Monday, February 23, 2009

Economic crisis (again) – how do we get out of the mess?

Finally he is back. Bill Maher’s new season of ‘Real Time’ started again last Friday. He is one of the funniest guys on TV in North America right now, and certainly one of the smartest. The first show this season was all about – yes – the economy. Could you have imagined that in normal times? ‘The economy? On a comedy program??’ But here we are.

The show started off with reminding us that the crisis on Wall Street is just about to unravel, we have just seen the beginning. ‘Skank of America’ or ‘Shittybank’ (BM) are still close to the abyss, despite the earlier $700bn bailout. The central contention of the show was this: should the government be involved with another bailout, or should we just allow the system to collapse. After all, this is America, the home of the free market and individual liberty. Let the market sort it out, so Ron Paul on the show.

That didn’t go down well with the other guests. Crystia Freeland, North America Editor of the Financial Times, wasn’t having any of it. Her best comment was that since the bankers of the private sector had failed on such a megalomaniac scale, putting government bureaucrats in charge could certainly not make things worse, hopefully even better. Could you have imagined such a benevolent statement about government involvement in the economy from a Financial Times editor a year ago?

It was fascinating to see how ethical issues dominated the entire program. Congresswomen Maxine Waters, another guest, made an interesting suggestion: there should be the ‘Nuremberg trial for bankers’! That, however, was at least more realistic than Bill Maher’s very funny black humored piece on just ‘hanging’ two bankers, you know, symbolically. As they did in China with the managers who caused the milk scandal some months ago. That might teach these Wall Street guys a lesson…

It is a time of deep navel gazing in America and beyond. Bill Maher’s suggestion was that the last years have given rise not to the ‘American dream’ but rather to the ‘American fantasy’. What happened was not the pursuit of happiness through hard work which makes dreams come true but luring people into the illusion to raise their standard of living based on money that didn’t exist. And he concluded: ‘There is a difference between a fantasy and a dream. Boy do I know!'…

Sunday, February 8, 2009

Ethics of executive pay limits

As discussed in our last blog, executive compensation is a hot ethical issue at the moment. There's been lots of talk about the ethics of excessive salaries, especially for the Wall Street 'fat cats' and the rogue's gallery of bosses who took home big bonuses whilst their firms went looking for government bailouts in the wake of the financial crisis.

But now we have a new ethical question: what about the solution proposed by Barack Obama this week? Should we applaud Obama's proposal to limit the compensation of all senior executives at any companies receiving 'exceptional' government loans to $500,000? Has Obama's executive 'paydar' hit ethical pay dirt?

The executive pay limit has certainly stirred a lot of debate. On the one side are those that view it as an appropriate response to protect the public interest given the amount of public money that is being pumped into failing companies. Many believe that government's have moral duty to ensure that the taxpayer's money does not simply disappear into the pockets of senior executives. On the other side are those that argue that the pay limit will burden already struggling firms with an inability to attract the best executive talent. As one analyst told Bloomberg Television "No one goes into Wall Street to save the world ... compensation is the motivating factor." These folks tend to think that governments shouldn't interfere in labour markets to 'fix' wages as this leads to unnecessary inefficiencies - and can harm the very industries that the government is seeking to rescue.

From an ethical point of view, and put rather crudely, this is largely a question of principles versus consequences. But given that we're off the page at the moment in terms of the usual 'rules of the game', this is pretty much an ethical free for all. No one really can say for sure what the rights or responsibilities are of governments in situations like this because we haven't got too many precedents to work it all out from. And who knows what the consequences will be when no one is very sure at the moment what's going to happen next anyway. These are uncertain times indeed. One thing we do know though is that if the big threat looming over all this is that Wall Street will lose it's best talent because the grass is, well ... greener elsewhere, then maybe we shouldn't really be all that concerned anyway. After all, executives that have no concern for the public interest, who think that paying themselves bonuses while their employees are being laid off is good management, and who pretty much launched us into the most devastating financial crisis of our times might not be exactly the kind of 'talent' we need right now.

But from our point of view, all this ethical to-ing and fro-ing is probably missing the bigger point anyway. The real issue here is not so much the rights or wrongs of the Obama proposal itself, but the bigger message it is sending about executive compensation and corporate governance. Read between the lines and what the US President is saying is this: 'the system isn't working right, so get your act together and fix it or we'll do it for you - and you won't much like the results if we do'. And it's not just in the US - according to the FT, European governments are beginning to float similar ideas too.

Now, it is unlikely that any of these governments will step further than paycaps in bailed out institutions - after all this is where they have a more direct stake. But the writing is on the wall that they will have their eyes on deeper governance reforms if firms continue to revel in what Obama calls 'shameful' compensation deals. Smart firms and industry bodies, not to mention the more forward thinking think tanks and reformers, should be taking this opportunity to get ahead of the curve and start crafting a new moral direction for corporate governance. The deeper questions about what kinds of success should exec comp be rewarding, and how should this be structured to achieve fair rewards for all stakeholders need to be back on the front burner - and quickly so. Time is of the essence before another dirty bomb gets launched into mangled mess of Wall Street.

Photo copyright David Paul Ohmer. Reproduced under Creative Commons license