On Executive Pay

Here from the NY Times:

WASHINGTON — The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.

I have a few thoughts on this, and they're quite simply reduced to:

1. Institutions that are on the "public teat", that is, those that have taken public funds to guarantee their survival, should be forced to have all employees live under the "GS" schedule for government employment wages, effective at the time they take the public funds.  The general rule is this: If we backstop you then you live on public-sector salaries.  End of discussion.  If you object to this then return the public money and have a go of it on your own.
2. All other public companies should be free to set wages as they see fit but the power of voting stock must pass to the final beneficial owner.
3. For all public companies the right of voting must pass only to public shareholders; privately held blocks of stock in a public corporation cannot vote.  This prohibits the abusive practice of accessing public markets for companies that are actually privately held (e.g. 80% private ownership, thereby effective permanent private control.)

#2 means that stock held in a mutual fund or pension plan may not be voted by the fund in aggregate, it must instead be voted by the beneficiaries of the fund or plan in question, and proxies must be passed through to those people.

Further, if you can't obtain 50%+1 consent to your directors by the final and actual beneficial owners of your firm, they may not serve.

That is, the right to vote is a personal right, not a corporate right, and if you access the public equity markets the public float is the voting stock of the corporation.  This aligns corporate voting rights with political voting rights.

Further, corporate governance should be changed such that for all public corporations:

1. A majority of voting stock must vote to RETAIN or ELECT directors, not a majority of VOTED shares.  That is you must pass a positive retention test of the shareholders, not a negative one.  This also means that a board may not name a replacement director; they can proffer one for election, but the shareholders must pass on it.
2. Executive compensation packages must be voted upon by the full board and the minutes and recorded votes must be published for all such packages, with a vote being taken not less often than annually.

Put these changes in place at a federal level for all public companies and the executive compensation problem is immediately solved.  The public owners will have the first, best and only say on both compensation and board membership.

If you don't like these rules then operate as a privately-held firm and do what you want.

If you want to access the public financial markets and tap the public for capital, then the public to whom you sold stock has the right to pass on your executive compensation packages on an annual basis, as well as the right to determine whether the directors of the firm are acting in their interest.

The present problem exists due to corporate "aggregate" owners such as mutual funds and pension plans, who vote their shares as a block yet are not responsive to their ultimate owners.  In the case of pension plans there is no feedback mechanism available to the employee to force appropriate governance changes to be adopted, and in the case of mutual funds the aggregation of dozens or hundreds of companies in one fund, along with cross-ownership by different funds makes it essentially impossible for investors to exert their displeasure by moving from one fund to another.

Correct this imbalance and essentially the entirety of this problem is solved.