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Reining in Executive Compensation and the Supreme Court

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Of all the factors responsible for the 2009 financial melt-down, you'd be hard pressed to find one more destabilizing than executive compensation, a model for those high-flying Wall Street executives piloting companies whose collapse drove our economy into the rocks. Lucrative packages rewarding reckless risk-taking and abject greed served as the foundation for a house of cards, a strategy of socializing risks while privatizing profits. So it's no surprise that the disparity between the salaries of CEOs and other employees is also at a record high.

That's why the Obama administration was wise to designate a Special Master for TARP Executive Compensation, aka, the Pay Czar. Helping to ensure that executive compensation is hard-wired to a firm's affinity for risk is an important step in the right direction, and Pay Czar, Kenneth Feinberg, has an idea for how to do just that -- relatively low base salaries coupled with higher levels of company stock, stock that must be held for years prior to transfer. Such measures would likely help dampen enthusiasm for playing short term high stakes corporate poker with other people's money.

Linking executive compensation to executive behavior and a firm's longer-term performance is very much overdo. But can this actually occur, and on how broad a scale? So far Mr. Feingberg's plan is voluntary, and only for the five firms yet to fully repay taxpayer TARP funds. But Treasury Secretary Ben Bernanke reminds us that the systemic risks responsible for the melt-down still lurk within the system, so a voluntary measure applied to a handful of corporations hardly renders sustained confidence.

The good news is that the broader suite of Obama administration reforms also takes aim at corporate governance and corporate regulation, both domestically and internationally. The bad news is there's good reason to believe these reforms will either never see the light of day or will be ushered into darkness shortly thereafter.

The Supreme Court's decision, Citizens United v. Federal Election Commission, on January 21 of this year has changed everything. For-profit corporations, domestic and foreign, can now commit unlimited independent expenditures from their general treasuries towards electing or opposing candidates in federal elections.

Prohibition on the use of monies from a corporation's general treasury for such purposes is gone.

Corporate political expenditures no longer need to be funneled through PACs.

Prior restrictions that afforded a 30 and 60 day time-out before primary and general elections respectfully, is also gone, which means unlimited funds can be used to swamp advertising time and space across the internet, newspapers, radio and network or broadcast television, right up to the election.

This is bad news -- and not just for reform of the financial industry -- particularly given that this is a federal election year. Attorney General offices, BAR Associations and Voter advocate groups are in the process of trying to assess the broader implications of the Court's decision, which means enforcement of whatever regulations remain will likely be mired in legal confusion. This could not have come at a more inopportune time.

From Justice Kennedy's opinion written for the majority:

The Court has thus rejected the argument that political speech of corporations or other associations should be treated differently under the First Amendment simply because such associations are not "natural persons".

It is irrelevant for purposes of the First Amendment that corporate funds may "have little or no correlation to the public's support for the corporation's political ideas."

The appearance of influence or access, furthermore, will not cause the electorate to lose faith in our democracy.

We need not reach the question whether the Government has a compelling interest in preventing foreign individuals or associations from influencing our Nation's political process.

These are staggering remarks, and suggest those in the majority opinion -- Chief Justice Roberts and Justices Kennedy, Scalia, Thomas and Alito -- have been entombed in some other world. But such is the luxury for some who reside on the Court. For the rest of us who live in the real world, the question is, "what can be done?"

A lasting fix would require amending the Constitution, that, or wait for a new Court and hope this detrimental decision is overruled -- both high hurdles taking years, if ever. In the meantime Congress can move towards mitigating some of the impact, though it's likely any Congressional actions will ultimately prove ineffective against corporate mutations evolving to circumvent them and the river of additional corporate money flowing into our political system.

The implications for addressing climate change, arriving at a more responsible energy policy, or addressing any other significant policy initiative are difficult to even think about. Short of a massive public outcry, it's hard to envision a meaningful remedy.