Executive Clawbacks

To The Editor, Wall Street Journal:
Carly Fiorina ("Corporate Leadership and the Crisis") recommended clawback provisions for CEOs, which are the right solution to the debate over executive compensation. Successful CEOs should be richly rewarded for great work, but if they've built a house of cards that collapses, they need to give it back. Well-designed clawbacks would not only satisfy the public's need for fairness, they would focus CEOs – and other corporate officers, and boards of directors – on long term performance rather than annual goals tied to compensation.

The devil is always in the details, so I'd like to encourage those focused on corporate governance to develop a "standard American clawback." My two cents: all compensation above what is earned by the President of the United States is subject to a two-year clawback – for example, bankruptcy in September 2008 would mean executives return all "excess compensation" from September 2006 on. Triggering events would include precipitous stock drops, significant layoffs, executive indictments, bankruptcy, and government bailouts. Mitigating circumstances might include popped stock bubbles, CEOs hired for turnarounds, whistleblowers and force majeure events.  All corporate officers and board members would be subject to the clawbacks, including those who have left the company. Clawback proceeds would go to the company in the case of bankruptcy, bailouts or indictments. Terminated employees would share clawback proceeds after major layoffs, and shareholders would receive a special dividend in the case of stock swoons. In no instance would the government share in the proceeds.

If this "standard American clawback" had been in place during 2008, hundreds of corporate executives and board members would be disgorging hundreds of millions of dollars, at times going into personal bankruptcy as a result. And that's exactly the point – we want our corporate leaders keenly focused to make sure this mess never happens again.

First Principles II

The following is a continuation of yesterday's random laundry list of centrist principles, world views and policy prescription summaries.

Principles

What Works

Centrists value what works – which is not to be confused with “the ends justify the means.” With a 360-degree, long-term view, centrists don’t advocate expediency for short-term results or horrific means to achieve them. 

Genetic Similarity

There’s no reason to think humans who choose business careers have a nature or nurture substantially different from public servants. The litany of human weaknesses and quirks that can lead to untoward business results also plague those on government payrolls. So while liberals give government benefit of the doubt and conservatives cut business a break, centrists give the public and private sectors equal measures of support and skepticism.

Distributed Honeypots

Part of the genius and success of American democratic capitalism is that power and money are widely distributed among competing government branches and industry giants, which helps mitigate (but does not eliminate) self-dealing by Big Leaders.

Bill of Responsibilities

In a world of conflicting rights, individuals must exercise responsibility, the first of which is to respect others’ rights.

Equal Opportunity, Not Equal Results

Exceptionally capable people happen, and we all benefit when their abilities are amply rewarded. Progress and growth are highly dependent on outliers. At the same time, we all benefit when human capital is fully developed across the board. Equal opportunity is in all of our enlightened self-interest as well as being the right thing to do.

Transparency

In government and commerce, transparency is essential to proper functioning. It’s often battled, occasionally for good reasons but more often to hide socially undesirable behavior.

Accountability

Democracy and capitalism don’t work without accountability. Incumbents will forever attempt to escape or soften or delay or defer their judgment days.  Widespread bailouts and 95% re-election rates are not a good sign.

Contextualism, Not Relativism

Centrists believe in the importance of core values like liberty, personal responsibility, supporting the needy, protecting the innocent. They are not relativists who believe that all values are relative and judging one higher than another is pointless. However, in the real world core values can collide, and context is the key to assessing balance – which means that no value is permanently dominant.

World View

Financial Incentives Matter A Lot

If you want to figure out whether markets, businesses, and even government agencies are working as they should, follow the money. 

Watch the Watchdogs

Government isn’t the only important commerce referee. Accounting firms, boards of directors, bond rating companies, stock analysts, buy-side investors, banks and the press all play important roles. If watchdog financial incentives are misaligned, trouble follows.

Elite Hubris

Smart people often over-rate their own abilities. Too often elite policy prescriptions project their over-rated abilities onto their favorite organizations – government, business, religion, non-profits. Average competence is in fact alarmingly low, and it is average public servants, business people and ministers who implement these prescriptions to continual disappointment.

Mistakes Happen

In a complex universe filled with uncertainty, mistakes happen all the time. To err is human, to recognize and correct them quickly is divine.

Unintended Consequences Happen

In a complex universe filled with uncertainty, many choices produce unwanted, unintended results alongside the desirable. Hubris-fired elite myopia compounds the problem with denial. Humble centrists plan for the unexpected and adjust at the line of scrimmage.

Not So Simple

Democracy is more than voting. Capitalism is more than private ownership. Actually, they are much more. The failure of neoconservatives stems from their overly simplified understanding of democracy and capitalism.

The Rules of the Game

Democracy and capitalism have extensive rules that dramatically affect outcomes. It’s often easier to rig the rules in your favor than win on merit, so rule rigging is frequent and attempted rule rigging never ends. Never. 

Watch the Bigs

Big government, big business, big religion, big unions, big non-profits, big military… when power and money amass under one roof, it’s an irresistible honey pot for those who crave power and money, and a heady brew for all who try to lead. Large organizations are uniquely capable of massive projects (think lunar landings) but create Sisyphean imperatives for corruption watchdogs. 

Short Termism

One of our most debilitating human flaws is our propensity to embrace short-term rewards over long-term success. Encouraging long-termism is both important and difficult.

Policy Prescriptions

Democracy 2.0

The US led the world in creating modern democracy, but as other countries have created their constitutions, some of America’s “legacy systems” have not been emulated. It’s time to upgrade.

Votes and Purchases: Crude Tools

In our multi-polar, multi-issue, two-party democracy, a vote provides insufficient information. Is it supporting economic policy? Social? Foreign? Or just good teeth? Similarly, purchasing multi-featured products in crowded markets is insufficient to guide product planning. Democracy and capitalism need more information-rich transactions.

Immigrants Fuel Growth

The data show immigrants and their children contribute disproportionately to America’s growth. Steady immigrant flow is key to creation of new companies, new industries, new jobs, and American competitive advantage in the globalized twenty-first century.

Centrist Economics

Economic Evolution

Capitalist commerce follows evolutionary patterns just like ecosystems and species. Innovations have improved American capitalism, although extinctions and dangerous mutations happen along the way. More innovations are needed to polish capitalism’s rough edges.

Massively Synchronized Errors

Mistakes and failures that happen randomly with bounded and predictable frequency do not hobble modern capitalist systems. When errors are massively synchronized – as in most homeowners and mortgage lenders believing that housing prices can strongly rise without end – recessions happen and bubbles burst.

Economic Acts = Experiments

Every economic action is like a scientific experiment. There is a thesis – demand today will be like demand yesterday; buying this product will make me happy – and the results of the action are forecast with some perceived and actual risk of failure.  

(Un)Manageable Risks

All businesses face daily risks. A business executive’s job is to manage those risks within their grasp: people, technology, competitive strategy, financial management. Government’s job is to minimize unmanageable business risks: unpredictable inflation, unstable growth, infrastructure costs, security, the rule of law, bad actors (economic actors that is, although Hollywood isn’t great at eliminating the other kind).

First Principles

Obama appointees have often been labeled centrists, despite the lack of agreement on what it means to be a centrist. The primary goal of this blog, which may become a Wiki-blog ("bliki") if I find an appropriate platform, is to articulate principles that can underlie centrist policies, thereby giving them intellectual underpinnings.

Why is this important? The knock on centrists (by extremist conservatives and liberals alike) is that they are "moderates" - really a "mushy middle." Mainstream media generally presents two sides of any question, when the third side - a 360-degree view from the middle - might actually lead to solutions rather than nightly bickering by talking heads.

I believe credible principles backed by a coherent world view are essential for a Muscular Middle to emerge. This initial posting is not intended to be a comprehensive nor well organized list, but rather, an initial dump of thoughts to be assembled, expanded, interconnected, polished, and of course discussed over the next five years.

Balance (aka The Goldilocks Principle)
When values or principles conflict, centrists seek creative balance such that opposing values can both be honored while unintended consequences of extremist adherence are minimized.

Results
Typically politicians declare victory when a bill is passed. Businesses know that new product launches mark the beginning of the work, not the end. Centrists understand that balanced results aren't guaranteed by mere compromises; victory can't be declared until inevitable unintended consequences surface and are addressed.

360-Degree View
The right and the left have their blind spots, people or constituencies they largely ignore. Centrists have to work harder, striving to understand policy implications for everyone.

Policy Dials
Extremists hyperbolize about capitalism suddenly switching to socialism, or popular safety nets disappearing with a click of a voting booth for the "other" party. Centrists see a rainbow of options, a broad spectrum of policy choices that can be adjusted between values (fairness versus effectiveness, freedom versus security) on a policy dial.

Open Minds
AKA "The Truth Is My Friend." Nobody has a monopoly on the truth, and centrists are unafraid to embrace good ideas as well as harsh realities wherever they appear.

Humility With Confidence
In a complex universe centrists eschew blinding hubris. That does not preclude optimism and confidence that collectively we can overcome any obstacles the universe might throw at us.

Mutual Respect
We believe that all men are created equal. Combine that with open minds and confident humility, you get a prescription for mutual respect as a centrist modus operandi that stands in stark contrast to shrill put-downs from Extremist Talking Heads. Centrists don't make for great television, they make for great governance.

Informed Loyalty
Centrists love our country. But friends don't let friends... and citizens don't let their government...

Enlightened Self-Interest
Conservatives have faith that self-interest, guided by Adam Smith's "invisible hand," will lead to optimal social outcomes. Only when we myopic humans look long-term with 360-degree vision do we develop enlightened self-interest that truly can lead to great social outcomes.

Freedom From, Freedom To
Liberals emphasize freedom "from" poverty, prejudice, injustice. Conservatives emphasize freedom "to" live their lives without government interference. Both are important to centrists.

Centrist Economics
The "free market" versus "socialism" debate has reared its ugly head. In its place I'll be offering a different view on the appropriate relationship between commerce and government.

Marketology is the classification of markets, which are incredibly diverse, according to attributes which suggest different government approaches should be taken based on those attributes.

Fair Markets combine the "conservative" (or classical liberal) appreciation of markets' benefits with the notion that government often needs to play referee, and maybe set the rules of the game, to keep capitalists from "cheating."

Popular capitalism is the most desirable form of private ownership of the means of production, in contrast to crony capitalism, corporatism, mercantilism, kleptocracies, and lots of other approaches that have been tried from time to time.

Behavioral economics is an important emerging field at the intersection of psychology and economics, whose experimental data results need to inform policy far more than they do.

Incentive misalignment is far too common in "free" markets and leads to undesirable results, the mortgage meltdown being only the most recent example.

Competing competitions can lead to meritocratic "free" markets being overthrown by crony capitalists, mercantilists, Machiavellianists, and even thugocracies.

That's it for now - I know there's more, but dinner is calling!