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Stand by for a good 'siccing'

Created:
7 May 2008
Written by:
Alistair Blair

After reading last week's column attacking the Labour government's weird sympathies with the high-pay culture in Britain's boardrooms, a reader directed me to Alan Greenspan's views on the subject. These are set out in his recent book, The Age of Turbulence .

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The extent of Alan Greenspan's responsibility for the last 12 months of turbulence is a pretty gripping subject. I'd say he's not doing very well on that front, his latest heavyweight putdown having been administered by Charlie Munger at the Berkshire Hathaway annual general meeting last weekend. Greenspan's contribution to the directors' pay debate also comes up short. "He doesn't like the CEO pay heist, but he can't see how to stop it", was my correspondent's summary.

However, in Greenspan's chapter 23 (entitled 'Corporate Governance') I found a redeeming feature in the form of a new word that admirably suits the subject matter. It is recounted how, during the 1980s, in pursuit of a pay grab, the executive management of Mobil "sicced" a remuneration consultant onto Mobil's non-executive directors, including Greenspan.

Sicced? I had to read it twice. Was there a K missing? Was there an 'up' missing? In fact, neither. To 'sic', it turns out, is not even an Americanism - my Anglophile dictionary reveals it to mean giving the order to attack (it is a variant of the dog command 'seek').

During the 25 years before he became chairman of the US Federal Reserve, Greenspan was at various times a non-executive director on the boards of 15 companies. In this role, he observed how the 'myth' of shareholder control had been quietly displaced by the actuality of CEO control, because the institutional shareholders who began to hold sway from the 1960s insisted it was no business of theirs to manage the management. "It should come as no surprise that … the lack of adequate accountability in corporate management has spawned abuse..." After three paragraphs summarising the iniquities of CEO pay, Greenspan "hopes" shareholders will pay more attention to the subject because "if compensation is inappropriate, it is their pockets that are being picked".

But if shareholders don’t decide to pay more attention, then frankly, so be it, according to Greenspan, notwithstanding his belief that "income inequalities are destabilising to society". Observing that, despite its shortcomings, US corporate governance has presided over a pretty successful corporate sector for a very long period, Alan Greenspan concludes "however reluctantly, that if owners are no longer the managers, CEO control and the [abuses] it breeds are probably the only way to run an enterprise successfully". How bleak.

As a disciple of Ayn Rand - a god-like figure to American capitalism who abhorred government intervention and believed that free markets would always provide the best possible outcome - Alan Greenspan can see no role for government intervention in the CEO pay heist: "There is no role here for government wage control. Taxpayer funds are not involved." Then he goes on to think the unthinkable: "Relative compensation in our society is market-determined… Is there a better arbiter? An equally consistent but never successfully applied standard is that all workers should share equally... but averring that a certain set of income inequalities is too large or too small requires a standard by which to judge. 'Too large' accepts the premise that inequality at some level is justified. Why shouldn't it be lower? Or higher, for that matter?" (My italics)

It is good that Greenspan points this out. It is a warning to all from a supremely well-placed commentator that CEO pay is set to carry on rising.

I agree with Greenspan that this is not an area for government wage controls. Indeed one effort by the US administration in this area proved a resounding backfire. 15 years ago, Congress eliminated tax deductibility on CEO pay exceeding $1m. In retrospect, it is clear that this set off a feast of siccing and a huge acceleration in bonuses and payment in shares.

Greenspan's commitment to free markets blinds him to the vital distinction between shareholders and owners. Owners are, like Alan Greenspan, appalled by the CEO pay heist. They would, if given the opportunity by law, arrest the CEO pay abuse documented by Greenspan. But in today's corporate arena, shareholder votes are not votes by owners. They are votes by the appointed representatives of owners - in the form of institutional investors - who are institutionally obliged to connive in CEO pay abuse.

This could readily be put right by new statutes requiring institutional investors to ascertain and reflect the views of their customers on CEO pay.

MORE FROM ALISTAIR BLAIR...

Read more of Alistair's columns at his IC home page.

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Alistair Blair is a past winner of the Business Writer of the Year Award, and has worked in investment banking and fund management.

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