Corporate America and Bank Pay Reform

Per Paul Hodgson's post yesterday, The Wall Street Journal reports that the White House is preparing a proposal to change compensation practices in the financial services industry. 

Administration and regulatory officials are looking at various options, including using the Federal Reserve's supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.
Among ideas being discussed are Fed rules that would curb banks' ability to pay employees in a way that would threaten the "safety and soundness" of the bank -- such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing "best practices" to guide firms in structuring pay.

There may also be legislative proposals coming from the House and Senate.  Corporate apologists Martin Lipton and Theodore Mervis of the New York law firm Wachtell, Lipton, Rosen and Katz  and Professor Jay Lorsch of Harvard Business School took pre-emptive action by publishing an op-ed in the Wall Street Journal blaming shareholders – not executives -- for the economic meltdown. 

Excessive stockholder power is precisely what caused the short-term fixation that led to the current financial crisis. As stockholder power increased over the last 20 years, our stock markets also became increasingly institutionalized. The real investors are mostly professional money managers who are focused on the short term.

They call for “quinquennial” elections of directors to promote long-term thinking.  This is simply absurd.  If corporate America wants to promote long-term thinking it can do so itself as through its pension funds it is corporate America’s largest shareholder.  And as fiduciaries for the employees who have seen the value of their pension funds shrink over the past year, it is time for the corporate managers to put their money where Lipton’s, Mervis’, and Lorsch’s mouths are.  If they begin to manage these funds with the long-term view they espouse, entrenching proposals like “quinquennial” elections will be superfluous.

Nell Minow — Editor