Geithner Redux

I want to follow up on my post yesterday regarding the path the bank bailout plan seems to be taking. To that end, I'd suggest reading another post by Josh Marshall over at TPM today. It deals with the "why" of choosing this plan in terms of psychology. It's interesting at the very least.

Also, here is another reader response to TPM's coverage of this issue. This one is by an anonymous TPM reader and is given below in full. Check the site for responses and other coverage, as always.

The real problem behind the AIG public relations mess is not the tin ears of all the President's men, or their tone deaf commentary, or their ham-handed approach to decision-making. The real problem is that the AIG situation implies that they, the President's men, don't think like shareholders. They don't act as if their fiduciary duty is to the taxpayers whose money they spend. They don't seem to put the interests of the public first and foremost and ahead of all the interests of private fims. Instead, they seem to think that their job is to have the non-taxpayer, private shareholders and management of various firms return to normalcy -- meaning, doing commerce and making money. This goal is not to be derided, and it is important, but it does not correctly reflect the duties of the government officials who represent the taxpayers in owning or controlling many firms, including AIG. To see the right mirror of those duties, one needs only look to public company boards.

On public company boards, compensation committees do not include any members of management. The members of these committees determine, as a matter of law, the compensation of management in all respects. These committee members, composed exclusively of independent directors, owe their duties exclusively to the shareholders. Ben Bernanke publicly talked about the duty owed by the Fed to the institutions it is helping; when it comes to compensation decisions the duty is owed to shareholders, not to the abstract idea of a corporation.=2 0And when the taxpayers are the shareholders, the duty is owed to them.

The corporation, its management, its shareholders and the directors who represent them, are, of course, closely interrelated. Indeed, the goal of compensation decisions in public companies is to align the interests of top management and shareholders. When the executives do well, the shareholders should do well, and vice-versa. The pursuit of this alignment involves difficult decisions, including but not limited to balancing the notion of doing well in the short-term with doing well over the long-run. But this decision-making starts with a clear understanding of roles. Translating the compensation decisions of public company directors to the decision-making at AIG or any of the many many other companies owned in whole or in large part, directly or indirectly, by the taxpayers, through Treasury or the Fed, at least the following questions arise:

First, who represents the taxpayers in the compensation decisions at government-controlled firms? For example, at AIG, how can it be that the CEO, no matter how fine a fellow he may be, operates without a compensation committee of independent directors who decide executive compensation? There must be such an organization, although it has been conspicuous by its absence in the recent "debate." And on it there must be individuals who represent the shareholders exclusively, even when those shareholders are the taxpayers. There must be a reasoned process and a clear, publi c record of decision-making. If these processes, which are routine in public companies, don't exist it should take less than a few days to put them in place. This is not rocket science or even toxic asset clean-up; it is utterly familiar territory for dozens and hundreds of experts ready and able to take the burden of such decision-making off the desk of the Treasury Secretary, the Fed governors, and certainly the folks in the White House.

Second, if the right sort of compensation committees were created, it would follow inevitably that they would decide and announce their philosophy. For example, are they following the necessary goals of compensation: recruiting, retaining, and motivating? How are they putting these tenets into place? How do they balance the need to pay for performance with the general lack of income and liquidity in the troubled firms that the taxpayers have such large stakes in? These decisions are, again, both difficult and extremely familiar in public companies. It is easy to go to the right place for expertise; it is high time for the government's officials to get that expertise. It is past time to assure America that the Treasury Secretary has delegated this sort of responsibility; compensation needs to be done fairly, but it is not as important as various other crises for Tim Geithner to solve. On the other hand, it is a big problem if Treasury doesn't have the inclination or capability to delegate and assign accountability for many many issues, of which c ompensation in not just AIG, but many other firms, is one.

As another example, it is impossible to believe that the current proposed new bail-out plan for toxic assets does not raise issues of possible wealth allocation as among private parties and taxpayers. These issues will include compensation decisions. Treasury cannot be indifferent, secretive, or wholly responsible for such decisions -- it needs to delegate and obtain outside counsel in open, reasonable ways.

Public companies invariably use outside advice to make compensation decisions. Much of that advice draws scepticism. But no one would suggest that comparables and standards are irrelevant. What comparables and standards for reward and compensation shall Treasury apply to its present bail-out plans, or indeed to any and all of the firms where it now has major or controlling stakes? At public companies, transparency is required; at Treasury it ought to be part of the prevailing ethic.

At bottom, the AIG flap is about fairness: fairness of result and fairness of process. As long as Treasury maintains a rule of secrecy, it is certain to generate more AIG flaps, whether or not the flapping is legitimate. People, whether in the role of voter, taxpayer, citizen, or shareholder, simply want to know what's going on.

22 March 2009