Monday, August 10, 2009

Corporate CEOs are the New Potentates

Friedrich Hayek stated the following with regard to the rule of law in 1961: “By ‘law’ we mean the general rules that apply equally to everybody… As a true law should not name any particulars, so it should especially not single out any specific persons or group of persons... the rules must apply to those who lay them down and those who apply – that is, to the government as well as the governed – and that nobody has the power to grant exceptions.” Aristotle and Plato cast the rule of law in terms of legal autonomy—meaning that government is the servant of law, not that law is the servant of the government. Indeed, the difference between the rule of law versus rule by law amounts to the abuse of power wherein law is reduced to a mere instrumentality of oppression, unfair advantage, and the arrogation of legal immunity.

In the US, our legal system has devolved from a rule of law system to a rule by law system. I posit that this transition is the direct outcome of rising inequality, with a very high concentration of resources at the very top of the income distribution. When a small percentage of the population accumulates vast resources then they will naturally seek to influence the law with money to entrench themselves and insulate themselves from competition and even basic accountability. Note from the chart above, that the income share of the top 0.01 percent of our population has soared in recent decades, eclipsing even the 1928-1929 high by a significant amount.

This spike in inequality at the very high end coincided with an assault on the rule of law in the corporate arena. In 1986-1988 corporate elites abolished the duty of care for corporate directors. In 1995 and 1998 those same elites insulated themselves from liability for securities fraud. In 1999 they freed themselves to become too big to fail by repealing the Glass-Steagall Act, the last remaining legal cap on the size of banks. Now they have secured government guarantees for their bonus payments and golden parachute payments. All of these legal indulgences directly contributed to the subprime fiasco.

It makes sense that elites would immunize themselves from corporate laws that imposed accountability or constrained their accumulation of power. First, it is clear that a significant number of the families in the top 0.01 percent of the income distribution are CEO families from the data on executive compensation, above. Second, in addition to their own prodigious resources they can also muster the lobbying efforts of the corporation, as well as the wealth of other senior officers within the corporation. Thus, corporate wealth services the political goals of management not the shareholders. Third, CEOs are a small group of 500 or 1000 individuals (depending on how you count) which means they can act collectively with little cost of free-riders.

The picture is fairly grim. It runs from inequality to executive compensation to an assault on the rule of law. Moreover, since this is a bi-partisan dynamic it is unlikely that either party is likely to roll back the immunities, subsidies and exceptions to accountability corporate executives have garnered. The financial sector lavishly supported both Obama as well as McCain. The law now quite clearly serves the interests of the CEOs.


  1. grim indeed!

    if a poltical party had the will, what restraints would you recommend? how would one go about capping executive compensation? what methodologies?

    is there no hope that the obama administration will work toward equity?

  2. Restoring traditional common law restraints and private securities litigation would do wonders.

    Earlier today I posted on the importance of regulating corporate political activities.

    The good news is that corporate money can be effectively regulated at the corporate governance level without First Amendment restarint.

    The bad news is that the Supreme Court now seems determined to further deregulate corporate political activities.