Frank Talk: Barney Frank's Scary Comments on CEO Compensation

Barney Frank, US Representative from Massachusetts, appeared on CNBC the other day to discuss his views on CEO compensation.

Being the extremely liberal Democrat that he is, it's difficult to enumerate all of the nonsense that he spouted in a ten minute interview. However, a few examples serve to illustrate what we are in for if the Democrats regain the House later this year.

Bob Nardelli's pay package as CEO of Home Depot touched off this past week's firestorm over CEO compensation. The company's stock has struggled recently, after plunging during Nardelli's early years as CEO. If I recall correctly, he joined Home Depot some five years ago, when it became clear he would not be replacing Jack Welch as CEO of General Electric.

Frank is so ill-informed regarding performance metrics that he voiced the opinion that perhaps CEOs should be compensated on the basis of 'net revenues or market share.' Apparently his staff is as clueless as Frank is, because neither measure of corporate performance makes sense. Market share is notoriously difficult to calculate effectively, since it can vary by market segment, and makes no sense whatsoever for a multi-product company. Paying a CEO for increasing revenues is simply idiocy. If you think we've seen fraud recently, you haven't seen anything yet if Frank's suggestion becomes law.

What I found most interesting, however, was his diametrically opposing view to mine of what realistic options are available to minority shareholders of public companies. Frank expounded on the lack of "shareholder democracy" implicit in the advice that shareholders who don't like the performance or CEO pay policies of a company sell their shares. I remain unable to understand this.

Why do so many people, Frank included, believe that any minority shareholder with as little as one share of stock, should have the right to set corporate policies? The ability to easily and inexpensively sell your stock when you don't like what a company is doing is a benefit of our capitalist system in the US, not a weakness. In addition, it is not as if most shareholders founded the company, then lost control. No, they typically buy into a company whose prospects they deem attractive. But they know going in that they do not control anything.

Perhaps the most fear-inspiring comments from Frank were about the need for federal government interference in the affairs of publicly-traded companies in the US. He seems to feel that their "rights" need protecting, because selling shares in a company with whose policies a shareholder disagrees is viewed by the Congressman as "undemocratic." Nevermind that liquidity in most publicly-traded shares is more than adequate to allow a shareholder to exit an unwanted stock.

It seems that Frank, along many other critics, have the mistaken notion that minority shareholders control the policies of corporations in which they own shares. In reality, in our system, minority shareholders get the benefit of the performance of companies whose shares they hold. And they may vote on candidates for the board of directors. But that's it. They don't own controlling interests, and most of them did not found the company. They know the limitations of their position going into the stock purchase. And, most importantly, there are many other companies whose stock they may buy if they become disenchanted with the shares they own.

How much worse it would be if there were no liquid, inexpensive markets in which to simply sell unwanted positions and be rid of corporate situations with which one disagrees.

From his comments the other day on CNBC, my sense is that if Frank ever becomes chairman of the House committee on which he serves (I believe it is Finance), Sarbanes-Oxley will become the lesser of our worries regarding unwanted Federal intrusion into private enterprise.