Back around 1987 I recall hearing the then-Dean of the George Mason University School of Law, Henry Manne, predict that the wave of legislation sweeping through state houses to protect corporations from hostile takeovers (and, hence, protect incumbent corporate managers from losing their jobs) will result in an increase in corporate misbehavior.
In this interview with The Region (a publication of the Minneapolis Fed), Eugene Fama makes a similar point:
Region: In the early 1980s, you authored three key pieces regarding principal-agent conflicts [due to differing incentives of an organization’s owners and employees] and how they play out efficiently in various types of organizations. How have your ideas evolved in light of transformations in the corporate world?
Fama: I haven’t spent a lot of time on these issues since then, but they keep popping up. I haven’t seen anything that would cause me to change my opinions generally, but something that has bothered me is the drying up of the takeover market due to the installation of antitakeover provisions by most companies, enabled by state legislatures.
Region: Poison pills and the like?
Fama: Right, and that is very unhealthy, I think, for the corporate world because it takes away the threat of outside takeovers, which is very important for the economy.
Region: A form of market discipline.
Fama: Yes, it’s a unique discipline that corporations have that other forms of organization don’t have. For example, it’s very difficult to attack the University of Chicago in that way. It doesn’t need a takeover defense because there’s no real way to attack it. For a corporation, on the other hand, there was a way. That allowed corporations to have expert boards because the board wasn’t the court of last resort. But the institution of all antitakeover amendments threw a wrench in the process.
[Anyone who hasn’t yet read Manne’s classic paper "Mergers and the Market for Corporate Control" (Journal of Political Economy, April 1965) should do so forthwith. Its insights are keen and important yet sadly too-little understood.]
But here, in the same interview, is what Fama says about CEO compensation:
Region: Another issue those papers touched on was compensation of CEOs, a controversial question in recent years. How do you view the suggestion that
some CEOs are overcompensated?
Fama: If the [compensation] process gets captured by the CEO, then it can get corrupted. But if what you’re seeing is a market wage, then I don’t know why you would say it’s too high. If it’s a market wage, it’s a market wage. I don’t know of any solid evidence that the process was corrupted. So my premise would be that you’re just looking at market wages. They may be big numbers; that’s not saying they’re too high. It’s easy to say that people are paid too much, but when you’re on the other side of the fence trying to hire high-level corporate managers, it turns out not to be so easy.
As patrons of the Cafe might easily guess, I am — like Fama — not especially hot’n’bothered by CEO compensation. But it strikes me that Fama here skirts close to being inconsistent. Surely the use of antitakeover statutes to protect incumbent managers from market forces at least partially corrupts the market for managers and, hence, might be at least partly responsible for the height of some CEOs’ salaries. (Of course, if this is true, the way to correct the problem is to repeal the antitakeover legislation.)