Gregg Easterbrook of TNR has an excellent piece on why the accounting fraud epidemic is inextricably linked with the recent astronomical increase in CEO salaries.
But the two controversies really aren't separate--they are one and the same. The motive for almost all the corporate deceit now being exposed was not "the pressure of quarterly profit statements," as spin has it. Yes, shareholders exert demands for positive earnings statements. But they would be irrational if they wanted to be deceived, which is what the unpersuasive "quarterly profits pressure" pretext boils down to. The motive for almost all the corporate cheating was not to issue pleasant earning statements but to run up the pay of CEOs.
Top managers of firms such as Enron, Global Crossing, and, it now appears, Xerox systematically lied about the condition of their enterprises to rationalize granting themselves huge sums diverted from equity. If this isn't common theft--lying in order to abscond with someone else's money--what is? While, we assume at this point, most CEOs haven't lied, many have exploited the lying-triggered "exuberance" to pay themselves exorbitant amounts. All the corporate lying has been devastating to shareholders, to the United States economy, and to the world standing of market economics. But, boy, has it been great for CEOs! Systematic corporate lying has created an environment in which top managers feel justified in paying themselves $100 million or more per year. And, amazingly enough, this cash-grab now continues even as business fortunes turn down.
The fundamental morality underpinning capitalism is that wealth distribution was required to provide proper incentives to the more productive members of society. Thus, the problem is not that CEOs get paid outrageous sums for providing their companies with dramatic improvements in productivity. Its that they get paid these outrageous sums even if they don't. To use a sports metaphor, whose contract is more outrageous Shaq's ($21.4 million a year to be the most dominant player in the game) or Juwan Howard's ($18.8 million a year to be an average starter at his position). The accounting schemes resulted from CEO's who couldn't produce by the rules, cheating to create the illusion of production. This would be bad enough if it allowed them merely to swindle an unjustified salary. What's far worse is that they were able to steal money from average investors by cashing out on stock prices that were inflated as a direct result of their policies.
This outrage has to end. First - we need to throw as many executives who engaged in an inflate and cash out strategy in jail as possible. Second - while improved regulation would help, we need to change the rules of the game so that there is no longer such a powerful incentive for CEOs to create a disjunct between the real and apparent values of their firms. In otherwords, if CEOs are to be given stock options as incentives - the system needs to make sure that they only benefit from long-term, actual growth. (Jeff Hauser has endorsed a previous Tsongasian reform of capital gains that penalizes speculators, but reduces the amount long-term investors are taxed. The main argument against such reforms is that it impinges on the liquidity of the market. I'll defer to the more economically trained than myself to rebut such an argument).
Economic conservatives such as Andrew Sullivan are desperately trying to downplay the significance of these scandals. They fear an overreaction that will to overregulation. That argument, however is nothing more than a disingenuous cop out. If economic conservatives are really interested in a system that rewards the talented as opposed to merely the powerful, they need to step up to the plate with proposals of their own to fix the obvious flaws in the current system.
No comments:
Post a Comment