The elephant in the room when it comes to the sinking economy is out-of-control inequality. It strains the social safety net through programs like Social Security which cap contributions at the $100,000 income level, and it cycles money out of the economy instead of circulating it through the broad base of people. Unequal societies rarely reach their economic potential, and often slip into recessions, depressions, and most troubling, social and political unrest. We're talking banana republic stuff. At the root is a compensation structure on Wall Street and for business executives that results from a handpicked board giving the CEO whatever he wants in the belief that they will get the same largesse in return. Yesterday a House panel approved a fix that would give shareholders a role in determining executive compensation.
The approval by the House Financial Services Committee, on a party-line vote of 40 to 28, clears the way for the measure to be considered by the full House later this week, when it is likely to be adopted.
The bill does not set pay limits. Instead, it gives shareholders the right to vote on pay and requires that independent directors from outside of management serve on compensation committees.
The shareholder votes would not be binding on company management.
The measure tries to reduce the potential conflicts of interest involving compensation consultants who play a central role in blessing pay packages. Many of those consultants also provide other services to the companies, putting them in a conflicting role for issuing fairness opinions about pay.
The measure also gives regulators the authority to prohibit inappropriate or risky compensation practices for banks and other regulated financial institutions.
This is weak. Nonbinding votes on CEO pay seem unlikely to have a great effect. And yet, shareholder revolts over the past few years have had an impact on corporate behavior. I believe the bigger fix here is the mandating of independent directors from outside management. How about shareholders chosen by lot? In this day and age of fiber optics, they don't have to live in New York.
The business world will fight this tooth and nail, I expect. But if they stepped back, and saw how their own personal greed not only helped cause this deep recession, but negatively impacted their businesses for years, maybe they would submit to these relatively minor changes.