Taking Risks, Executive Pay, Pointing Fingers And Betting The Farm

One interesting development now that my daily traffic is in the commercial category is I’m getting emails from PR and other professionals asking me to comment on their boss’ articles or review books and other columns in my blog. It’s flattering, but also holds a strong temptation. I can get complacent and just take what comes in and not go out searching for the nugget that no one else is writing about in quite my way.

I’m also getting information from slightly unlikely sources, that is publications that do not necessarily follow my party line. I’m not opposed to entertaining contrary opinions. I may be wrong on some points sometimes, but I doubt it. In the interest of enlivening the discussion though, I will point you to people who describe other viewpoints in an entertaining way.

I have written about executive compensation here and here and here. I can’t blame the executives. I, too, would make the best possible, most advantageous contract if I were going in as an executive at some of these risky companies, especially the financial firms.

In fact, I have a friend who recently was let go from a very risky company. He took a chance, went in with an employment contract, with no-fault exit clauses, a “prenuptial” of sorts for a time when the company and he no longer saw eye to eye. Unfortunately, the company may have made some huge mistakes and will pay even more, but that is a story for another day. In the end, as an executive, it’s your god-given right under our great capitalist system to negotiate the best deal for yourself in order to minimize your personal risks. It’s the Board of Directors whose job it is to make sure these contracts are not against the shareholder’s best interests. When the Boards get in bed with the executives because they are all part of the same club, well then, that’s where problems arise.

The editorial below was written by the Editor in Chief of The Deal. Please go to the site for more interesting articles from their perspective. Mr. Teitleman makes some points about who takes risks. Those that have it all sometimes start taking unnecessary risks. It’s called hubris. Arrogance and insularity develop. They believe they are immune from consequences. Dumb schmucks.

But the other side of the equation is the person who has nothing to lose. Mr. Teitleman’s example is Mr. Kerviel of SocGen. It’s a good one. I’ll add Mr. Dooley of MF Global. When you have nowhere to go but up and it can not get much worse, you sometimes bet the farm….

Companies underestimate individuals support networks. There are people who still will do the right thing regardless of the consequences. They are called professionals. Their belief in integrity and the standards that they live by overcome any concerns about the perceptions of their career and reputation in other’s eyes. Good people don’t go hungry or want for support. They can endure much in the name of right and will take what others consider huge risks to their career and professional life that those with zero integrity will not.

The Deal touts itself as:

“Voice of the deal economy”

Their Mission: The Deal brings unique perspective to corporate and financial professionals by exploring the complexities of transactions and their impact on corporate growth and the global capital markets.

Their Coverage Niche: The Deal reports, analyzes and disseminates business and financial news that offers fresh insights on the deal economy, a set of interrelated activities, focused on dealmaking of all kinds, whose purpose is to generate corporate growth in a continually changing global market.

I must have linked to them at one point…

News just in: Money matters. To be more specific, compensation matters. To be more weighty, comp packages determine everything worth determining. To be more ridiculous, comp arrangements in banking, on Wall Street, were the original sin that led to the current woes that weigh down our fraught little world. In the past few weeks, a number of pronouncements, one from a Federal Reserve governor (who just about defines weighty), argued this last ridiculous point. The Fed’s Randall Kroszner, according to the Financial Times, gave a speech that “highlights the extent to which policymakers believe perverse incentives helped to foster excessive risk-taking in the run-up to the credit crisis — and see the need for changes to banks’ compensation systems.” The most obvious point is that the Fed seems to be blaming pay for a crisis much of the world blames on the Fed. …

Did pay packages play a role in the bubble? Maybe. A manager who has no money socked away may be more prudent, than one with, say, $50 million. He needs the job. Of course, there’s always the Jérôme Kerviel Exception, but no matter. Where’s the magic line drawn? Well, that depends on psychology — age, expectations, habits, addictions — of managers. …The unspoken truth is that bank horizons have grown increasingly short-term as they increasingly did the bidding of, shhh, empowered shareholders. It’s so obvious, it’s amazing it has to be articulated. How can managers play long-term when shareholders demand short-term? Have you met Bill Ackman? I… But say Lloyd Blankfein strolled outside 85 Broad and announced a) Goldman was eliminating prop trading, b) getting out of businesses that compete with customers and c) designing compensation programs so senior managers have to wait a decade before getting rich enough to enter politics. Poor Lloyd couldn’t scamper back to the building before the crowd ripped him to shreds. That’s the reality. You can fiddle with comp; you can preach transparency; you can fret over moral decline. But as long as shareholders call the shots, as long as they bathe in the now, you’ve got preconditions for excessive risk, best practices be damned. But make the scheme voluntary. That’ll work.