Many think CEOs earn too much. But should government do anything about it? Government cannot cure every ill, particularly in situations involving decisions made within legal, private businesses.
Intervention in such cases often creates more problems than it resolves, and economists across the political spectrum — from Libertarian Milton Friedman to liberal Paul Krugman — have warned against it.
Former British Prime Minister Margaret Thatcher, however, provided an example of government regulation worth considering. Thatcher admired Friedman and believed in minimal government regulation. But she agreed that government needed to “set the rules of the game.”
When she became prime minister in 1979, labor unions had great economic power. Strikes by major unions could result in drastic cuts to economic output and employment. Virtually all unions strongly opposed Thatcher and strove to thwart the policy changes she sought. To succeed, she had to reduce the economic power of unions at a time when the British trade-union movement still had broad popular support.
She found a reform that was hard to oppose. Unlike the United States, union leaders in the U.K. could call strikes without requiring approval by a majority of the union’s members. Many union bosses, including Arthur Scargill, head of the powerful coal miners union, could and did send tens of thousands of members to the picket lines without any democratic process.
This differed from the U.S., where the National Labor Relations Act of 1935 requires an independent secret vote of members before any strike. Thatcher secured a similar requirement in the U.K. That, together with other measures, reduced the political power of the trade union leaders considerably.
Some suggest a similar restriction on the compensation of corporate managers. Let corporations give their CEOs and other key managers any pay, perks and stock options they want — as long as the pay packages are approved by a secret vote of all stockholders.
Neither case involves undue government interference in private institutions. Both merely set the rules of the game to give those most affected by key decisions — union members and stockholders — a voice.
The strike-vote requirement was not a cure-all for the U.K.’s economic woes, nor did it eliminate all union abuses. A requirement for shareholder votes on corporate pay packages would be no panacea for excesses in CEO pay. Corporate boards still would have enormous discretion, and managers would still have great influence over boards’ decisions.
Nevertheless, a stockholder-vote requirement would help tilt the field back toward the level. It would give individual shareholders some voice. It would add to the clout of large institutional investors like the California State Teachers Retirement System and the Teachers Insurance and Annuity Association that struggle for the interests of stockowners. Perhaps we should try it.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.