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Friday, April 5, 2013

Should Germany Prop Up the E.U.'s Southern States?

In April 2013, Deutsche Welle reported that the German central bank had “analyzed possible effect a domestic growth package could have on southern European economies. ‘By and large, it would have no impact,’ claimed Clemens Fuest, president of the Mannheim-based Center for European Economic Research. ‘We won't be able to fight recession in southern Europe with domestic growth incentives.’ He added that southern European states do not just have a demand problem. ‘Prices there have got out of hand,’ he said. ‘Wages and labor costs have spiraled out of control, and must be brought down again. If you were to implement a growth scheme, you'd only slow down the necessary adjustments.’”

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Thursday, April 4, 2013

States Move Beyond Congress on Gun Control

On April 4, 2013, the government of Connecticut passed “a sweeping new set of gun control reforms.” Colorado and New York had already passed their respective versions of “sweeping gun legislation,” all in the wake of the Sandy Hook school shooting in Connecticut the previous December. 

The complete essay is at Essays on Two Federal Empires.

Getting More For Doing Less: Bank Board Directors

Executive compensation is an art rather than a science. It is not as if certain numbers are fed into a computer and the correct compensation amounts pop out. There is more discretion involved than meets the eye. “Since the financial crisis,” the New York Times reported in 2013, “compensation for the directors of [America’s] biggest banks has continued to rise even as the banks themselves, facing difficult markets and regulatory pressures, are reining in bonuses and pay.” Board and upper management pay seem to be going in different directions is spite of both being presumably tied to the same firm performance. There is much maneuver, in other words, even given a performance-incentive approach.
At $488,709 in 2011, Goldman Sachs had the highest director-pay of any American bank. Some of the bank’s 13 directors make more than $500,000 because they have extra board responsibilities. As the directors are paid in stock, 2012 promised to be an even better year for the thirteen. Compensation experts say banks must pay premium dollar to pay such figures for what is essentially part-time work in order to get the best advice. However, JPMorgan, the largest American bank, gave its directors “only” an average of $278,194 in 2011. Bank of America paid its directors $275,000 each. Equilar reports that the average compensation for a director at one of the six largest American banks in 2011 was $328,655. This compares with $232,142 at almost 500 publicly-traded companies, according to Spencer Stuart, in spite of the fact that regulations have narrowed the responsibilities of bank boards. One would think that compensation would reflect changes in the number of tasks even more than macro indicators of bank performance.  
“I get you have to pay up for sophisticated board, but what is that complexity worth?” said Timothy M. Ghriskey, co-founder of the Solaris Group, a financial services shareholder that voted in 2011 to reject a pay plan for top executives at Citigroup. “Does it take $200,000 or $500,000? The discrepancy between a board like JPMorgan and Goldman is confusing.” For one thing, the differential indicates that the matter is far more subjective than meets the eye. This in turn suggests that when a compensation expert claims that a certain level is necessary, the claim can be critiqued rather than taken at face value.
In fact, when it is claimed that a certain director-level compensation is necessary (e.g., X amount of stock at Y exercise price), the fact that this claim is not true may suggest that insider collusion between board members or the board and upper management is involved. Put another way, the false-necessity may be a subterfuge used by insiders seeking to enrich each other. You scratch my back, and I’ll scratch yours. The dispersed stockholders a left with less.
In short, it can be doubted whether the director compensation level is necessary or even in the stockholders’ interest. The excess probably reflects the difficulty facing stockholders in holding the insiders accountable. Accordingly, one consequence of corporate governance reform may be a reining in of pay for what is really a part-time job (i.e., gravy) with fewer and fewer responsibilities.


Susanne Craig, “At Banks, Board Pay Soars Amid Cutbacks,” The New York Times, April 1, 2013.




Sunday, March 31, 2013

Bad Directors at HP: Like Guests Who Overstay?

Lest it be thought that Congress ignoring the business lobby would result in laws capable of reforming corporate governance in the U.S. in the interest of stockholders, even putting the “objectionable” stuff back into legislation may not be sufficient. In this essay, I look at the proposed elimination of plurality voting in the original Dodd-Frank bill from the perspective of the case of HP. Put simply, the question is whether it would have made any difference had the proposal been retained in the bill.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.