Saturday, May 25, 2019

Executive Compensation Tied to Firm Performance: A Critique

With robust economies in America boosting companies’ sales, corporate tax cuts, and an increase in stock buybacks lifting stock prices in 2018, the default mantra in executive compensation circles that high CEO pay is justified if it is tied to firm performance could be questioned. Similarly, the typical assumption that high pay would have to get higher for a CEO to be motivated to do the basics of the job, including overseeing mergers and acquisitions, (or that doing the basics warrants a raise) could be questioned. Particularly in 2018, the comfortable, self-serving ways of the business elite in the U.S. were ripe for critique.

An analysis by The New York Times shows that the medium compensation for CEOs in 2018 was $18.6 million, which represents a raise of $1.1 million, or 6.3%, from 2017.[1] Meanwhile, the average private-sector worker got a 3.2% raise, which translates into 84 cents per hour. In short, the CEO compensation increased at almost twice the rate of ordinary wages. The question is whether the increase was justified or a matter of the American business elite taking care of their own.

Years earlier, Congress had given shareholders of American companies a “special but nonbinding vote” on the ratio of a CEO’s pay to that of the medium employee.[2] The nonbinding feature meant, however, that populism would have no weight in corporate boardrooms. If lawmakers had been motivated by corporate campaign contributions, the nonbinding nature of the vote suffered from the start from a conflict of interest exploited by the political and business elites.

Even the (pro-active?) response of corporate boards to pressure from some shareholders and advisory firms is problematic even though it seems to make sense from business perspective. Boards have been tying more of a CEO’s pay to the company’s financial performance as if the CEO has a big impact as distinct from structural forces such as a good economy or a tax cut that help companies’ bottom lines and stock prices. Boards “continue to act as if C.E.O.s have unique powers to deliver better returns.”[3]  

For example, Testla’s board approved compensation as much as $2.3 billion for Elon Musk, the CEO. To be sure, the company’s market value would have to increase 18 times to $650 billion for Musk to see get all “the options in the award.”[4] The board members tied the high compensation to company performance so he would “devote his time and energy” in Tesla rather than “wander to his other ventures, like SpaceX, or that he could leave Tesla altogether.”[5] As pointed out by the Times, this logic is flawed, for he already “owned roughly a fifth of Tesla, [so] his financial interests were already strongly aligned with the company,” according to Analysts for Institutional Shareholder Services.[6] Additionally, a highly paid CEO (without counting the 2018 award, had it been awarded) should be expected to be motivated by the high pay alone (without a 6% raise) to devote a lot of time and energy to the job. To be sure, Musk was at the time considered a visionary at the company. However, using tied-to-firm-performance to motivate him to show up each workday suggests that the criterion or basis undergirding executive compensation is problematic—and this doesn’t even take into account the matter of getting compensated more because of a tax cut or a strong economy, neither of which a CEO should get credit unless he or she had made the political contribution that got the corporate tax cut passed.


[1] Peter Eavis, “It’s Never Been Easier to Be a C.E.O., and the Pay Keeps Rising,” The New York Times, May 24, 2019.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.

An Institutional Conflict of Interest in Corporate Governance: The Case of Goldman Sachs

In September 2011, a pension fund representing U.S. government employees filed a shareholder proposal to strip Goldman Sachs CEO Lloyd Blankfein of his other post as chairman of the board. According to Reuters, “The pension plan of the American Federation of State, County & Municipal Employees said on Wednesday an independent chairman would provide checks and balances in the power structure at the largest U.S. investment bank. AFSCME said splitting the roles of CEO and chairman might have prevented Goldman from getting into trouble for its actions leading up to the financial crisis and will improve its stock performance going forward. ‘A strong, independent Board chair would focus Goldman on generating long-term value for its shareholders,’ AFSCME President Gerald McEntee said in a statement.” Goldman spokesman Stephen Cohen responded, “We think we have a robust governance structure in place, with a very effective independent lead director. We always listen to our shareholders, so it is disappointing that AFSCME decided to go to the media before raising the issue with us.”[1]

Analysis:

One of a board of directors’ main functions is to monitor the performance of the company's management, including the chief executive. It follows that for the same person to serve concurrently as CEO and chair of the board constitutes an institutional conflict of interest in that the CEO is in charge of the group that serves as a check on the CEO. There would also have been a conflict of interest if AFSCME had taken its complaint up with the management, which is under the CEO. No group should thus be left to have the final say on complaints about the group (and especially its head). 

Goldman’s management pointing to a “lead director” as somehow providing a check on the CEO ignored the fact that that director was under the board’s chair, who was also the CEO. The management’s claim that the firm had a “robust governance system” thus rings hollow; robust systems do not contain an obvious conflict of interest. Nor should instituting them depend on there having been bad performance. However, practically speaking, anything less would have been insufficient to prompt the appointment of a new chair at Goldman.

At the time of the proposal, Goldman shares already had dropped 38 percent in 2011, compared with a decline of 43 percent for its chief rival, Morgan Stanley. The other four biggest U.S. banks were down 21-48 percent. Aside from relative financial performance, the hits to Goldman’s reputational capital since September 2008, including paying a settlement on a fraud claim, suggest that Goldman’s shareholders could have benefited from a check on the bank’s management. Unfortunately, AFSCME directly held 7,101 shares of Goldman, worth $741,000 at the market prices at the time, according to pension fund spokesman Chris Fleming. AFSCME's 1.6 million members owned 2.5 percent of Goldman's outstanding shares, worth $1.325 billion.[2] Other institutional investors would have had to be persuaded, and absent bad financial performance, achieving a majority would have been difficult.

My point is simply that recognizing the chair of a board as an inherent check on a company’s management ought not depend on the owners of enough shares being persuaded by bad financial performance. Every company should have the institutional structure of a robust governance system, rather than one containing a blatant conflict of interest. If the problem is managements having too much power in corporate governance, using corporate governance or legislation to reduce that power is apt to be a non-starter. Going to management for the reform would be sheer insanity. Expecting Lloyd Blankfein to voluntarily give up the chairmanship at Goldman in 2011 would have been tantamount to waking up one morning and expecting people to no longer be concerned with power and even their own self-interest. The U.S. Constitution was designed in large part to counter ambition with ambition rather than assuming that people with a lot of power will act selflessly. Perhaps corporate governance could take a lesson from government. 


1. “Goldman Should Strip Blankfein of Chairmanship, Pension Fund Says,” Reuters, September 14, 2011. 
2. Ibid.

Wednesday, May 22, 2019

A Far-Right "States' Rights" Ideological Depiction of the European Union Critiqued

Roughly a month before the 2019 elections of the representatives in the E.U.’s Parliament, Matteo Salvini, the leader of an anti-immigrant party at the state level in the state of Italy, announced the formation of a far-right party—also anti-immigrant—at the federal level. Because far-right parties at the state level are dubbed “nationalist,” at least by The New York Times, that paper suggested at the time that such nationalist parties federalized can seem “incompatible with a transnational body.”[1] I submit that any such thought of even apparent incompatibility stems at least in part from a lack of understanding of the E.U. itself, as well as federalism and thus the place of states from the perspective of the federal system rather than a state. In short, the paper implicitly took the perspective of the states in writing about the upcoming election. The paradigm chosen by the paper reflects the far-right ideology in the E.U., and is thus not neutral. In fact, the slant is inherently helpful to the Euroskeptic and anti-immigration political agendas.

The paper’s uses of nationalist and transnational, for example, are misleading. Both terms imply that the E.U. is an international organization, or “bloc,” which was not the case even when the E.U. came into existence.  We can translate the term “nationalist” as used by the far-right parties in terms of two senses relevant to the federal level. The term could mean “Euroskeptic,” or, in American terms, “anti-federalist.”[2] Euroskeptic, unlike nationalist, is a term from the perspective of the E.U. because a Euroskeptic is a person who wants less power at the federal level and more at the state level. Nationalism, on the other hand, is a stand-alone term without implicitly or explicitly suggesting the existence of a federal system. In fact, nationalism implies a sovereign rather than a semi-sovereign state. In the cases both of the E.U. and U.S., complete governmental sovereignty encompasses that of both levels, hence both federal unions are nations even if not recognized as such.  In discussing a federal election, terms that make sense in terms of federalism should be used.

No contradiction exists in having an anti-federalist or Euroskeptic party active at the federal level. In the U.S., the anti-federalists became Thomas Jefferson’s Republican Party. Having a weaker central government paired with stronger state governments as the central pillar is consistent with federalism because ending the federal system itself is not being advocated. In contrast, a nationalist party at the federal level does not make sense unless the federation is a confederation of totally sovereign states, which does not apply to either the E.U. or U.S. because of the feature of dual sovereignty (i.e., both levels have some governmental sovereignty). Whether most of the sovereignty is at the state or federal level does not matter; in both cases, neither level has all of the sovereignty. If a nation has full national sovereignty, then the affairs of semi-sovereign states in a federal system cannot be labeled as nationalist. In such a system, and from its perspective, using nationalist to refer to the state level is incorrect. Neither does the national-transnational divide apply because transnational organizations do not themselves hold even some governmental sovereignty. Simply put, the E.U. is not an international or transnational organization, even if “nationalist” ideologies at the state level want to insist otherwise.

Besides meaning Euroskepticism in regard to federalism, nationalist can also refer to an anti-immigration platform. In 2019, the Republican Party at the federal level in the U.S. was strongly anti-immigration, especially in the White House. Both how many immigrants are allowed and the respective involvements of the state and federal governments are matters that involve federalism, rather than only the states. So to equate anti-immigration with nationalism at the state level is flawed. In fact, to use nationalist for either Euroskepticism or anti-immigration is faulty because “national” concerns do not reduce two platform items. In other words, the term is too broad for its use in characterizing the federal involvement of either a state-level or federal party at the federal level. I suspect the term was being used anyway as a way of furthering the far-right ideology. As noted above, even the media was implicitly (or intentionally) helping.

As for the E.U. being “transnational,” this term is a misnomer. To be sure, the European Council represents the state governments just as the U.S. Senate does. Both the Council and the Senate can be said to be transnational in that the member-states are semi-sovereign. Both bodies are based on principles of international law. For example, polities rather than individuals are the members, and thus represented, in the bodies. Qualified majority rule in the Council and the filibuster in the Senate reflect the fact that the respective members retain residual sovereignty. By the way, qualified majority voting is itself one way in which the federal level of the E.U. has some of the sovereignty in the federal system. Enumerated competencies (in the E.U.) and powers (in the U.S.) are another source of federal-level governmental sovereignty. In contrast, transnational bodies such as NAFTA and NATO do not have governmental sovereignty.

Another, glaring (i.e., because the Times was reporting on the Parliament’s upcoming election) reason why the E.U.’s federal level is not transnational centers ironically on the E.U.’s Parliament.  Unlike the Council, the Parliament consists of direct representatives of E.U. citizens rather than of the states. That each state has so many House seats in the U.S. and Parliament seats in the E.U. does not mean that the seats represent the states or that the state governments pick the representatives. Even though Americans vote for a specific candidate whereas Europeans vote for a party, the elected representatives in both cases represent the citizens rather than the states. This corresponds to the notion of direct effect, which means that federal-level governmental institutions can bypass the state governments in affecting the citizens directly. Transnational bodies and even international confederations, such as the ancient Spartan league and the early-modern U.S. Articles of Confederation, do not have legislative bodies that represent and have direct effect on citizens rather than the member polities.[3] 

In fact, whereas the U.S. Senate and the E.U. Council are predicated on modified international law, the U.S. House and the E.U.’s Parliament are national in principle, both in terms of citizens being directly represented and direct effect. The appellation of national to a federal-level institution may seem strange to many Europeans in 2019, but Americans had the same reaction during at least the first fifty years of the United States because, like the United Colonies before, the U.S. was commonly viewed on both sides of the Atlantic as an empire.[4] In fact, the members of the British Empire, whether Ireland or Virginia, had their own legislatures for domestic legislation.

Therefore, transnational is a misnomer in referring to the federal level of the E.U. Reflected in its federal institutions, the E.U., like the U.S., is actually a national/international hybrid at the federal level. Both citizens and polities are represented, and governmental sovereignty is split between the federal and state levels.

Regarding the body in the Times’ term, “transnational body,” to characterize the E.U., again the intent or implication is to diminish the legitimacy of the federal legislative, executive, and judicial (i.e., governmental) institutions in line with the far-right ideology. The E.U. is not itself a “body.” Rather, the federal level has several bodies, or institutions. The European Parliament, the Commission, the European Court of Justice, and the European Council (and the Council of Ministers) are all governmental bodies at the federal level. They all have institutional interests going beyond particular state interests and even the summation of state interests, for in a federal system, both levels have their own distinct interests. Applying logic to counter ideology, the E.U. itself cannot be a body because the federal level contains several governmental bodies. Furthermore, to claim that the E.U.’s federal level reduces to one of its bodies, or even an aggregation of them denies the distinct interest of a federal level, which can be at odds with state interests.

So the “confusion” regarding the E.U. that The New York Times reported as one of the reasons why voter turnout had dropped in federal elections (i.e., of representatives in the E.U.’s Parliament) is in part caused by intentional misnomers. These tend to reflect an anti-federalist ideology that views the federal level as something less than a government whereas all legitimate legislation is promulgated at the state level. Hence the states are nationalist whereas the E.U. is a transnational body rather than national in part. The term nationalist is used problematically instead of Euroskeptic or anti-immigration, and the term transnational body and even bloc are used rather than federal level or even federal government. “Blocs” do not have legislatures, executive branches (the Commission), and a Supreme Court (the E.C.J.) as well as competencies in a variety of domains in addition to trade and even economics. To refer to the E.U. as a “bloc,” like a trading bloc (and where did the k go?), essentially denies the political development that differentiates the EEC from the E.U. Specifically, the federal competencies of the E.U. extend beyond economics and trade and the federal system itself fits under modern federalism wherein sovereignty is split and the federal level has direct effect (and a legislative body based on national rather than international principles), rather than under confederalism wherein the member-countries are sovereign (e.g. the UN).  I submit that the terminological “mistakes” fit and thus implicitly advance an anti-federalist or Euroskeptic ideology that seeks to minimize the onslaught of federal legislation by going after the credibility of the E.U. itself.


1. Megan Specia, “European Elections 2019: How the System Works and Why It Matters,” The New York Times, May 21, 2019.
2. See Ralph Ketcham, The Anti-Federalist Papers and the Constitutional Convention Debate (New York: Penguin, 2003).
3. Althusius’ text on historical federal thought, based in large part on the Holy Roman Empire, clearly demonstrates that each level in a confederation acts only on the next lowest. Only the guilds act directly on the individuals. See Althusius’ Politica (Indianapolis: Liberty Fund, 1604/2010).

Monday, May 20, 2019

NASA and It's Contractors: The Challenger Disaster

Roger Boisjoly was a booster rocket engineer at a NASA contractor, Morton Thiokol. Boisjoly blew the whistle both within the company and to NASA regarding the danger of the rubber in the o-rings, which seal the connections in the shuttle’s rockets, being insufficiently elastic in cold weather. Although The Challenger Disaster (2019) is not a documentary, the film’s narrative, which centers on Roger, or "Adam," is oriented to understanding why the Challenger space shuttle exploded after being launched on January 28, 1986. In other words, although some names are different and the conversations are not verbatim in the film, the factors that contributed to the actual explosion are presented. In fact, the film leans too much on technical details before the disaster and legal arguments afterwards without adequate entertaining elements to make the film enjoyable. However, the film's political function in informing a mass market of why part of the government-business system was broken is valuable. In fact, this mission demonstrates that the medium of motion pictures is capable of aiding in social, political, economic, and religious awareness and education, and thus development. 

The full essay is at "The Challenger Disaster."