Posted by Marc Hodak on December 10, 2007 under Executive compensation | 
…but I somehow doubt that the Congress wouldn’t just end up gumming it up for all of us.
The House of Representatives Committee on Oversight and Government Reform just published a document on executive pay that claims that “corporate consultants can have a financial conflict of interest if they provide both executive compensation advice and other services to the same company.” The committee is considering additional disclosure rules to remedy this problem.
Henry Waxman, the congressman who requested this report, is apparently concerned that compensation consultants and corporate executives are conspiring to disregard their professional responsibilities to each other and the shareholders. This seems like a reasonable concern, if you consider the board of directors nominally overseeing this transaction as lazy or corrupt. In that case, more disclosure about the arrangements between consultants and management would make sense, if you consider the investors to be alert enough to do something positive about it. As it turns out, all of these assumptions are highly debatable. Investors with competent directors don’t need additional disclosure; investors with incompetent directors can’t be helped by it.
Congressman Waxman should know a thing or two about conflicts of interest, and how much difference disclosure really makes. Waxman gets the lions share of his campaign funding from unions. He has 93% rating from the AFL-CIO based on how he voted on issues of concern to union leaders. Do those facts suggest a conflict of interest? And how many of the citizens in West Hollywood, Santa Monica and Beverly Hills, that hotbed of the working class that Waxman represents, know those particulars? All of it is out there, if you know where to look. The fact is that the link between Waxman’s congressional cash flow and his congressional work won’t penetrate the sunglasses of his constituents any more than the details of corporate HR policy will be taken in by shareholders, despite mounds of disclosure already available to them.
Some problems are simply not big enough for the ham-handed machinery of Congress to fix. Some problems cannot be fixed even by unconflicted lawmakers, and most problems are made worse by their attempts to fix them.
Posted by Marc Hodak on December 9, 2007 under Revealed preference |
…as if a reasonable person needed any.
From Cato Unbound.
Posted by Marc Hodak on December 7, 2007 under Scandal |
Let’s say your boss walked into your office and asks you to backdate a letter so that a decision looks like it was made earlier than it really was. You don’t feel perfectly comfortable with this, but you say, “OK.” If you had stopped in your busy day to think about this particular act, and realized that neither you nor your boss would be personally enriched by it, and that the company and its shareholders may very well benefit from it, you’d probably wouldn’t think it’s such a big deal. You wouldn’t think that you’d end up with a criminal conviction leading to up to 20 years in jail. But that’s what basically happened to Stephanie Jensen.
Here is the prosecutorial logic. When someone says “OK” to her boss’s improper request, that’s conspiracy. 10 years. When one signs a letter that is ultimately used to misstate accounting results, even if you have no control over the accounting or understanding of the intricate rules involved, that’s fraud. 10 years. Normally, criminal fraud requires that someone personally benefit from their deceit, but in securities law, any impact on disclosed financial results can be presumed to lead investors astray to their detriment.
Jensen is only lucky that she’s not facing the full fury of post-Enron sentencing madness. The political appetite to punish what most sane people would consider marginal behavior became completely unhinged during the Enron/WorldCom scandal. Here is a taste of the unchecked attitude toward the sketchiest business behavior by Senator Leahy, Chairman of the Senate Judiciary Committee in 2002:
Today’s report includes a tough new crime of securities fraud, which will cover any scheme or artifice to defraud investors. Working with Chairman Sensenbrenner, we were able to retain the provision as I wrote it with a higher 25 year maximum jail term. That will cause scam artists to think twice. (Their emphasis)
Taken to the extreme, that means saying “OK” to your boss’s request to do something you may not quite understand is illegal, and may not actually harm anybody. Now, even the most self-righteous, ambitious prosecutor would be unlikely to actually pursue a low-level employee on something as simple as an “OK.” But the prosecutor would have this tool as leverage against this employee in getting their cooperation.
One could only wish that congresspersons were held to anywhere near the same criminal standards. Unfortunately, the media promotes the political vanity that lawmaking is a noble exercise in power free from conspiracies, while business is a messy financial affair where conspiracies abound.
Larry Ribstein makes another excellent case for the fact that Jensen merely lost the criminal backdating lottery.
Posted by Marc Hodak on December 6, 2007 under Unintended consequences |
Let’s say one wanted to create a set of incentives for our best and brightest who want to go into medicine to strongly prefer medically superfluous areas like penile inserts, nose jobs, and hair removal while shunning areas like oncology, cardiology, and neurosurgery. How would one approach such a task? Apparently by doing what Europe and Japan do, and what most American politicians advocate doing here–socialized medicine.
In a study of doctors in Japan, Harvard’s Mark Ramsmeyer studied the effects of Japanese health care policy on how prospective doctors choose to invest in their talents.
The Japanese national health insurance provides universal coverage. Necessarily, this entails a subsidy that dramatically raises the demand for medical services. In the face of the increased demand, the government suppresses costs by suppressing prices.
Ramsmeyer figures that this policy will lead to certain economic consequences on investment decisions by doctors in their training and specilization.
Crucially, the national health insurance does not cover services – like elective cosmetic surgery – deemed medically superfluous. Facing price caps in the covered sector but competitive prices in these superfluous sectors, the most talented doctors should tend to shift into the superfluous sectors and there to invest heavily in their expertise.
So, he looked at all the cosmetic surgeons and an equal number from a random sample of other types of medical specialties to see if he could identify where the greatest investment in skills was taking place.
Cosmetic surgeons earn higher incomes than other doctors; are more likely to have attended a national (generally more selective) medical school; are more likely to have served on the faculty of a medical school; and are more likely to be board-certified.
His conclusions are sobering, if not surprising:
The point is not that Japanese cosmetic surgeons earn a premium not available here. The point is that by operating beyond the scope of the universal health insurance, they can profitably do what few other Japanese physicians can cost-effectively do: invest in field-specific training. In most medical fields, the price controls preclude a physician from earning a large enough return to his training to make any serious specialization worthwhile. In cosmetic surgery, however, those controls do not apply. Like their peers here, Japanese physicians respond to the price signals by specializing, training, and certifying their expertise.
Is that the kind of society we want for us? As the author notes, we’ve already moved part way in that direction. Our cosmetic surgeons already earn a premium here. They’re working in a field that politicians ignore. Other areas, unfortunately, appear to be too important to be left to the market.
HT: Larry Ribstein
