The Financial Tsunami ( FT ) - The Way Forward ( 16 ) - Blocking Bonuses is the Best Bet

http://news.bbc.co.uk/2/hi/business/7945774.stm

Obama was literally choked with anger in condemning the proposed payment of huge bonuses to the derivatives managers and other high ranking executives of the embattled AIG insurance giant which is receiving enormous amounts of rescue funds approved by the US Congress ( please refer to above news video from BBC ). When it comes to money people have will not give a damn whatsoever to decency or proper restraint. Enough is enough. What kind of logic is behind this payment of bonuses to the custodian of a failed financial institutions through greed and possibly fraud and incompetence ? Some black sheep corporate custodians are now public enemy number one who should be severely punished instead of richly rewarded.

No doubt these black sheep will fall back on their so called legal contracts of employment and their claim on the sacred protection of the law to justify their claim to the proposed bonuses. Mind you if any contract is drawn up unfairly the court has the power to annul it. Just think about the general circumstances under which most corporate employment contracts of CEOs and their likes are concluded. They are approved by the board of directors who are all ( with the fewest of exceptions ) aiming at maximizing their own remunerations at the expense of shareholders that are mostly absentee owners. Even when the directors are major shareholders of the corporation in question they can still benefit by drawing huge remuneration packages part of which will be born by the minority absentee owners. This is the basic pitfall of all limited liability companies as explained in my article on the FT ( entitled " 2008 Economic & Financial Tsunami - An Overview for the Lay Person ). The reader can access my article by clicking on the title of this blog to reach my website or click on my complete profile.

Let me put it this way. If I were the CEO of a big corporation how else can I justify my own out of proportion remuneration package if I do not hire my subordinates with substantial amount of salary and bonuses ? Let me quantify this for you. If my assistant does not get $5 million a year how can I justify my $10 to $15 million annual salary ? It is all a matter of you scratch my back I scratch yours kind of situation. Furthermore, who votes for the unreasonable amount of most CEO remuneration packages at the board of directors' meeting ? Of course, it is the directors themselves. There is a clear conflict of interest here which I will propose to disallow in my summary proposal for the reference of the G20 summit to be held early next month. You may say that some CEO may not even be a board member. True in so cases but the prevailing corporate culture makes it easy for a collusion between directors and high ranking executives to stick together to benefit themselves at the expense of shareholders and now the society as a whole as a result of their greed and callous behaviour. In short, it is an exclusive boys club that teams up to rip off shareholders. Basic reform on corporate law is urgently needed.

By challenging the remuneration contracts of these greedy executives despite their skill ( with the help of their black sheep legal advisers ) in manipulating through the gray areas of the law we can force them to justify their claim and so learn their dirty tricks for our future reference when planning the regulatory reforms. Needless to say, bringing them to court and hopefully getting the court to annul their contract because of their bad performance will no doubt raise the morale of the struggling public who are all suffering tremendously as a result of their evil deeds.

I have delayed the summary ( which is in progress ) of my proposals to combat the FT so as to draw everyone's attention to the basic weakness of the limited liability concept which unfortunately we cannot do without in our modern market economy. Since this concept is indispensable to economic growth and full employment by channeling savings into investment we had better improve our regulatory system in the right way to deal with this problem if the FT is not to be repeated.

JKHC.