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Michael Dell Passes The Apple Test

Tom Kirkendall, of the always illuminating “Houston’s Clear Thinkers” blog, writes about the legal troubles at Dell and founder Michael Dell’s apparent escape from criminal prosecution. This, of course, requires mention Larry Ribstein’s incisive “Apple Rule” of business criminalization, which says: Media favorites don’t go to prison.

Executive Compensation. In a column titled “We must ratchet back bankers’ pay,” the WaPo’s Matt Miller writes: “The way pay is rigged at publicly owned Wall Street firms creates incentives for casino-style gambling, because bankers reap all the upside and stick shareholders or taxpayers with the losses. When their big bets go bad, in other words, top bankers walk away rich anyway. This is not how capitalism is supposed to work.”

Notice Miller’s slick linkage of “shareholders or taxpayers,” as though they bore any remotely similar relationship to corporate management. Taxpayers certainly should not compensate businesses for losses. So, if Miller would like to orchestrate a general apology from government officials who did so and an iron-clad pledge from them never to do it again, I am with him all the way. But shareholders should indeed lose money if a company’s management produces losses, whether through “gambling” or otherwise. That is precisely how capitalism works, because shareholders are the people who hold the residual equity stake in a company.

The issue of executive compensation is an entirely different issue, which may be utterly unrelated to corporate profit and loss. Did the executive’s actions make money for the company? His salary may be cut if the company has nonetheless fallen far behind its competition. Did the executive’s actions lose money for the company? His salary may be raised if the company fears a different executive would have lost more. Only the board of directors responsible for paying the executive can judge what salary is appropriate. It is not a matter that can be intelligently commented on by outsiders--whether newspapeer columnists or government bureaucrats.

Can Businessmen Get Justice in Court? Writing at the blog “The Conglomerate,” David Zarig remarked on the Supreme Court’s recent business decisions: “When you think about the judicial record in relation to the financial crisis--quietude on both the state and federal level during both the merger period and the bailout period—and you think about how long PCAOB [Public Company Accounting Oversight Board] has been doing its thing and how many people have been prosecuted for the government’s crazy definition of honest services fraud, you can see just how much of a backstop, rather than proactive particiapant in the regulatory system, the courts are.”

In response, Professor Stephen Bainbridge commented: “It's not clear whether this is meant as a mere observation or a criticism. If the latter, I find it puzzling. The very nature of their social role precludes judges from being proactive regulators.”

It’s never prudent to disagree with Professor Bainbridge, but I think in this case I must. I believe he is paying too much attention to Zarig’s ill-chosen term “proactive” and not enough to his examples. Judges had to preside over trials in which businessmen were charged with “honest services” fraud, and, when the businessmen were found guilty, those judges had to sentence them. Which they did--often  to many years in prison. It would not have been “proactive” for a judge to say: “I do not see that this man could have known with clarity what behavior was forbidden by this law.” It would have been doing his simple duty.

The Gulf Spill. Lastly, in a philosophic spirit, I link to this Christian Science Monitor article (“Top five bottlenecks in the Gulf oil spill response”), by Patrik [sic] Jonsson [sic], because it well illustrates the point that running any significant industrial enterprise is a matter of generating and coping with endless snafus. If we allow the existence of snafus to be a sufficient reason to damn complex enterprises, then mankind must retreat to primitive work characterized by simple repetition and routine. That type of work is easy to perfect, true enough, but it does not provide much security from the vagaries of nature and life.

 

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