Corporate Culture and the Problem of Executive Compensation

Let me begin by saying that I was struck by an observation made by Ken West in his contribution to this symposium. He posed the question: "Is corporate America bending the social contract business has with the American public?" I wholeheartedly agree with him that the answer is yes. I also was struck by an observation made by Ira Kay, the thrust of which was that companies are actually not paying executives excessive amounts as compared to the contribution that they make. Frankly, I think Kay's argument misses the point. That argument may well have been made at various points in time in our country's history, but not today. If there is anything that engages the public today about the business community, it is the issue of compensation. Having built and run a variety of businesses, I know that public confidence is a strong motivating factor and that public perceptions matter a great deal. I believe that Lucian Bebchuk and Jesse Fried have brought to light one of the most important issues facing our society today. ' I agree enthusiastically and almost completely with their analysis of the problem. I am not so sure that I totally agree with their solutions, or whether I believe their solutions are practical. I tend to be pragmatic about things of this kind, and I would rather move toward what can be done than what might be done. Their findings confirm what many have seen firsthand: a breakdown in corporate governance and a buildup in greed. I know that you can argue the greed question, but there is a difference between personal greed and the profit motive. As the former head of Goldman Sachs, Gus Levy, used to say: "Yes, we're greedy, but long-term greedy," and that makes a lot of sense.2 When it comes to the issue of executive compensation, I have found that when you point out the various distortions in certain circles, people look at you funny. They think that you are some sort of radical calling for a redistribution of wealth, and that you do not believe in markets. However, I believe in markets passionately. While these huge discrepancies in compensation call into question our notion of fairness and equality, I do have problems with exorbitant executive pay precisely because I care about the market and private enterprise. These huge paydays, I believe, undermine corporate governance and send a signal that boards are willing to spend shareholders' money lavishly and too often with too little oversight. Moreover, these compensation packages set up a system in which executives have, I believe, the wrong incentives. Too often they are managing the numbers for short-term gain and personal payout, and not managing the business for long-term growth and shareholder value. I believe this behavior has to stop, and the time to reform this issue of executive compensation has come. I would like to lay out some of the reforms that I would like to see, but let me first say a word about the limits of such rules. They may not have intended it, but Bebchuk and Fried's book makes clear that there is a larger cultural issue that must be addressed. I think that issue relates essentially to how boards are structured and the personality of Americans. We are a friendly people; we tend to go on boards when invited by people we know. One of the first questions we invariably ask is, "Who else serves on this board?" Once we are on that board, how likely are we to challenge the person who invited us and to go against the persons who will reinvite us if we enjoy that service? The culture is almost fraternal. I have been on and have structured small boards and large boards, nonprofit boards, and other kinds of boards, and I see that situation played out over and over and over again. This fraternal culture is the background music that is simply not going to change, and I think we have to understand that. Now, the proposals that I would put forward are focused on accountability and disclosure. First of all, I think we have to make sure that the expensing of stock options really occurs. …