Editor's note: Nell Minow is editor and chairwoman of the Corporate Library, an independent research company, and was named one of the 20 most influential people in corporate governance by Directorship magazine and "the queen of good corporate governance" by BusinessWeek Online. She has co-written three books.
Nell Minow says it's great when executives make a lot of money, but only if they really earn it.
WASHINGTON (CNN) -- They asked for it.
Wall Street had every possible opportunity to fend off government interference in executive compensation, but they bungled it through a combination of arrogance and ineptitude.
Remember the Chrysler bailout of 1979? With the then-unheard-of credit guarantee of $1.5 billion? Lee Iacocca established instant confidence and credibility by taking $1 a year and escalated stock options.
He showed that he was willing to bet on himself and the company, and that, more than any other statement he could make, made everyone -- employees, investors, government and taxpayers -- willing to bet on him, too.
First, the government got paid back and got a good return (though it should have been higher) and then the shareholders and then Iacocca, who made as much as any Wall Street titan could ask for.
But the motto of the Wall Street firms seems to be "where's mine first?" They have lost billions of dollars of shareholder value, but they have lost even more in the deterioration of their brand, not just their individual brands but the brand of Wall Street as a trustworthy provider of financial services.
The Bernie Madoff scandal provided a sense of relief: If the allegations are true, it was localized, straightforward theft and deception, and we could be confident that someone is going to jail. One of the most distressing aspects of the current mess is how systemic and apparently within the rules it all is.
We want to see some perp walks. Instead, we get headlines about corporate jets and million-dollar office renovations. I used to compare these guys to Marie Antoinette. Now, the more apt comparison seems to be Nero.
The president's curbs on executive compensation were my second choice.
I would have preferred to have the corporate community demonstrate some sense of responsibility, leadership and self-preservation by taking steps themselves to establish a compensation system that communicated a commitment to investors and taxpayers.
When they failed to do so, the government had no choice but to step in. There are some important points to note about the program.
First, the government is not acting here as regulator. It is acting as a provider of capital to the banks. If the financial services companies could find a private firm large enough to provide them with the capital they needed, I can promise they would have had to come up with even more stringent givebacks.
It was pouring gasoline on the fire for the Bush administration to give them the first payments without insisting on any changes in pay, any restrictions on the use of the funds or even any reporting requirements on where they money went. It is good to know that the Obama administration has learned from that mistake.
Second, it is really not fair to say that pay has been capped. There is no cap on payment in the form of restricted stock. The key point here is that the restricted stock grants do not vest until after the government has been paid off. As with Iacocca's pay package, there is enormous upside potential.
Third, the president's program is an essential first step in thinking about the role that executive compensation played in creating the economic meltdown. Perverse pay incentives and excessive compensation are not a symptom or a side benefit; they are a cause.
Pay that rewarded the number of transactions rather than the quality of transactions is at the heart of the subprime mess, and the executives and directors responsible for it should bear the consequences. Universal clawbacks of pay for any restatement a bank has to make, whether for fraud or for a typographical error, are an essential part of a legitimate pay plan.
Fourth, our attention is deservedly on the "supply side" of corporate governance, the public companies. But we must also focus on the "demand side."
Institutional investors, both public and private, hampered by conflicts of interest and impediments imposed by corporate interests, have failed to exercise the oversight that is an indispensable element of the free market system.
Because stock ownership, even by large institutional investors, is so widely dispersed, the potential return an investor can get by being an activist shareholder is too low to justify spending his or her time and money on efforts to hold down unnecessary pay and spending.
Warren Buffett famously told the executives at Salomon that, "If you lose money for the firm by bad decisions, I will be very understanding. If you lose reputation for the firm, I will be ruthless." Wall Street has lost reputation -- for itself and for the integrity of our financial markets.
It is time for America as investors and as citizens to be ruthless in forcing Wall Street to prove that the return on investment for every dollar spent on executive compensation provides competitive returns.
The opinions expressed in this commentary are solely those of Nell Minow.
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