Another take on excessive executive pay


Did the "poison pill" legislation of the 1980s insulate executives from the free market?
I hadn't seen this theory before, but it makes sense.

A third, and I think correct, explanation is offered in Deepak Lal's new book Reviving the Invisible Hand. As a result of the takeover boom of the early 1980s the managements of some of the larger corporations started to look for permission, from both courts and politicians, to protect themselves with poison pill defenses in order to thwart takeover bids. These take a number of forms but the essential outcome is much the same: it makes the hostile takeover of a company by a corporate raider more expensive.

This strikes to the heart of the agency problem. In a modern corporation the shareholders have to hire experts (managers) to do the actual work for them. But how are they to ensure that what is good for the shareholders is exactly the same as what is good for the managers? In fact, as is fairly obvious, whether or not a company gets taken over is exactly when those interests diverge. If there is a hostile takeover, the shareholders get the bidding premium, take their money and go and do something else with it. The managers lose their jobs. A pretty clear divergence of interests there I hope you'll agree?

The managers clearly benefit from the poison pill defenses and the shareholders equally clearly do not.

It wouldn't be the first time that government regulation benefited a small minority to the cost of the majority.

The free market is really about the exchange of information. The more that the information is masked, the less choice people have.

— NeoWayland

Posted: Tue - August 1, 2006 at 04:33 AM  Tag


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