Good incentives for the corporate world
Some of the least popular people today are financial sector bosses, notably in America and Britain. In return for huge salaries and bonuses over the years, they have ruined some of the biggest names in banking, along with markets, industries and the lives of many ordinary people around the world.
To be fair, financiers were not the only factor in creating this crisis. Global trade imbalances, loose monetary policy and ineffective regulation all helped create the environment in which mortgage debt turned into a monster. But the bank bosses' role was crucial, especially in mismanaging risk. It is hardly surprising that the public is so angry at the huge pay and bonus packages some of these individuals received, even after the bailouts began.
This culture of massive executive packages goes back quite a few years. Michael Eisner became famous for making more than US$680 million as the Walt Disney chief executive in the late 1990s, mostly through stock options. That was controversial, but at least Mickey Mouse never threatened to bring down the global financial system. What has happened lately has affected us all, and it seems clear that executive compensation played a role in bringing about this crisis. The chief executives had huge incentives to produce short-term increases in revenue or profit, even using financial engineering or fancy accounting if necessary.
There is an interesting contrast between the US and Hong Kong, where bigger companies are typically listed but majority family owned and controlled. Some chief executives hired to manage our major companies get very big salaries. But, unlike their counterparts in the US, they don't report to a board of directors representing aggressive minority shareholders such as fund managers, demanding quarter after quarter of profit growth.
Rather than being under pressure to maximise short-term shareholder value, they are paid to preserve and increase the owners' wealth. You don't take risks with your family fortune. Majority shareholders may be thinking as much about the next generation as the next quarter.
We all know there can be problems with the family-run, listed-company model we see in Hong Kong. Complaints about corporate governance, in particular treatment of minority shareholders, are quite common, and often valid. I am not saying we have an ideal system, or that companies elsewhere can learn from it. For example, another criticism of our local family firms is that their aversion to risk makes them too conservative, when they should be more innovative.
How should companies create incentives for their top managers in the future? It will be much harder to justify huge packages unless the rewards are linked to stiffer and more transparent conditions. Shareholders will insist that their interests come first. That means more pressure on chief executives from boards. And, coming from the other direction, auditors and regulators will tie chief executives' hands even more - maybe more than they need to, just to be safe.
In the eyes of the public, this crisis is rooted in greed. Whether this is an accurate view doesn't matter. Even in Hong Kong, with a stable financial system, people have lost confidence in investment products, especially because of the Lehman minibonds issue. In the US and elsewhere, citizens, politicians and the media are seeing unemployment rising and are turning on senior bankers, regulators and the whole financial sector. I recently heard a banker advise colleagues not to tell people they worked in finance when visiting the US. I think they are just as cautious in Hong Kong, too.
The whole corporate world will have to behave impeccably in the years to come, and chief executives' compensation will be a highly visible benchmark. Could we, for example, see corporate social responsibility targets built into incentive packages? I wouldn't be surprised.
Bernard Chan is a former member of the executive and legislative councils