Ayn Rand Institute
Center for the Advancement of Objectivism
Say "No Way!" to
"Say on Pay"
Thursday, May 24,
By: Yaron Brook
The House of
Representatives recently passed the "say on pay" bill proposed by
Congressman Barney Frank. The bill forces all corporations to allow
shareholders a non-binding vote on CEO compensation. The idea is to shame
directors into lowering CEO pay, which the bill's supporters claim is out of
Although the bill is
touted as a means of protecting the interests of shareholders, what it
actually represents is a usurpation of corporate control. It is therefore a
violation of shareholders' rights.
Those clamoring for
this bill insist that legislation is necessary to give shareholders a "say
on pay." But shareholders already have a say on pay--i.e., a means of
exercising control over corporate governance. If a shareholder is upset
about CEO pay or any other management issue, he has three legitimate, free
market options: 1. "Vote with his dollars" by selling his shares; 2.
Accumulate a controlling interest in the company (typically 51%) and impose
a new board of directors; 3. Persuade a majority of shareholders to replace
the board with people sympathetic to their concerns.
If enough shareholders
really wanted a vote on CEO pay, they could demand a change to their
company's by-laws. But very few companies have adopted such changes,
suggesting that most shareholders are not actually interested in this
control. After all, one of the great benefits of the corporate structure is
a clear division of labor: shareholders invest capital, but leave the
business management to an elected board and its chosen executives. Rational
shareholders do not want to micromanage public companies by participating in
such decisions as setting CEO pay.
It is a minority of
"activist" shareholders--together with anti-business politicians--who are
shrieking about "outrageous" CEO pay packages. And it is highly revealing
that, instead of pursuing one of the above methods that respects everyone's
freedom, they are agitating for legislation--seeking to wield the power of
government to force their views of corporate governance and CEO pay on the
majority of shareholders.
What motivates these
activists is not the wellbeing--i.e., the wealth--of fellow shareholders,
but an anti-profit, anti-capitalist social agenda. It is they who call for
corporate "social responsibility"--the idea that executives and shareholders
should sacrifice money-making for the sake of sundry "stakeholders." This is
incompatible with the purpose of business and with the responsibility of
corporate leaders to maximize shareholder wealth.
Indeed, if these
activists were truly concerned with the shareholder and the quality of
boards of directors and CEOs that he can hire, they would be advocating for
less government regulation not more. Regulations today prevent market forces
from fully operating in corporate America.
For instance, the
Williams Act restricts stock accumulation, and other regulations place
strict constraints on board membership and hostile takeovers, all of which
make ousting incompetent management more difficult. Sarbanes-Oxley, that
incredible perversion of justice, has cost innocent businessmen billions of
dollars in the name of fighting the misdeeds committed by others. This has
made running an honest business more precarious and less enjoyable.
Anyone truly concerned
about shareholders--and about the health of corporate America--should be
campaigning for the repeal of these regulations.
But far from fighting
government controls, shareholder "activists" fight to hand control over
American corporations to government--or to organizations controlled
indirectly by politicians, such as public pension plans. Indeed, this is
already beginning, prompting many businesses to flee to the relative safety
of private ownership--i.e., being owned and run by professionals--so that
they can continue to maximize their wealth.
ever-increasing web of regulations, does anyone really believe that the
government will stop at non-binding shareholder votes, that the next step
won't be the imposition of binding votes and, longer-term, government limits
on CEO pay? Congressman Frank doesn't. Frank--who has supported outright
caps on CEO pay--has threatened that if "say on pay" does not sufficiently
reduce CEO compensation relative to that of other employees, "then we will
do something more."
Don't be fooled by
those who say they just want to give shareholders a say. The real issue is
who has the right to decide how a business is run: its owners or "activists"
who have seized the power of governmental coercion?
Yaron Brook is
executive director of the Ayn Rand Institute in Irvine, CA. The Institute
promotes Objectivism, the philosophy of Ayn Rand--author of "Atlas Shrugged"
and "The Fountainhead."
(This op-ed was
published in InvestmentNews on May 22, 2007.)
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