Tuesday, June 12, 2007
Posted by Jeff Lipshaw
Yesterday was moving day, and my assignment was help the movers clear the stuff out of our self-storage locker, then gather up the dogs (and Toby the Tortoise) and leave for Michigan. (I saw a friend in our local coffee shop and he was sympathizing about moving, and I analogized moving day itself to the actual colonoscopy: once you have done the prep, the procedure itself isn't so bad.)
This is a somewhat random explanation why it was that I was listening to the Diane Rehm Show on NPR between 11 a.m. and noon yesterday, in a car by myself (if you don't count the dogs and the tortoise) on I-69 somewhere between Muncie and Fort Wayne. I like to listen to Diane Rehm (right), particularly when she is interviewing somebody on a non-political subject, because she is a good interviewer, and I admire her courage in continuing her radio career after contracting her voice illness, spasmodic dysphonia. But the one thing that is boring about NPR is the predictability of the political viewpoint, and Diane is no exception.
Anyway, her guest was Alan Murray, the columnist for the Wall Street Journal, who has just published a book, Revolt in the Boardroom, which looks at the recent contretemps at HP, AIG, and Boeing in particular. She was atwitter about the executive pay packages, and particularly annoying in offering the opinion that "it stunk" that shareholders owned the companies (I am pretty sure that was the context). I thought Murray started weak, but compared to Ms. Rehm, started to sound pretty balanced and nuanced by the end of the program.
Here's what I keep stumbling on. There is a polarity in corporate governance between the accountability and the authority of corporate management. As Larry Ribstein continues to point out, the analogy between shareholders in a "corporate democracy" and voters in a political democracy is weak. I suspect Murray was correct (his strongest point) in believing that the last five or six years have marked a watershed in moving the meter back toward more accountability, but I am still agnostic on the breadth of a corporate governance crisis outside of the high profile cases over the last several years. I believe there are something like 9,000 publicly traded companies in the United States. And I bridle a little at sweeping and undocumented generalizations about cronyism. The charge may be true. But I don't think it is supported by looking at the ten or twenty meltdowns, or the 200 backdating cases.
Similarly, golden parachutes took the usual body blows. Again, Murray, in an afterthought, noted that the severance packages were designed to counterbalance management resistance to value-creating take-overs, but he contended that the rise of stock options had made the parachutes disproportionate to that goal. Again, I'd like to see some data on this. The example on the program was James Kilts' payout in the Gillette - Procter & Gamble deal; Murray contended Kilts didn't need that much money to have an incentive to do the deal. He may be right. But my experience is that you really do want to have a situation in which the management is indifferent if what is being offered for the company exceeds the internal view of the company's long-term value.
The old saying is that bad cases make bad law, and that seems to be the case as it relates to the one place a change in the law would make a radical difference in how companies operate, and that's the business judgment rule. After-the-fact review focuses on high-profile issues, but rarely captures the nuance, the complexity, and the uncertainty facing business management and boards. I'll have to think about how to approach this, academically speaking, both empirically and theoretically. But my intuition is that the presumptions are correct where they sit in the law right now.
Oh, and by the way, I was irritated enough by the lack of depth in the conversation on the radio to call in from the car. I actually got into the queue, listened, decided I couldn't possibly be coherent, intelligent, or have any chance of winning in that forum (which despite the relative depth of NPR is still a "sound bite" debate), took a deep breath, and hung up. My last foray into debating these issues with public commentators was when I (as ghostwriter for the CEO) took on Nell Minow of The Corporate Library about whether shareholder proposal advocates were always right, and boards were always wrong. You start out playing defense to a strong political and populist position, and have a hard time doing better than deflecting the "and how many times do you beat your wife?" questions.