compensation committees, many top execs, much of the financial press, and probably a lot of business school wisdom—the idea that top management’s compensation ought to be linked to the company’s performance, typically through stock and related options.
Sounds perfectly reasonable. Pay for performance, alignment of management and shareholder interests, etc. And if that argument applies to managers, then shouldn’t it apply to the Board of Directors?
Not so fast, Peterson says—look at all the stock manipulation shenanigans cooked up by management. If stock-based motivation can lead managers to behave badly toward shareholders, don’t we compound the error when we apply stock-based rewards to Boards, who after all, are supposed to provide adult supervision to management? Slippery slopes and all that.
Hmmm… I hadn’t thought of that one. Scratch yet another structural trust fix.
Meanwhile, back at Ben Stein—yes, still that Ben Stein. He suggests in “On Buyouts, There Ought to Be a Law” that leveraged management buyouts ought to be illegal. His logic? Managers are hired hands whose employers are the shareholders. Given their privileged access to information, there is an inherent conflict of interest when they act on their own behalf.
Note this is another structural trust solution (i.e. relying on laws and boundaries, not principles). It strikes me as a reasonable idea, though in fairness, at least one free marketer—Private Equity—makes a counter-argument. Her position, I think, boils down to “if the management proposal is better than anyone else’s, then it’s actually in the shareholders’ interest anyway.”
I love reading Private Equity, but am un-persuaded in this case—it’s still the fox setting the price for the chickens. If I were Ben Stein, I’m not sure it’d win my money. How about yours?