Rhetoric won't likely lead to reform

No corporate-governance issue captures the imagination and frustration of the American public and politicians more than executive pay.

Despite two decades of varied lawmaker efforts such as tax measures, board-independence requirements and mandated disclosures, executive-pay levels continue to soar, as does the saliency of executive pay as a political issue.

In light of this unimpressive history, the public should not expect the Obama administration and Congress to transform their fiery executive-pay rhetoric into far-reaching reform.

Lawmakers, irrespective of political party, often use the executive-pay issue as a mechanism for political diversion that shifts public attention away from more pressing socioeconomic issues such as the minimum wage, unemployment, education, health insurance, pension protection and home foreclosures.

The executive-pay diversion also shifts responsibility from lawmakers to corporate executives. The recent focus on executive pay signals to constituents that the Obama administration and Congress are doing something to hold big business accountable, even if such efforts prove negligible. Public support is particularly important in the current political climate given the taxpayer implications of the $787 billion stimulus package and dire economic conditions.

From a political standpoint, the executive-pay issue is inextricably tied to two perspectives: (1) an internal investor-protection perspective; and (2) an external public-accountability perspective.

The internal perspective reflects the need to maximize shareholder wealth and prevent corporate managers from shirking their responsibilities at the expense of a company's shareholders. Meanwhile, the external perspective reflects the need for greater corporate accountability to broader societal and non-shareholder interests. The investor-protection perspective dominated the debate among lawmakers and the business community during the 1990s. But the latter public-accountability perspective has dominated the recent executive-pay rhetoric from the Obama administration and Congress. The reason behind the shifting narrative is executive pay's symbolic link to the current economic crisis, massive unemployment, housing foreclosures and stock-market declines. Executive pay, like the wage gap, is often invoked as a societal litmus test for fairness, making it a convenient target for populist outrage.

Despite the shifting executive-pay narrative, corporate executives still have little reason to fear substantial regulatory encroachment. If the past two decades are any indication of the present direction, executive-pay reform will be moderate, contain loopholes and not upset the internal affairs of the corporation nor displace business judgment. Ironically, the political focus on executive pay may actually avert more substantial regulatory intrusions that would further restrict executive power.

Ordinary Americans have the most to lose from the executive-pay diversion. Certainly, stories of unearned excessive executive pay should stir public outrage. But irrespective of political rhetoric and posturing, executive pay has a minor impact on corporate performance. Excessive executive compensation is merely a symptom of a greater disease -- ineffective governance by corporate boards of directors.

The overemphasis on reducing executive pay for a few individuals at the top of the wealth pyramid may ameliorate populist outrage, but it does not put money back into the hands of ordinary Americans, who find themselves unemployed and their retirement accounts depleted.

Efforts by the Obama administration and Congress to stimulate the ailing economy will ultimately be evaluated in light of their broad tangible impact on the quality of life for average Americans -- not on the restriction of executive pay for a small minority of individuals.

■ Omari Scott Simmons is an assistant professor of law at the Wake Forest University School of Law.

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