Bonus outrage poor excuse for good public policy

March 23, 2009
The wages paid by a company to its employees are a distinctly private matter. Government has no competence (legally or practically) in this area, and should remain officially detached from the matter.

That does not mean we cannot be outraged by the decisions executives make about wages, bonuses, retirement plans and golden parachutes. Indeed, fury is the emotion of the day and we should be surprised if our elected leaders, from President Obama on down, remained silent on the matter. But outrage and calumny are poor motivations for public policy.

The current disgust is rightfully aimed at executive bonuses at failing insurance giant American International Group. This company persists in giving huge bonuses even though it was among the first recipients of the "too big to fail" bailout programs that began late last year.

These bonuses are doubly hard to swallow since many of them consist of more money than most of us will make in a lifetime of hard, honest work. This is simply poor moral leadership from the board of directors on down.

But the problem does not end with AIG. General Motors Corp. and Chrysler LLC have both received huge federal bailouts. Both corporations have been driven into a catastrophic state in large measure due to labor contracts with the United Auto Workers. Company-paid health care benefits and 30-year retirements doomed both companies long before the quality of their cars became a staple of late-night TV jokes.

In both cases, the free markets should take care of the poor decisions by these firms. For example, the breathtaking decline in unions over the past 25 years is largely due to workers rejecting the job-killing environment that comes with union membership. Indeed, if UAW membership follows the trend of the past three years, it will be gone by 2012. This is the market working to clean house.

Unfortunately, the mechanism to clean up poor decisions by corporate boards is far less advanced—this, despite the fact that the problem was noted as far back as the 1930s in a book by two Harvard professors, Adolf Berle and Gardiner Means. I think I have a partial solution that's tailor-made for the Internet age.

A private-sector group, like Underwriter's Laboratory, needs to track corporate board members. The votes of individual board members would be followed and reported annually (this would require a change to Securities and Exchange Commission rules). This would be useful information for institutional investors as they pick and choose investments. Indeed, it is institutional investors as well as labor groups who should fund this effort.

This system wouldn't be perfect. After all, we do the same for lawyers and physicians, and malpractice still exists. However, this would be a huge step forward in improving corporate boards.

Further, it might prevent us, in the future, from wasting our time and emotions on shameless fools like those running AIG.


Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at 
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