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Home Publications Blogs Beat the Press Andrew Ross Sorkin Doesn't Believe that Executive Compensation is Tied to Company Performance

Andrew Ross Sorkin Doesn't Believe that Executive Compensation is Tied to Company Performance

Tuesday, 03 August 2010 04:52

Andrew Ross Sorkin argued that assessing fines against companies for misleading shareholders is unfair because it punishes the shareholders a second time. Actually, if shareholders know that their companies will be punished, hurting its stock price, if its top executives lie about the company's performance, then they have more incentive to ensure that they do not get lying executives. This is a desirable outcome since their lying will distort stock prices, and in principle, lead to misplaced investment.

Of course if shareholders really have very little control over companies then this increased incentive will have little effect. However, that would be a very serious indictment of the system of corporate governance.  

Comments (4)Add Comment
Victimhood of Stockholders, a Catch-22
written by izzatzo, August 03, 2010 7:24
From the NYT article, this quote:

Mr. Pitt offered a cynical, yet practical reason the S.E.C. was tougher on companies than individuals: companies are quicker to settle given the potential damage to their stock price and reputation as headlines linger.

If the S.E.C. were to just pursue cases against individuals, Mr. Pitt said, “they will be getting far less settlements, which means they will have to litigate more cases, which means they will bring less cases.”

But if company-wide penalties were effective per Baker's explanation, then individual penalties wouldn't be necessary. Pitt catches himself in his own Catch-22 trap, that by Wall Street rendering the SEC ineffective to the point it can't pursue individuals, then it becomes ineffective because its only recourse is to pursue company-wide penalities, which allows Pitt to claim the SEC is victimizing stockholders.

Sorkin, Pitt, et al are advancing the same worn out failed argument that it's always the individual, the bad apple, and never the system. The incestuos relationships between closed circles in boards of directors and CEOs, the obscene compensation packages fatally designed to remove CEOs from the threat of risks so they will then take fatal risks, the bizarre claims that only a tiny elite group of individuals qualify for CEO positions, are all immune from criticism by the likes of Sorkin and Pitt.

A primary reason is that corporate welfare for the upper 6% of the population as funded by the other 94% is not to be threatened with such indiscriminate, broad based discipline on stockholders. It may break through the corruption and rid companies of lying, grossly overpaid CEOs whose specific performance requirements includes protection and extension of a corrupt system, for which chasing down bad apples is part of the distraction game embedded in the public relations department.

Of course when the subject changes to, say, scaling down banks that are too big to fail, suddenly the "victim" penalized conveniently becomes the entire company rather than individuals, claimed necessary to be large to compete internationally, another Catch-22.

After all, how can over-sized corporations with grossly overpaid CEOs be expected to maintain their massive, overwhelming market power if they're forced to compete with each other, which requires a skill set for which they have no experience or expertise. Competition isn't for them, it's for the masses.
the middle management oil spill
written by frankenduf, August 03, 2010 8:21
all cynicism aside, it is an ethical conundrum figuring out group culpability- since the courts have decided to treat corps as individuals, then they are culpable by law- yet it is a simple truth that only humans can be culpable- it's like the joke where the guy asks to show him the university, so you walk him around, show him the lecture halls, the library, the labs, the cafeteria... then he says, ok, but where's the university?- so it doesn't take a rocket scientist to argue that BP is evil, but how is justice meted out?- if you punish the company, the evildoers get off the hook (or resign with benefits), and if you punish the evildoers, the company's capacity for evil remains unchecked
written by Kenneth Fingeret, August 03, 2010 9:31
Does anyone want to try the Chinese Sentencing Guidelines? This will thin the herd which may or may not be a good thing.
Limited Liability is the name of the game
written by Scott Dunn, August 04, 2010 8:24
The problem is that corporations are setup with limited liability. Once members of a corporation, the stockholders and the board get the idea that they could be liable for something other than the value of the stock they hold, that might get their attention.

Until that happens, we need to review corporate governance again. Dean, do you have any suggested reading on ways to improve corporate governance so common shareholders would have more say in how a company is run?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.