Pigs At The Trough

William F. Buckley wrote a delightfully acerbic piece recently in National Review about the outrage of executive compensation and the implications for our system of capitalism. Delving into the compensation of Viacom executive Tom Freston, who received a $16 million bonus last year while Viacom's stock fell 18%, WFB writes:

Mr. Freston is based in New York. But from time to time, business requires him to be in Los Angeles — where, as it happens, he also has a home. On those nights does he take hotel rooms? Ample hotel rooms, understand. No. He just charges the company what he thinks is appropriate to pay him for using his own home. In 2004, this amounted to $43,000. He is evidently a man with simpler habits than the Los Angeles-based Mr. Moonves's. He does the same kind of thing, he has his own home in New York, but what he charged the company for the nights he spent in New York was $105,000.

And the money quote:

That money was taken, directly, from company shareholders. But the loss, viewed on a larger scale, is a loss to the community of people who believe in the capitalist free-market system. Because extortions of that size tell us, really, that the market system is not working — in respect of executive remuneration. What is going on is phony. It is shoddy, it is contemptible, and it is philosophically blasphemous.

Bingo. What's incredible is that the examples WFB cites are far from extraordinary. Because of my job, I've had a front row seat to these ongoing outrages for many years, and some of what I see is stunning. One very small company I follow announced a "stock buyback" of 2 million shares; the buyback took place, with the company buying 400,000 shares from the public and 1.6 million shares from the personal account of the CEO, who then put the proceeds of that sale into his own wallet. The same company also announced a "cash dividend" to be paid to all stockholders. The largest stockholder? You guessed it--the CEO, who owned about 50% of the stock and thus received the majority of the dividend straight from the company's coffers. All this, despite a stock price that had declined about 95% from its high of the past few years.

This is just one company, and Buckley writes about only a few executives. There are far more examples of similar behavior by the most "respected" executives at the most "blue chip" companies.

One of the essential facets of capitalism is trust. Capital markets, the counter-party system and free trade cannot exist in an ethical vacuum; there must be an underlying pillar of public trust for the system to function effectively and to be sustainable. Trust is hard-won and easily lost; it springs from an underlying atmosphere of ethics, common sense, and proportion regarding issues such as executive compensation and corporate conduct. Without trust, a nation's economic system falters, its citizens become cynical and jaded, and its enemies gain fuel.

I've never been fan of government regulation in most areas, and that goes double for any increased regulation. But our financial system--which includes publicly-traded companies and the financial markets--is an exception for me. The abuses have become so egregious and so systemic that I believe they pose as much of a threat to our economy and way of life as terrorism does. Indeed, the terrorists would love nothing more than for our financial system to implode because of our own greed and apathy.

We need to make a distinction between what is illegal, and what's legal but morally bankrupt. In the case of the former, some of the blame for lax enforcement must fall on the Clinton administration; for eight years, the SEC was emasculated, starved of funds, and essentially told to hear no evil/see no evil so the stock market could rise unhindered. The Bush administration has certainly put more of a priority on identifying and prosecuting white-collar crime, but could do far more. It speaks volumes that the most important enforcement activity has come from New York State Attorney General Eliot Spitzer, a Democrat. While he's motivated partially by political ambition, Spitzer recognizes the threat to our financial system and is acting appropriately--in the absence of a vigorous SEC, NASD, and Justice Department, and to the chagrin of Wall Street's laissez-faire pollyannas.

But the regulators can only act on what's illegal. The merely immoral requires grass-roots outrage in order for change to occur, and we haven't seen that yet. After the technology bubble burst a few years ago and people discovered how and why they'd lost nest eggs and retirements, I thought we would see townsfolk gathering in the village square with pitchforks. That didn't happen. Maybe the pain never got bad enough. But if and when we see another major market decline, gluttonous immorality will likely become legislated illegality.

Since Wall Street and our corporate community have proven themselves unencumbered by conscience, that wouldn't be such a bad thing. I just wish the public didn't need the pain as a wake-up call.