Corporate Governance

Jon Macey and Socializing the American Economy: A Missed Opportunity

By Armin K. Sarabi

Jon Macey at Yale published an editorial in this weeks WSJ contending that the recent spate of congressional interference in the economy (mostly bailout money) was the "first step in an ongoing porcess to socialize American finance."  Its a provocative thesis.  Unfortunately, the essay is really little more than a litany of reforms in the corporate governance area that Macy does not like (and digs at people like Chris Dodd that have little bearing on this thesis).  The piece is particularly critical of say on pay, accusing the government of implementing a system that "shareholders have rejected in the past." 

Put aside that not all shareholders have rejected say on pay, the more salient issue is how criticism of the practice contributes to Macey's contention that finance is becoming socialized.  Moreover, Macey has, in the past, expressed almost talismatic reliance on the market to police all things wrong with corporate governance.  But surely there is widespread agreement that with respect to risk taking and executive compensation, the market approach has failed.  Yet his essay offers no solution other than snippets that suggest he would continue to rely on the market. 

Thus, he opposes limits on golden parachutes because "many top executives need to be pushed out."  The absence of golden parachutes "will lead to the kind of managerial entrenchment that has crippled the economy."  In effect, this is an admission that boards of directors cannot be counted on to replace inefficient management (something he acknowledges in his book, Corporate Governance, where he asserts that the CEO often has "captured" the board).  In other words, the current system doesn't work.  Moreover, to the extent that executives need financial inducements to leave, presumably they would prefer exessive inducements to stay and only take the exit package as a last resort.  In other words, Macey really opposes all mandated limits on executive compensation, a dicey position given the obvious excesses that have occurred in recent years.

No one, including this Blog, enjoys the government's deepening involvement in the corporate governance process.  The idea that the CEO of GM could only be ousted because the President of the United States essentially fired him is highly unfortunate.  But it reflects a failure of a corporate governance model implemented by Delaware and largely supported by academics like Jon Macey.  It is, therefore, no great surprise that he would criticize the government solution without mentioning the source of the problem.

Full post as published by The Race to the Bottom on April 15, 2009 (boomark / email).