Compensation furor indicates new environment

Anger has been rising among Americans and other global observers that the financial calamity of 2008 has not caused a more sensible approach to CEO and executive compensation.

The issue is  a marker for a larger re-examination of the role of the largest businesses in the global economy.

At the end of the robber baron era of the 19th century, progressive societies chose not to allow the pursuit of profit at any cost to be the determinative factor in business success.

Throughout the 20th century, other objectives like ending child labor, paying minimum wages, providing pensions and health care, equal employment opportunity and environmental remediation have become societal imperatives that businesses must embrace.

From the Drexel Burnham Lambert junk bond days through the 2008 meltdown, the pedalum swung towards profound cost-shifting of those obligations to individuals while a privileged elite concentrated more and more wealth.

In my opinion article for the New York Society of Security Analysts in October 2008, I suggested that a rebound of the market would depend on how well companies, particularly in the financial sectors, read the lessons of the Obama election.

“Is there an Obama play in the market?” predicted that companies would need to grow not just by moving money around in acquisitions but by demonstrating ethics and broad societal value.

It has taken a while for the changed environment to sink in.  Some CEOs have seen the Troubled Asset Recovery Program as a piggy bank to fund even larger bonuses and stock options.

As the proxy for the taxpayers who had to fund the $700 billion TARP, the federal government should act against top executives who felt they deserved rewards for almost presiding over the demise of their firms.  That poor judgment would not have survived in an open market, and government intervention should not protect them from those consequences.

A wider adjustment should come from the pension funds which supply much of the liquidity in the market.   The best investment plays are policies and practices which widen opportunity.

Outlandish bonuses in the face of high unemployment and depressed demand are a bigger threat to capitalism than any government regulation.  The economy depends on trust.  Managers, who do not understand that, need the same wakeup call that investors and consumers got last year.

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