I was surprised to learn that Sherron Watkins has connected corporate ethics to compensation policy:
Of particular interest was [Watkins'] answer to the question of how such egregious behavior could exist in a business. She believes that such behavior primarily comes from faulty compensation policy. She commented that if you divided the people in the room into groups, 10% would always do the right thing no matter what, 10% are likely to be ethically challenged from the get go and 80% could go either way depending on their compensation plan, direction from a superior or recognition that everyone else is doing it so it must be ok.
Their compensation plan? This is silly on its face. Andy Fastow was well compensated; he was making millions of disclosed dollars and millions more that were not disclosed. So he acted unethically…why? And by the way, Watkins was compensated pretty well too, and she acted unethically – she traded on insider information, which she admitted in open court, under oath.
Why is she some great ethical leader? She’s not – and it bothers me that so many people think she has something to teach about being ethical. It is not ethical to trade on insider information, to write an anonymous letter stating that there’s a PR problem, and if there is fraud she wants in on it, and then to wait until the company collapses, step in, and call yourself a whistleblower. No, that isn’t ethical.
Here’s something to think about. One hundred percent of the Enron executives I speak to on any given day are some of the most ethical, kind, generous people you will ever meet. I would absolutely trust any one of them with my life, or my life savings. They are not predators or money-hungry monsters.
I can’t say the same about Sherron Watkins.
ETHICS
is entirely dependent on the framework of values you adopt.
I would say, that the core ethics of corporate executives, directors, managers et al in their work role is to forward the interests of the corporation – its business interests, its business model, its core mission, and its fiduciary duty to shareholders and its obligation to creditors.
Compensation of corporate executives is a cardinal example of the principal agent problem that bedevils all attempts of humanity to employ the work of other humans.
The executives always will have an interest in near term cash flow. Every human being on earth does. As they say, cash is king and you need it to function as an actor in our economy.
The interests of those retained by corporations to perform a role to maximize their own interest for near term cash flow is always somewhat conflicting with the fiduciary duty of executives and managers to the ownership of the corporation.
It is a very difficult balancing act as you clearly have divergent sets of interests, divergent values and ethical conflicts that have their root in differing ethical outlooks.
That conflict – and the questions of value that spring from it will never go away. It has as its wellspring the fundamental dynamics of human nature.
That said, I think that corporate executives ought to command reasonable compensation for what their skill sets command in the marketplace.
If you really want to incentivize corporate executives the right way, find a compensation method that aligns their own financial interest as much as possible along the lines of the creation of long term, durable shareholder value.
Other compensation schemes can run into two principal conflicts which can be deadly to corporate interest 1) the interest of corporate agents for near term cash flow that is usually at odds with their fiduciary duty to the corporate ownership and 2) perverse incentives that can lead to economic bubble type situations, and the manipulative exploitation of those sorts of dynamics.
Economic bubbles destroy real value and obliterate trust. They make the activities of a corporation appear like an elaborate shell game. They will periodically recur, but incentive systems that drive bubble mentality driven investment ought to be guarded against.