Posted by Marc Hodak on July 20, 2011 under Practical definitions | 
I don’t get the media’s willingness to accept the politician’s definition of “ask,” as in:
“We’ll ask them to hand over their assets to government”
“We should not be asking them to make sacrifices if we’re not asking the most fortunate in our society to make some sacrifices as well.”
The first quote comes from the Zimbabwean Minister of Economic Empowerment–an Orwellian title if ever one existed–with regards to foreign owners of mines. The second quote is U.S. President Obama discussing his hope for budget cuts and tax increases. Each of those phrases is more honest if “ask” is substituted for “force.”
Actually, that substitution doesn’t work as cleanly in Obama’s statement. In the first instance of “asking,” the government is taking benefits away that it currently provides; in the second instance of “asking,” the government is taking by force resources that are nominally owned by other people. Substituting “ask” for “force, or supplanting “ask” with “from behind a gun” reveals Obama’s linguistic trick in attempting to treat these very different activities as similar.
The lesson is simple: when I ask you to do something, or you ask me, it’s a request that either of us can refuse. When the government “asks” you to do something, you can’t. Of course, every mafia don will insist that a person could refuse their requests when it comes down to it, but that insistence does as much violence to the language as it does to the person who refuses.
Posted by Marc Hodak on June 28, 2011 under Reporting on pay |
Gretchen Morgenson doesn’t have to disclose exactly how much she makes–she just gets to toss misleading, scurrilous barbs at those who must for her base pleasure–but it’s reasonable to assume that the Pulitzer Prize winning columnist earned, all by herself, about 10 percent of the total income from operations of the New York Times in 2008! In fact, she earned more than the shareholders did that year! In fact, she personally out-earned her company’s shareholders for two of the past five years!! That’s 20% of the time!!! What does all this mean!!!?
Nothing.
Not any more than the other useless comparisons she bandies around in her latest article on executive compensation, where she praises a study that compares executive pay to items like the GDP of third world countries, or random items off the income statement. Alas, these comparisons don’t have to mean anything if their real purpose is nothing more than “to get people fired up,” which is the explicit aim of this exercise. I have to admit, it did kind of get me riled up.
Posted by Marc Hodak on June 22, 2011 under Governance, Scandal |
I’m not sure if that is what this union officer meant by this:
“We fight for our pensions and paychecks the same way C.E.O.’s fight for theirs,” said Scott Diederich, a lifeguard and president of the Laguna Beach Municipal Employees’ Association.
That is, the head of a lifeguard union whose head lifeguard just retired at age 57 with a pension of $113,000 per year.
Anyway, there are a couple of interpretations of Mr. Diederich’s statement. The most innocent interpretation is: “Everyone has a right to negotiate hard for what they want.” True enough, and the reason I believe that “greed” is a peculiarly weak accusation against people who end up with more by dint of their preparation and hard work.
However, there is another interpretation. Most unions characterize the negotiation between CEOs and boards as a form of self-dealing. They believe that directors are generally cronies of the CEO, belonging to the same country club, sitting on each others boards, or, worse, that CEOs have the power to boot dissident directors who might not “play ball.” Leaving aside the gulf between that out-of-date stereotype and my experience in dealing with modern boards, the implications of Mr. Diederich’s statement is that he is condoning a form of, “Everybody does it.” Not as noble a sentiment.
It’s a subtle difference. On the one hand, someone is taking advantage of their leverage in a fair game–we’re not all born or made equal with regards to what is needed to win at a particular game. (Luck plays a role, too–my parents were obviously way wrong in denigrating my ambition to become a Cali lifeguard.) On the other hand, someone is taking advantage of their ability to alter the rules of the game to favor themselves. People have trouble with that.
When we complain about CEOs extracting money from pliant boards, the proper focus is on the system of governance that allows such a thing to happen. That focus has led to immense changes in corporate governance over the last 20 years. Now, attention is turning to the influence of public sector unions over the bosses they help elect, teeing up that system for changes. I expect unions to fight those changes every bit as much as the good ole’ boys resisted changes to our board culture. But when you give up the moral high ground with an “everyone else does it” explanation for a scandalous outcome, your power to prevent change measurably drops.
Posted by Marc Hodak on May 11, 2011 under Innumeracy |
Greece is out of cash. You would think that the land of Aristotle, Demosthenes and Euclid could do better than this:
Vassilis Theodorakopoulos, a 53-year old dental technician who works for the country’s main public health-care fund, said he was protesting a 20% cut in his salary, as well as a plan to expand the working week for public servants to 40 hours—in line with the private sector—from 37.5 currently.
“Personally, I don’t think there should be a difference between the public and private sector,” he said. “What we are fighting for is a reduction in private-sector working hours.”
He said he also objects to a plan by the government to eliminate free dental braces for children, his specialty, as part of its health-care reform.
That last part actually makes sense, at least in a world where one’s income is driven by politics. If I were an economics professor employed by the state, I’m sure I could make an excellent case for spending big,big bucks to raise economic literacy, using quotes like the one above to support my case.
Unfortunately, you can’t spend money even on important things when you have no money left. When that happens, then you see what is really important to those in power.
Posted by Marc Hodak on May 10, 2011 under Executive compensation |
Larry Ribstein notes a questionable allocation of scarce SEC resources:
The SEC brought in Hu, a widely recognized expert on financial regulation, in response to its embarrassing Madoff failure. The Reuters article discusses some reservations about how much Hu accomplished, but I want to focus on another issue it covers: the price of Hu’s services.
The SEC let Hu call Austin home, then paid him to travel between DC and Austin and to stay in temporary housing in Chevy Chase.
The SEC allocated nearly a quarter of its entire travel budget to this one expert. Furthermore, the amount they paid his university in salary reimbursement and contributions to his benefits exceeded the cap on federal employee salaries for SEC division heads.
The point is not whether or not Hu was worth it. His SEC commissioners made that determination, and one ought to give them the benefit of the doubt. I’ve been involved in countless negotiations where getting the “right” guy or gal meant paying all sorts of travel-related expenses that the board considered worth it compared to the value of the services they were expecting to receive.
Ribstein makes the point that when the majority of SEC is looking at similar determinations by corporate boards, they feel that such decisions should be second-guessed by outside shareholders. He then suggests:
I suppose it’s too much to expect a national referendum on SEC pay. But shouldn’t we at least give Congress a say on SEC pay? If anything it’s more justified here, since investors can simply sell or decide not to invest in companies that pay too much, but what’s the taxpayers’ remedy for excesses by the SEC?
Of course, Congress does indirectly, but powerfully, have a say on SEC pay. I would suggest (and Larry would likely agree) that Congress is all too willing to focus on relatively inconsequential amounts, like the extra hundred thousand that the SEC may have used in their best judgment to attract Dr. Hu, while ignoring the hundred thousand dollars that the government spends every second that they tie themselves up in such deliberations. In adopting Say on Pay, Congress was merely spreading the fun of second-guessing the immaterial executive awards to institutional investors who are generally poorly equipped to make such distinctions, and should be much more concerned about what they are getting from their managers than what they are giving them.
But if they don’t like what’s going on with their CEO’s pay or policies, investors can cut loose their shares without having to permanently leave the country.
Posted by Marc Hodak on May 6, 2011 under Executive compensation, Governance |
Well, not a rabbi, really, but the CEO of a Jewish organization, along with the others “will be there to press Goldman Sachs Group Inc. to evaluate whether it’s paying executives too much.”
“When we see CEOs earning over 300 times more than the typical worker, it raises serious questions for shareholders on whether they are really (that) valuable,” says Sister Nash, who has been a nun for 50 years.
I personally have no doubt that Goldman’s executives are paid way too much. I have somehow found a way to be reasonably happy and secure with my relatively paltry income, so why do they need so much? I can only imagine how it must look to nuns, who have taken a vow of poverty.
But that, of course is my personal, not my professional, opinion. I can’t render a professional opinion on Goldman’s pay because I don’t know what information the board had about:
a) Agreements, explicit or implicit, that had been reached between these executives and their (quite independent) compensation committee
b) The likelihood of losing key executives to hedge funds, where they could each make multiples of what the top five made together
c) The impact on the company’s returns if one or more of these people left
The latter gets to the heart of how valuable these executives are relative to the “typical” worker.
Goldman has a market cap of about $82 billion. Its shareholders understand that the firm recently survived a financial tsunami, is now dealing with the radioactive Frank-Dodd aftermath in the midst of market and regulatory shifts that are transforming the global financial industry. The “typical worker” is not going to have much impact on how Goldman Sachs strategically and organizationally responds and adapts to these changes for the benefit of the shareholders. So, the relevant question is this: Is it possible that the difference in outcomes between what this management might achieve versus the next best management team that the board might lure could be something in the range of $69 million?
If the Sisters of Saint Francis asked God, “would losing your dear, unconverted son, Lloyd, in favor of his next best make a two hundredth of one percent difference in the GS stock price?” and the Lord replied, “Yea, my children, losing Lloyd would make 10 times, nay 15 times, that difference,” would they then go back to the board and insist that they increase management’s pay? Would they do that for the sake of the shareholders?
Posted by Marc Hodak on April 26, 2011 under Movie reviews |
Unlike Ayn Rand, I will quickly get to the end of the story: if you are an Atlas fan, or at least someone with strong libertarian sympathies, you will probably like this movie. You will think the screenplay was a reasonably faithful adaptation of the novel, and may even appreciate the degree to which it wasn’t, leaving out as it did much of Rand’s clunky dialogue. You will think the scenes were visually rich, and the characters were superbly acted. You would be generous, forgiving, perhaps charitable, in your critique.
If you hate Rand, or what you think Rand stands for, then you are likely to be objective, unforgiving, even ruthless. Being in a skeptical mode, you will notice the residual unwieldiness of the screenplay (you simply can’t purge Rand’s writing from her story). You will think that the visuals are cheesy, especially against the standards of modern epics being made for ten times this film’s budget. You will think the acting looked forced because acting generally looks forced when you’re simply not into the story, and you refuse to view this film with the suspension of disbelief that one might normally accord to a cinematic experience.
This simple difference in perspective is very likely why 85 percent of the people who saw this film liked it, and 95 percent of the professional critics hated it. The degree to which critics hated it worse than the viewers like it may account for the legitimate flaws in this film, but more likely that difference is caused by the mismatch between the medium and the message. Rand’s writing style is more Dostoevsky or Tolstoy than, say, John Grisham. Turgid, Russian novels are her literary heritage, and something no sane, modern Hollywood producer would consider committing to celluloid. I’m frankly amazed that producers Harmon Kaslow and John Aglialoro did as well with it as they did.
To paraphrase Mad Men’s Don Draper, “When a man walks into a theater, he brings his whole life with him.” One can claim that they are only reviewing the film on its artistic merits, but reading their reviews and seeing the audience data, their protestations ring hollow. At no time is that pretense laid more bare than when they compare the Atlas Shrugged movie unfavorably against the insipid 1949 production of The Fountainhead. Gary Cooper couldn’t save that hulk. Patricia Neal looked positively psychotic. I contrasted that with Grant Bowler’s sharp performance as the uncompromising Hank Rearden, and Taylor Schilling’s compelling ice princess portrait of Dagny Taggart. They were a pleasure to watch.
I’m not hopeful that this film will be a commercial success. It may not really be good enough for that. I’m certain it would offend Rand’s sensibilities, everything she stood for, really, for her fans to encourage others to see the movie to artificially boost its returns in the hope of getting the sequels done. Ironically, if the film’s parts two and three get made, it will likely be for non-commercial reasons. Could a true Objectivist live with that?
Posted by Marc Hodak on April 17, 2011 under Unintended consequences |
And why should they? They didn’t write Dodd-Frank. But they did lobby relentlessly for greater regulation of, and therefore greater control over, hedge funds. Which led to this:
Jamie Nash, a hedge-fund lawyer in New York, said some start-up managers are nervous that they won’t be able to build an operations or compliance system that meets the SEC’s expectations.
The regulations “are erecting barriers to entry,” Mr. Nash said. “That is going to cause consolidation in the industry of smaller managers into larger managers who have the infrastructure and can afford this.”
A spokesman for the SEC declined to comment.
So, the government decided it had to increase regulations the one part of the financial services sector–hedge funds–that had nothing to do with the financial crisis. And because the government felt compelled to spend gobs of taxpayer cash to bail out financial institution that were too big to fail, Congress created a raft of regulations whose main effect will be to crush entrepreneurship and compel waves of consolidation.
And the people who pushed for this regulation, who inadvertently insisted that the fixed costs of doing business in America are not yet high enough, will be shocked to find that only the big survive. They likely will blame the big companies for the lack of real competition, or they will blame capitalism. They may even blame the economics profession or discipline itself.
Posted by Marc Hodak on April 10, 2011 under Executive compensation, Reporting on pay |
Only, the audience for this announcement wasn’t the shareholders; it was the angry Dutch public:
“Regrettably, I have to conclude that the variable compensation for 2010 threatened to damage the slowly recovering confidence among customers and society,” Mr. Hommen wrote in a letter published Tuesday in Dutch daily De Volkskrant. “I hope that this shows that we take criticism on ING seriously and that we are willing to act accordingly.”
The only thing the bonuses threatened was how Jan Hommen, the afflicted CEO, looked in the media. Mr. Hommen tossed the bonuses back to the company because the mob was angry, and European leaders–both public and private–have an unfortunate history when it comes to angry mobs.
It’s hard to blame the people. They equate bonuses with good performance, and being bailed out and on the public dole with bad performance. So bailed out companies still on the dole and awarding bonuses to management does not compute in the calculus of media-driven public awareness. In the calculus of competition, which the media ignores and is largely invisible to the public, companies need talent. A big part of getting and keeping that talent is total compensation. In that context, the distinction of variable compensation, e.g., bonuses, is not very helpful–total compensation has to be enough to get the good workers. If those workers are individually performing well, even in a crappy bank, you risk losing them and making the bank crappier by failing to give them their bonuses.
Of course, one could argue that the calculus of competition means letting banks fail when they get into trouble, and you wouldn’t get any argument from me. Bailing them out and underpaying their best talent is just a way to slow the dying process, making it much costlier to taxpayers in the short run, and creates moral hazard and misallocated resources that make it far costlier to society in the long run.
Posted by Marc Hodak on February 28, 2011 under Invisible trade-offs, Unintended consequences |
A story today describes how start-ups are having problems:
Internet start-ups across Silicon Valley are struggling to compete for talent amid the investment frenzy gripping Facebook Inc., Twitter Inc. and Zynga Inc., with many smaller companies beefing up pay and recruiting and wading into the private-company share market to keep pace with their larger rivals.
Silicon Valley is full of world-class engineers sleeping on futons and living on ramen noodles. These (mostly young) people accept company paper instead of the decent cash that their talents could easily justify for the privilege of toiling 14 hours a day in untested ventures. This system depends upon well-functioning equity markets to secure this manner of devotion. Public equity markets enable those making the gamble to see the payoff sooner. Bill Gates has said that Microsoft never needed the public capital for investment in growth; the company went public to so that its 10,000 paper millionaires could become actual millionaires. Many of them would go on to fund or work in other start-ups, and their example has fueled many more.
Today, our IPO market is broken. That avenue of exit has been crushed by the weight of governance regulations, especially Sarbanes-Oxley. These rules were intended to restore confidence in our public markets. They have, instead, prevented ordinary people from investing in maturing companies like Facebook, Twitter, or LinkedIn, and hampered the ability of companies like that to attract the talent they need to get going. Such companies are now forced to go to private markets for liquidity, markets that are far less accessible to smaller firms than IPOs used to be.
We will never know how many Microsofts or Apples have not been able to get off the ground since 2002–the year SOX was passed–or may not in the future, because of the higher cost of securing needed talent. Unfortunately, the people who proliferate these rules like Topsy are not accountable for what doesn’t get created.
