Friday, May 22, 2009

Rotman School’s Dean, Roger Martin, agrees with my diagnosis:

Global financial meltdown was caused by executive compensation schemes:

I made this point some time ago, about the negative effects on our economy from the manner in which executives of CORPORATIONS are compensated. In fact I made it before the global financial meltdown and made it again a number of times after the global financial meltdown, by observing that the lack of financial regulation allowed corporate managers to “go places” where they shouldn’t , and that their compensation schemes incented them to “go places” where they shouldn’t. Lack of regulation and the manner of executive compensation were the twin dance partners of the global financial meltdown. I have not heard others say this until today, in which Roger Martin is pointing out the negative effects of how corporate managers are compensated.

He also fails to point out that government has a major guilty hand to play in all of this, by virtue of the tax treatment of employee stock HALF the rate of taxation of the income from employment it simply represents. Another point that I have repeatedly made as recently as April 15, 2009.

On stock options themselves, Roger Martin, Dean of the Rotman School of Management, concludes in the article below by saying:

“People are just talking about how to “tweak” stock incentive plans. But they need to get rid of them. And at Rotman, we’re doing our part yo put things in perspective. Hopefully others will get on board soon. The real market is where it’s at. We have to return to the real game, as soon as we possibly can”

Major Policy lesson for Ottawa:

(1) Executive stock options are bad for the economy for reasons unto themselves as described by Roger Martin in today’s Globe article and for the reasons I have repeatedly made in the past. That is obvious. So why is Ottawa contributing to this obvious problem by taxing employee stock options at half the rate of the employment income they represent?

(2) Income trusts ARE the REAL game by virtue of their twin disciplines of paying out all excess earnings to their owners to be deployed by their owners into the REAL economy and the discipline that any acquisition by an income trust be "accretive" to their owners, i.e. economically additive in REAL terms, as opposed to economically subtractive, in the case of non-accretive acquisitions. Common shares of corporations are clearly subject to far too many abuses and negative outcomes and are not a responsible form of business ownership, in the manner in which they have evolved and have been endlessly gamed by corporate managers

(3) Derivative investment products that are designed for the sole purpose of creating fee stream, like Manulife’s Income Plus, are the worst offenders, especially when these products that are notionally tied to the stock market are not being hedged. I repeat, not being hedged. How is that the ”real world” that Roger Martin states we need to get back to? As if some people actually need to be told this, which unfortunately too many do. Especially the politicians. This problem with Manulife’s Income Plus is a marriage of the problems described in (2) with the inherent problems of synthetic investment products themselves, neither of which are "real".

(4) Do you suppose these are the points that Ed Clark would be making with Michael Ignatieff over dinner at Stornoway? Not on your life.

Time to give Bay Street the boot that it deserves and rescue this country back from the Bay Street bootleggers and make this country work for Canadians. Bay Street is going to have to learn to work for a living and stop lobbying for a living. However that will first require that the political ranks of this country actually have first hand knowledge of how Bay Street works and who the players and their track records are. That person or persons also have to be honest AND independent, I fit that bill, which is why I ran for office in 2008. I am not sure how many others do, if any?

We have a major fork in the road. Do we carry on with the corporate abuses of the past, in one new guise or another? Or do we chart an new economic course based on what Roger Martin is describing below and a return to the real game, as soon as we possibly can? The consequences of this decision will be immense, even for those who are too self absorbed or economically conflicted to realize it.

Part of returning to the real game, would be for Finance Minister and Prime Ministers to STOP LYING to Canadians about tax leakage on behalf of the corporate CEOs who put them up to their income trust policy and for “OPPOSITION” Leaders like Michael Ignatieff to show he has the cajones to confront these corporate CEOs himself, by exposing Harper’s lie about tax leakage.

Failure on the part of Michael Ignatieff to do so, will simply be irrefutable evidence that he is simply one of them and has been enjoined by these corporate managers to achieve their nefarious the detriment of all Canadians.

Shareholder value theory

Distorted incentives behind the financial crisis

Kerry Stirton
Globe and Mail
Page A19
May 22, 2009


Dr Mike said...

The market & the owners demanded something "better" than the status quo corporate structure.

As a result , income trusts were born.

Their tight control & great returns caused them to flourish wounding the corporate cheese heads & their stock option laced legacy.

So what to do if you are a cheese head.

Off to their friendly government control center for some market tweaking.

As they say , the rest is history & the corporate structure now has been sealed to continue on it`s wasteful way returning diddly to investors.

It`s not hard to compete when you have access to the guys controlling the game.

Dr Mike Popovich

Anonymous said...

You are correct about stock options. But there is another issue that can be as destructive as stock options. It's called: bonuses. Let me go over a number of problems associated with bonuses. Here is what I observed when Ron Freeman introduced bonuses at the European Bank for Reconstruction (of Eastern europe) when I was working there.
1. Bonuses lead to back stabbing and deceitful tricks among staff of a same organization. The competition for bonuses destroys the team approach and cooperation that is necessary for the success of an enterprise. It is each for himself even if it is at the expense of their colleagues and the enterprise. Guys were tripping one another to get hold of the larger projects for financing. They were hiding information even from their bosses.

2. Bonuses are also leading to a rush to put business in the books ,,,,,,,anything they could push by whatever means. Staff were rewarded with bonuses for the amount and not the quality of business they would put in the books. Every year ex-Salomon Brothers Ron Freeman (Vice president) would establish a lending target for the Bank that was typically higher than in the preceeding years. He even had a betting scheme where employees were invited to bet on the amout of loans the Bank would make in the year. Low bets considered to be defeatists. Bonuses were paid on an annual basis for the business put in the books in the preceeding 12 months. After 4-5 years they ended up with a collection of loans that were not disbursing or were stalled. The blame was always put on the borrower. But the guys kept getting their bonuses if they had put more business in the books in the last 12 months. When he banker had shown his total incompetence or excessive focus on bonuses he would more along with his bag of money to another institution and start all over a gain.

4. There was more to bonuses than just money. The battle for bonuses was fueled by the promotion fever. A guy who got two or three large bonuses in a row was a high flyer almost assured of getting a promotion. A promotion meant a lot as it made you more valuable and enhanced your capacity to jump ships and move to another bank often with another pay raise.

3. Bonuses lead to a disjunction between the staff and management on one side who run the bank and the owners/shareholders. The former are rewarded for putting business in the books (whatever it may be) i.e., quantity, but the latter are rewarded by sustained profitability, i.e., quantity AND quality of loans. The people who run the bank fill they pockets even if they have to take excessive if not reckless risk while the shareholders have no clue of what is going on. The latter are often put to sleep by the management team with beautiful stories of growth, record breaking and information of questionable integrity (or outright lies) when the need arises.

Bonuses and stock options are corrosive and should be abolished. People should be paid attractive and competitive salaries and rewarded with promotions when well deserved.