Richard Posner, a judge of the U.S. Court of Appeals for the Seventh Circuit, recently opined that the art of determining CEO pay and mutual fund fees has gone to hell, and a lot of people are getting ripped off. Eliot Spitzer read the paper (the link for which is suspiciously not working) and gleaned that Posner currently believes "the market is so broken that it can't be properly trusted on those two critical issues." And our future Attorney General liked that. A LOT:
...when I read an opinion authored by Judge Posner saying that the market is arguably incapable of either setting CEO compensation or determining mutual-fund fees, my first reaction was to put the document down, rub my eyes [Ed: Eyes? Please.], and check the authorship again. Then I read on, with increasing incredulity--and pleasure.
Following the self-love session, Spitzer gets down to business, asking "where does Judge Posner's reasoning take us?" and answering "Two remedies jump to mind." The first is, by Spitz's own estimation "retrospective and clumsy" but that's not the point, the point it is to take a trip down memory lane while muttering "told ya so":
Shareholders can go to court--suing the enriched executives and board members who participated in the process--to reclaim compensation or fees that were so excessive as to violate fiduciary duty. Indeed, when I was attorney general of New York, we successfully reclaimed billions of dollars of mutual-fund fees for the shareholders of many mutual-fund companies on just this theory--yet were criticized by the intellectual allies of Judge Posner for doing so.
Among those who could and should go into court to recoup these funds are now the various government entities that are shareholders of companies with excessive compensation. These entities are in some cases recent investors as part of the bailouts or longtime investors through government pension funds. Government shareholders have rarely exercised their rights to be heard on critical management issues. Comptrollers and others around the nation who are stewards of the pension system have been hesitant to pursue these remedies--in large measure, I suspect, because courts have traditionally been so deferential to the "business judgment" of management. Judge Posner's frank admission of market and management failure may cause courts to rethink the wide berth given to laissez-faire capitalism.
The second is less about him and more about telling people to WAKE UP!
The second and better remedy is not to rely on a few individual court cases that might succeed or fail--or for random regulations to be issued by government entities setting compensation standards. It is, rather, for boards, compensation consultants, and shareholders finally to awaken to their duties. If there is to be a revival in our corporate-management structure, it must begin with these stakeholders. They must insist on far greater transparency and far stricter evaluations of CEOs, eliminating the year-end congratulatory assessments that seem untethered to any economic reality.