Shareholders Out of the Loop?

The SEC says that Bank of America didn’t properly inform shareholders that Merrill planned to rush out $3.6 billion in bonuses to its employees – information that shareholders needed to make an informed decision about the merger.

In the fourth quarter, Merrill lost 14 billion dollars.

What do you get bonuses for? I was under the mistaken impression that these were rewards for performance. Apparently they have other uses.

However, there is a counter argument, Thomas F. Cooley, writing in an opinion piece for Forbes magazine writes that bonuses and other benefits are closely tied to shareholder interests and demonstrates this by using graphs. He graphs shareholder interests against executive benefits. I quote:
The observations cover the years 1992 to 2006. Our sample consists of information on 31,587 executives, employed by 2,872 companies, for a total of 33,896 company-executive matches and 167,822 executive-year observations.

His graphs indicate correlation between stockholder interests and compensation. I am not convincedin this instance. I am not opposed to high executive compensation provided it is approved by the shareholders and rewarded for successful performance. I am very opposed to executive compensation paid for out of public funds for a disastrous performance.

My problem with Mr. Cooley’s graph isn’t in its accuracy but in my perception that it does not analyze the problem at hand – the correlation between investment banks success and their executive bonuses with an appropriate analysis of how government funds played out in that success.

High executive compensation might work well in dozens of industries. Does it work well in these? And if it does not, what should we be doing instead?

Is it ethical to consider a business successsful if it can get government rescue money totalling billions of dollars to put it in the black? If so, is it then ethical to pay bonuses based on a success purchased with public money?

James Pilant

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