Excellent explanation
The real problem behind the AIG public relations mess is not the tin ears of all the President’s men, or their tone deaf commentary, or their ham-handed approach to decision-making. The real problem is that the AIG situation implies that they, the President’s men, don’t think like shareholders. They don’t act as if their fiduciary duty is to the taxpayers whose money they spend. They don’t seem to put the interests of the public first and foremost and ahead of all the interests of private firms. Instead, they seem to think that their job is to have the non-taxpayer, private shareholders and management of various firms return to normalcy — meaning, doing commerce and making money. This goal is not to be derided, and it is important, but it does not correctly reflect the duties of the government officials who represent the taxpayers in owning or controlling many firms, including AIG. To see the right mirror of those duties, one needs only look to public company boards.
On public company boards, compensation committees do not include any members of management. The members of these committees determine, as a matter of law, the compensation of management in all respects. These committee members, composed exclusively of independent directors, owe their duties exclusively to the shareholders. Ben Bernanke publicly talked about the duty owed by the Fed to the institutions it is helping; when it comes to compensation decisions the duty is owed to shareholders, not to the abstract idea of a corporation.=2 0And when the taxpayers are the shareholders, the duty is owed to them.
The corporation, its management, its shareholders and the directors who represent them, are, of course, closely interrelated. Indeed, the goal of compensation decisions in public companies is to align the interests of top management and shareholders. When the executives do well, the shareholders should do well, and vice-versa. The pursuit of this alignment involves difficult decisions, including but not limited to balancing the notion of doing well in the short-term with doing well over the long-run. But this decision-making starts with a clear understanding of roles. Translating the compensation decisions of public company directors to the decision-making at AIG or any of the many many other companies owned in whole or in large part, directly or indirectly, by the taxpayers, through Treasury or the Fed, at least the following questions arise:
First, who represents the taxpayers …
