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Someone Tell the NYT Editorial Board: Congress Sets Rules of Corporate Governance

In an editorial calling for companies to voluntarily allow non-binding shareholder votes on CEO compensation packages, the NYT warns that if companies don't allow such votes Congress may force them. It then adds that Congress "is not the place to set corporate salaries."

Of course no one is proposing that Congress would set CEO salaries. Congress is debating a change in the rules under which CEO salaries are set, and in fact Congress is the place that such rules are set. (Sorry NYT editorial writers, they weren't handed down by God.)

The rules of corporate governance are designed to prevent insider abuse. For example, they guarantee the protection of minority shareholders, so that an investor can't gain control of 51 percent of the shares and leave the owners of the other 49 percent with nothing.

Excessive CEO pay is exactly the sort of abuse that rules of corporate governance are intended to prevent. If the current rules are inadequate to accomplish this task, then it is the responsibility of Congress to change the rules so that they do prevent such abuses. This is not interference in corporate governance, it is getting the rules right.

--Dean Baker

Posted by Dean Baker on May 26, 2007 9:17 AM | Permalink |

COMMENTS (64)

We had an experiment where a government did not impose rules of corporate goverance - that being Russia in th 1990's. How well did that work out? Just check out the scandals surrounding a company named Yukos Oil.

Posted by: pgl | May 26, 2007 9:11 PM

I believe it's generally Delaware that sets these rules.

Incidentally, each jurisdiction should have the right to evaluate whether these fictional persons are acting with any public purpose. Do they? Can one state deny personhood to a misbehaving corporation within its jurisdiction?

Similarly, since some essential goods and services are provided by corporations in some jurisdictions, it should be a matter of public safety to always have the option to condemn corporate assets and operate them for the public good. Say, when a company secures $1m or $2m in state subsidy per promised job created to bring new operations to the state, part of the calculation ought to be whether it's better for the citizens of the state to condemn these operations and operate them publicly.

Or when a corporation requires its employees to train their Chinese replacements after which the plant will be relocated, a jurisdiction should consider condemning the plant and operating it for the jobs.

Posted by: john bailey | May 27, 2007 8:48 AM

A little miscue? John Bailey above is correct.... It is the several states that determine corporate rules. This began with the Massachusetts Bay Company and the Virginia Company et all.

Delaware, which has rolled over on behalf of the corporations is the home base for most of the Big Boys precisely because ....
it has rolled over. The residents of all other states suffer as consequence.

It is a problem (for more than stockholders). I doubt if DC is the answer to it however.

How about a state law, passed in each and every state requiring that a corporation above 20 million in revenue must contribute a sum equal to the salarly and bonus of the CEO and leadership to the education fund, every year to each state, serially, for fifty years. Then the rotation would repeat.

And if the CEO pay was above 100 times their lowest paid worker, they would have to contruibute to all states annually.

Call it a share the greed fee.

Posted by: David Bean | May 27, 2007 4:15 PM

It is not Delaware. The rules they are talking about have to do with public listing a company, not the corporate structure and it is the legislative branch of the federal government that has jurisdiction. If a company doesn't like it they alway have the option of going private. They seem to be taking this option with little penalty recently.

Posted by: Erik L | May 29, 2007 10:03 AM

John and Erik,

I appreciate the clarifications. The point is that Congress sets rules of governance for publicly traded companies, rules of incorporation are set state by state.

As a sidebar, I believe that Congress can impose rules that must apply to corporate charters in all 50 states. For example, a corporation (even a private one) cannot restrict ownership based on race. This is due to the constitution, but I don't think that Congress is prevented from imposing restrictions on states through laws. Any legal experts care to weigh in?

Posted by: Dean Baker | May 29, 2007 10:33 AM

Using "corporate governance" to try to control executives' greed won't work, mostly because voting stick is once share=one vote, so "money talks," as the saying goes.
More democratic would be a return to a steeply progressive income tax, such as we had after WWII. A 91% marginal tax rate could remove lots of incentive for bloated compensation.

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