"Why Can’t Shareholders Be Trusted to Set CEO Pay?"

Um, because Barney Frank is making their case?

This great post from Dean Baker at Beat the Press makes a simple and persuasive argument:

Representative Barney Frank has proposed a law that would require corporations to have non-binding polls of their shareholders on CEO compensation packages. According to Marketplace Radio, the opponents of this measure claim that shareholders have diverse interests and aren’t in a position to properly assess CEO compensation.

It would be helpful if the media teased this one out a bit further — the shareholders aren’t qualified to determine the pay of their top employee, but the insiders (a corporate board that usually owes their position primarily to the CEO) somehow can be trusted to act in their interest.

The media also portray this as a government intervention into the corporate sector. Of course, this is nonsense. The corporate sector is a creation of the government (individuals can have partnerships, legal corporations are a creation of the state), the question here is about setting the right rules. The government already imposes a long set of rules for corporate governance, including rules on disclosure of financial data and also rules ensuring that the rights of minority shareholders are protected. The issue here is whether it is necessary to change the rules to ensure that CEOs do not abuse their insider power to get exorbitant compensation packages. (I discuss this issue in a chapter of the Conservative Nanny State.)

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