Tuesday, January 11, 2011

Exorbitant executive salaries as legal fraud

Thinking about the obscenity of the salary paid to the CEO of Woodside (and other CEO's) I was reminded of the views of the great US economist JK Galbraith who in one of his last books The Economics of Innocent Fraud described the self enrichment practiced by the corporate elite as a form of "legal fraud".

I am very much in agreement with the arguements of criminologist David Friedrichs who in a recent paper titled "Exorbitant CEO compensation: Just reward or grand theft" in the Journal Crime, Law and Social Change  argued that executive compensation packages should be considered as a form of white collar crime. For Friederichs it is time to criminalize this behaviour. He calls it a form of robbery.

Friedrichs is Professor and Distinguished University Fellow, Sociology/Criminal Justice, The University of Scranton and a lifelong researcher on corporate and white collar crime.

He argues that the corporate culture and practices that provide for and justify excessive executive compensation for corporate executives not only creates what he calls "crimogenic conditions" but are likely to lead to the taking of money that belongs to others.

Friedrichs writes:
""Walking into a bank with a gun and demanding money from a teller is one way to steal money... Walking into a corporate boardroom and securing from the board's compensation committee, made up of cronies, paid consultants, and even relatives, compensation of millions sometimes tens of millions or hundreds of millions is another way to steal money. The principal differences are that the second way of stealing money pays much better, is all too often legal, and does not result in criminal prosecution and imprisonment. This needs to change"
The practices of excessive compensation have come to be viewed as standard business practice rather than as part of a spectrum of corporate criminal behaviour that goes unrecognized and unpunished. That is how corporate power works. It redefines reality to serve corporate and private interests. Its time to challenge that.


Matt Martell said...

Many at the board level and below are struggling to understand what effect the increased focus on risk and compensation is having on executive labor markets.

In my current position, I am fortunate to have deep insight into the challenges that senior executives face, and while many may think that greed is the primary driver for exec comp levels, all of those in a position to influence exec comp policy are considering some form of the following question: “Will this executive compensation policy provide meaningful incentives for executives to create long-term shareholder wealth without incurring excessive risk.

It’s important to note that Senior Executives are still have similar motivations and desires as everyone else and their compensation (if properly structured) won’t turn them into risk-taking maniacs but to help direct them to make quality decisions.

Matt Martell
CEB Views

John said...

Colin, there is an intriguing body of woork that suggests that our economic system rewards CEOs who share sociopathic traits. I would strongly recommend people read "The Allure of Toxic Leaders: Why We Follow Destructive Bosses and Corrupt Politicians - and How We Can Survive Them" by Jean Lipman-Blumen.



Colin Penter said...

Many thanks John for your interest and comments. I am not familiar with the work you mention but will track it down.