Unintended Consequences

I would like to share two quick thoughts with you that fall
under the heading of Unintended Consequences.

Sectarian strife in
Iraq: Late Monday I attended a presentation at the New America Foundation
by Wadah Khanfar, the director general of the Al Jazeera Network (the Arab TV
news network headquartered in Qatar, now with an English language channel). He
is a very interesting and impressive guy. His first observation was to totally
refute the nonsense that Muslims, Arabs or Arab Muslims dislike American values
of liberty, respect for the individual, religious freedom, etc. (it’s the
policies stupid).

Mr. Khanfar was the Al Jazeera bureau chief in Baghdad
during America’s invasion of Iraq. At Monday’s presentation he was asked if Al
Jazeera had a Sunni or Shia bias in its Iraq reporting. He replied that Al
Jazeera has strict, professional reporting standards and does its best to
adhere to them. He noted that in 2003 he and his fellow reporters did not even
know whether public figures in Iraq were Sunni, Shia, Christian, Jewish or
something else. Only when the U.S. designed elections requiring a balance of
religious group representation on slates of candidates did these officials need
to state their religious affiliations, thus bringing that issue into public
focus—the opposite of the intended purpose. You can see his entire presentation
here: http://www.youtube.com/watch?v=thg0owasbLw

Executive pay and
corporate governance: A cornerstone of capitalism is the belief that the
desire for profit by owners will maximize the prospects over time of capital
being allocated to the uses most wanted by consumers. Long-run profit
maximization is a good thing. Venture capitalists deliberately take large risks
for potentially big gains knowing that they will often fail, but it is their
money they are risking. Owners (shareholders) of established companies are
generally interested in the long-run survival and profitability of the firms
they own and are thus less interested in short-run gains that jeopardize the
long run profits of these firms. If paying high prices for the best talent
contributes to the prospects of greater profits over time, owners will want to
do so.

This characterization of capitalism is hard to reconcile
with the rules of corporate governance we now have in the U.S. “New York
Attorney General Andrew M. Cuomo reported that the nation’s nine largest banks
handed out $32.6 billion in bonuses last year even as they ran up more than $81
billion in losses and accepted tens of billions of dollars in emergency federal
aid.”[1]
Do such bonus rules reflect the judgment of owners of how to maximize profits
or the exploitation by management of short-term rents at the expense of
owners?  It may shock you, as it
did me, to learn how little owners can control the remuneration of those who
manage the firms they own.

“’Under this bill, the question of compensation amounts will
now be in the hands of shareholders and the question of systemic risk will be in
the hands of the government,’ said Rep. Barney Frank (D-Mass.), who leads the
House Financial Services Committee and who authored the bill.”[2]
Among other things the “bill also gives shareholders the right to reject a pay
package, but their vote would be
advisory.”[3] I always
thought that they had the full authority to approve pay packages. This is
shocking. Corporate governance rules need to be strengthened more than Barney Frank’s timid bill to put owners in
charge of managers.