Q&A with Bill George in Brasil Economico
Published on November 10, 2009
These questions were submitted by Gustavo Kahil of Brasil Economico.
Click HERE to read the article as printed in Brasil Economico.
How the “antibank” rhetoric can affect healthy banks and those financial institutions which aren’t using TARP funds?
The antibank rhetoric currently resonating across America has unfortunately worked towards assigning a negative connotation to the entire banking industry. The majority of banks are healthy, well-functioning, responsible operators, but they are being punished for the greed-driven, short-termist sins of an elite few. This has shaken America’s faith in the banking industry precisely at a time when we need it executing on its traditional duties: managing the flow of currency and generating capital. America needs capital to fund small businesses which will then generate jobs, and the antibank rhetoric is stirring political pressure on banks, that discourages them from resuming normal operations and opening up to lenders. We need to get beyond the antibank rhetoric so the politicians scale back their assault, and banks across the country can get back to business.
As a member of the Goldman Sachs board, what are your views on the Government decision to force banks that received government bailout money to limit executive payment? This decision can also be understood as an indirect punishment for healthy banks since it will reduce the market average executive payment?
I certainly agree that executive compensation can be lavish and indulgent. But I do not believe it is the government’s place to install and enforce a compensation limit for bank employees, particularly for those firms that were in the black this past quarter. From my experience as CEO of Medtronic and as a member of the Goldman Sachs board, I can attest that high compensation is not the issue – many desire every penny they earn. It’s the high compensation that rewards overly-risky short-term productivity that poses a concern. I advocate for an incentivized approach to curbing excessive executive pay, and recently joined Warren Buffett, John Bogle, and 25 other leaders in signing the Aspen Institutes statement: Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management. This is becoming a clarion call for those responsible business leaders who want to see irresponsible executive behavior curbed, but prefer to see it incentivized to ensure that the changes remain for the long haul.
Is this mainly a political measure, or it is in fact correcting a market imperfection and therefore lowering overall systemic risk?
An executive compensation cap does take a step towards a needed change where some firms are concerned. However, such compensation limits can have detrimental effects on the talent that those banks can draw, thereby making it more difficult for them to recover. The only way we can really work to lower the over systemic risk – which lavish executive compensation is a symptom of – is to work to change the culture on Wall Street. And the best way to change culture and curb irresponsible behavior is to incentivize better behavior i.e. responsible, principles-driven, long-term investment. That is what the Aspen Institute statement tenets do.
What are the other consequent negative impacts of this cut? Should we expect lower motivation on banks executives to increase the financial system efficiency? Or lower motivation to join into riskier ventures?
The pay cuts reinforce the idea that the “quick-fix” is the “best-fix.” That is seldom, if ever, the case. I have been highly critical of short-termist Wall Street leaders like Dick Fuld at Lehman Brothers and Ken Lewis at Bank of America, but simply firing those leaders and curbing lavish pay are solutions that only satisfy the short-term. I believe that the best way to ensure we don’t fall into similar traps again, and similarly flawed leadership take hold again, is to work towards a Wall Street culture shift. A quick-hitting executive compensation curb may satisfy voters and smooth ruffled political feathers, but it won’t help work towards a long-lasting solution.
What can the Government or the Bank`s Boards do to avoid the bankers being vilified?
The federal government can now work with willing CEOs and investors to alter the short-termist culture that has infiltrated Wall Street, not try to regulate it into submission from Washington, DC. This means providing the right incentives, including those that provides market-based incentives through restructured tax policy, aligns investor interest with company interests, and increases the transparency of shareholder/investor influence. To accomplish this, we need everyone – investors, bankers, Fortune 500 CEOs, politicians – to gather together and hammer out a mutually agreeable consensus.