Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

March 27, 2007

Are CEO’s Accountable To Shareholders?

by Brad Warbiany

Over in the comments to this post at Cafe Hayek, a debate is brewing over whether compensation for bad CEO’s is the fault of the shareholders or not.

In this debate, you constantly see people of the libertarian mindset blaming the shareholders for not exercising enough control over the CEO compensation process. This, I think, is hypocritical.

In any big organization, there is a facade of democratic decision-making. In the United States, we pick our President through primaries and a general election process. But since the process is completely driven by money and influence, we have a very limited number of choices to take into account, largely limited to who the RNC and the DNC put their money and weight behind. Yet when we complain and people say “well you elected them!”, we get angry.

What’s different with the shareholders? Often the selection of CEO is limited to a small number of candidates selected by the Board of Directors, who are also often selected by a very limited number of candidates.

When I look at the idiocy in the United States government, I can at least say that because the system of electing those idiots is completely screwed up, that I have very little meaningful control over who ends up in power and what they do with that power. I’m doing everything I can to change that system (including posting to this blog), but I still have almost zero influence over what they’re doing.

Wouldn’t it be consistent to apply the same argument to shareholders? The only advantage that shareholders have over citizens of the US is that the cost of exit from owning a company has a much lower transaction cost than leaving the United States. But the argument still holds. Do shareholders really exert meaningful control over the inner workings of a Board of Directors and CEO? Do they exert much more control than voters exert over our government?

I say no. In both cases, the system is broken. Blaming the peons in a system doesn’t accomplish anything if those peons can only change who runs the broken system, not the system itself.

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  • http://www.blackelectorate.com/articles.asp?ID=705 js290

    Blame government intervention:

    Reuven Brenner claims that legislation and legal decisions between 1982 and 1992 made it more difficult to conduct a “hostile takeover.” Reuven notes, “If you look at what happened between 1980 and 1990 when companies were taken over, you see that new management was put in place with lower compensation, fewer fringe benefits, or with types of compensation that truly aligned shareholders’ and management’s interest. The 1990s saw CEOs being compensated with no downside risk, and boards in dormant mode.”

  • Jawahar

    I think CEO is accountable if OPM (Other People’s Money) is involved.

  • http://pubcrawler.blogspot.com/ tkc

    The difference between the elections of politicians and the elections of CEOs has to do with consent. If you own Acme Inc. stock and don’t like how things are going you can remove your consent simply by the act of selling.
    Elections of politicians are different. Your consent is assumed and, as pointed out, the only real way to remove your consent is to leave. That is a scam in any book. To paraphrase Lysander Spooner, the US Constitution starts with “We the people…” but who ever specifically asked you? No one. Your consent was assumed. If I assumed your consent about a business arrangement and told you to pay up you’d tell me to take a hike. So why is it the other way around for electing politicians?

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