CitiGroup shareholder revolt: golden-rule capitalism

The American election campaign isn’t the only arena now trying to define what is “fair” on the issue of income inequality.

On Tuesday, shareholders of the giant banking firm CitiGroup shocked management with a vote that disapproved of a proposed pay package for top executives.

The vote’s real message?

Pay must be tied to a manager’s performance, especially in ensuring a company’s long-term health.

The shareholder revolt is a welcome measure of corporate democracy aimed at reining in Wall Street’s myopic drive for short-term earnings and for executive bonuses unhinged from individual merit.

For too long, Washington has assisted such practices with tax rules and other policies that favor management over shareholders and that encourage executives to be paid for a focus on quarterly financial results at the expense of a corporation’s well-being over time.

Those policies changed in a small way with a provision in the 2010 Dodd-Frank law that requires companies to put their pay practices to a shareholder vote at least every three years. This “say on pay” rule allows only an advisory vote by shareholders. But at least it may lessen the asymmetry between managers and shareholders.

Much more can be done by both Congress and states to shift power to shareholders who invest in a company for the long haul and who want control over performance pay to achieve that. Stock options, for instance, should be allowed to be exercised only after a long period of company growth.

This market approach, aimed at deferring compensation over years, would be better than government control of executive pay aimed at reducing income inequality in the United States.

“Congress generally has not done a good job where [it has] tried to determine what is the appropriate level of compensation a publicly held company should provide its senior management,” said Treasury Security Timothy Geithner last month.

The basic idea is to help investors and managers view a company as a mutual commitment to each other and the welfare of the firm – and less as a contest between competing self-interests. Otherwise, either party could damage the company by excessive behavior, such as demanding bonuses not tied to creating value over time. Think of banker Henry F. Potter in the movie “It’s a Wonderful Life.”

Also, under this “golden rule” capitalism, the kind of financial risk taking practiced by Wall Street executives in the run-up to the 2007-09 financial crisis might have been lessened. 

The glue that binds investors to managers must be more self-enforcing, like a curved archway that connects their interests into a greater good.

Votes in coming shareholder meetings of America’s public corporations may do as much for reducing income inequality as any election for US president or Congress.