Tuesday, January 24, 2006

Restoring the Reputation of the SEC

Irwin Stelzer discusses the efforts of SEC Chairman Christopher Cox to make executive pay more transparent.

After rejecting the policy of capping executive pay, Stelzer writes, "The better solution is to make the process by which executive compensation is set transparent. That would subject compensation to the review of the shareholder-owners of the company and to such restraints as institutional shareholders might be able to put on compensation packages. And perhaps at least some executives who know their compensation will be a matter for public scrutiny, even if they are never attacked by an angry spouse, will rediscover the virtues of self-restraint in order to avoid [former General Electric CEO Jack] Welch-style embarrassment. That's what Chris Cox and his SEC are hoping."

I think Stelzer has the right idea, but one has to consider how active institutional shareholders will be in imposing restraints. Most individual investors own shares of stock indirectly through mutual funds. That means they will be dependent on the likes of Fidelity and Vanguard to defend their interests and curb executive pay. That might be wishful thinking, because behemoth mutual fund complexes like Fidelity and Vanguard are not interested in angering executives who control which financial companies get their firm's 401(k) business. Although the fund companies' proxy votes are public now, it's unclear whether the fear of embarrassment on proxy votes will be greater than the incentive of the 401(k) business. As Stelzer implies, we will likely be dependent on activist hedge funds to hold management's feet to the fire. Perhaps this isn't so bad, and hedge funds get more of a bad rap than they deserve. (I think they do.) Still, it would be nice to see mutual funds (besides the Mutual Series funds and other, smaller value-oriented shops) take some responsibility in this area as well. Heck, there can be nice profits in "unlocking value" by engineering a management change or some other restructuring.


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