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Corporate shareholders should demand more

February 9, 2009

Have America's business leaders lost their moral compass? In the face of widespread economic pain, will they finally get the message?

One could view the past 15 years or so in our country as a reprise of the century-old era known as the "Gilded Age." In the late 1800s, the U.S. economy experienced vast wealth creation driven by rapid industrial growth.

The Vanderbilts, Rockefellers and Carnegies led the charge, overseeing massive infrastructure improvements that modernized our economy. Along the way, they also indulged in conspicuous consumption, leading to uproars over their opulent lifestyles with critics labeling them "robber barons."

A hundred years later, our generation's improved standard of living has been marked by rapid technological change and financial innovation. Leaps in technology have improved our lives, and fortunes have been made by the entrepreneurs who created and grew those businesses.

On the other hand, much of the financial innovation in our gilded era has been an abject failure. Worse, a disproportionate amount of the wealth migrated--or you might say was transferred--to the robber barons of today. How else does one explain the Hamptons and a zero-percent return on the S&P 500 over the last 11 years?

A new class of ultra-wealth rose up as corporate execs issued stock options and installed retirement packages that would make Rockefeller blush. The denizens of Wall Street created complex financial products and collected exorbitant fees while leveraging their businesses with obscene amounts of borrowed money that saddled our economy with huge risks.

And now comes the American taxpayer, checkbook in hand, to bail out the scoundrels. Not missing a beat, more than a few had the audacity to take the public's money and push through bonuses, buy planes, name stadiums and throw expensive parties, in what is tantamount to conducting a ponzi scheme right before the public's eyes. At least Madoff had the decency to try to hide his scam.

Corporate America is in dire need of a cultural renaissance. New demands on compensation are taking shape in our government, which has become an angry shareholder, reflecting the mood of the country. Free marketers cringe at the thought of government interference, but the fact is that the taxpayer is now a significant shareholder in a number of financial businesses. No one is pleading for socialism, but the robber barons have pushed too far.

Pay for performance is a fair compensation system when implemented to cut both ways--when people are paid very well when performance is great, but not so well for poor performance (even performance that turns out to be poor over the long run).

It's not difficult to design pay schemes that award on long-term results over, say, three- to five-year periods. Solutions might include "clawback" provisions, which confiscate pay earned in earlier years that was found to be earned on false performance, like the fees earned by Wall Street firms during their subprime securitization spree.

In general, America's corporate boardrooms are ineffective and beholden to management. They hide behind consultants, whom they hire, and who design their compensation packages. Boards should be populated by focused, independent thinkers who take the responsibility of holding management accountable and who work for the shareholders.

Now is the time for shareholders to rise up and assert their ownership voice in American business. With time, our economy will recover, and we should want our compass pointing in a direction that provides mutual benefits for all stakeholders.
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com. >

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