AIG bonuses

No issue has united the left and right like this. A company whose leadership has done nothing but fail for two years; a company whose management is so incompetent that the business -- the world's largest financial institution in 2008 -- would evaporate from the planet if it were not for a $150 billion handout from American taxpayers. 

AIG is an epic icon of failure and immorality, responsible to a serious degree for the greatest economic disaster to affect the world in nearly 80 years.

And yet, the leadership is rewarding itself with $150 million in bonuses.

I think this illustrates a problem with how public markets have altered capitalism. We have ceased to think of AIG's management as "the help," when in fact they are an educated form of just that. Because large public companies usually have no clear owner -- just millions of stockholders -- a vacuum forms at the top and is filled by people who work at the company, but own little or none of it. But we have to remember that capitalism is based on ownership, not management. If it was based on management it would be called something like gilded socialism.

In the realm of private, closely held companies, management is just a more skilled form of a company's labour. Owners of private companies hire people with good track records and perhaps education and demonstrated skills, to achieve certain results using the owner's capital. If they are successful, they will usually be paid well, and may be rewarded with some of the profits or perhaps even with a sliver of the owner's capital itself.

But these private company managers know their place -- they know the owner is not an irrelevant abstraction. The owner is often someone they see in the halls and in meetings every day; or at least is someone who visits the office. They cannot fire the owner but the owner can dismiss them. 

Public companies should be the same. But this vacuum has allowed management to take the role of owner.  

Obama's challenge is to change this perception; to ensure that managers manage and owners decide, among other things, how much managers are to be paid. I fail to understand why this is so difficult in the case of AIG, as Obama's government owns 80 per cent of the firm. Why does Obama not remove AIG's board and appoint a committee representing taxpayers to evaluate the past achievements of AIG's top managers and make decisions about their future ability to create value for the firm. Instead of the loosers controlling the purse strings, they will be purged Once AIG has competent managers and is stabilized, it should be returned to the private sector under a new regime of regulation.

Apart from AIG, we need to understand how this ascension of management occurs, and we need to prevent it. Unless a CEO is like Bill Gates, where s/he owns a large part of the company (ideally a controlling share), all CEOs, CFOs, or SVPs should act as though their "owner" is someone who walks the halls and asks questions about $1,200 trash bins and other things that are difficult to sneak by a private company owner. We need a mechanism to make public companies operate with the kind of attention and passion private company owners bring.