WHAT IS TO BE DONE? START WITH THE BOARD

Whenever I see Bernie Sanders on TV and hear his proposals for income equality, all I can think is ‘This is what we are going to get if we don’t put something effective in place soon.’

If all I have posited in the Skim and Partial Ponzi is correct, then the road to reform comes through executive compensation.  While this has long been mentioned as a solution, the overwhelming focus has been on purely reducing/cutting it, and/or nebulously tying it to some performance formula.  So far any such changes have clearly not worked, as their has been a huge and continuing wealth transfer in corporate America from the 99.99% to the .01%.

So let’s take a very small step by starting with the people who determine executive pay: The Board of Directors (BOD).  Being a director on a corporate board should be viewed as quasi-volunteer work.  Back in the old days (pre-1980 for a number), serving on a corporate board was viewed as an honor and a responsibility.  It was something a person did for altruistic purposes, to give back to the capitalist system that had served us so well.

Nowadays it is first and foremost a form of remuneration. As highlighted recently in the show ‘Billions,’ the female board member (aka Evelyn Benson) who gets ‘Axed’ from Yumtime’s board, cares most about losing her $200,000 annuity when she’s voted off the board.  It was a completely offhand comment, and that’s because it’s become so ingrained in our system.  Of course $200k is probably a lowball number, cut in half from the average director compensation once all the committee fees and other perks are added in.  Multiply it by 3-4 boards, and I’d say that’s a pretty good way of making a million a year, especially for only 4-6 weeks of work!

Well guess what, there’s still an enormous amount of value in being on the BOD of a major corporation, net of any compensation.  The knowledge garnered from being on a board is worth something, whether it be about the specific company, the industry, or what it’s like to be on a board and the dynamics of it.  It looks great on a resume.  It looks great in an obituary.  Finally, it confers prestige on the person, some of which very well could be monetized elsewhere1.  As proof of this, people actually pay …err donate, to serve for free on the boards of charitable organizations.

There are tons of retired former executives and businessmen/women looking to make a genuine contribution to this world – the salvation of capitalism – who possess the knowledge needed to sit on a corporate board.  Our country could easily find suitable and willing people to fill every board seat in America for free, solely for the prominence it brings.  But instead of nothing, I propose we cap board compensation at $50,000 in stock per member, no matter the size of the company2.  That’s still $150-200K a year for minimal work if one’s on those same 3-4 boards. …you unquestionably will find highly qualified people very willing to serve on corporate boards for $50K.3

In light of this remuneration slashing, do you really think there will be many board members giving up their roles due to low pay???  Highly unlikely, but the nation would be better off if they did.  I think 2/3 of all current directors need to go.  The average age of a corporate director is 63 years old and they are way too ingrained in the old ways.  Furthermore, this has to be done ASAP – these tenured board members are tainted and there’s the risk they will taint the new board members coming in, or at least slow them down.

We’re going to call this new remuneration and replacement policy “The Pledge.” Unions and non-corporate pension funds should start the campaign to require all board members to take it – and collectively use their own shareholdings to seat their chosen board members who have taken it.  The next target to take The Pledge is Vanguard, they are mutually owned by the investors in their funds and their overseers4  Then watch as every other mutual fund company follows suit or risks losing significant assets.

Now that director compensation has been rightsized, based on the laws of supply and demand5, BOD willingness to make cuts to executive compensation will be a lot easier, as they’ll be much more willing to rock the boat and risk their own compensation loss if it’s $50K a year instead of $300-400K!  Plus it’s easier to start with director pay because fewer arguments can be made about the difficulty in finding qualified ones – or deal with any fallout from a director’s whining why they’re underpaid – “You’re out, bring in the next one!”

Finally, as an added bonus, all directors taking “The Pledge” will also be bestowed with a new title, one that in this country anyway is akin to royalty: Defender of Capitalism.

  1. thru consulting, expert witness, etc. []
  2. Remember, the bigger the company the greater the prestige.  Sitting on the board of Apple Computer?  Who needs the $50k? []
  3. One additional stipulation – board members will have to hold all stock given to them until three years after they leave the board.  More on the “why” of this when we get to executive compensation []
  4. Of equal importance, the bulk of their equity assets are in passive products, and thus don’t require fealty to corporate managements in order to maintain access to them for analytical purposes.  In addition, because their non-passive equity products are managed by outsiders, even these can maintain their voting power in Vanguard’s hands without retribution. []
  5. as stated before, $50,000 a year on its own should do the trick, but add in the esteem and the candidate pool is huge []

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