Thursday, June 01, 2006

On the Enron Verdict

by Tom Bozzo

The Conglomerate is hosting a bunch of business law bloggers in an online forum on the Enron verdict (memo to Gordon Smith: swiping Crooked Timber's seminar summary post position and format would be a good idea once your guests have had their say).

Early highlight: discussing a "possible prosecutorial agency cost problem," Larry Ribstein says:

The problem is that what makes criminalizing agency costs problematic for the criminal justice system also makes corporate crime trials challenging for prosecutors. They have to get the jurors to see the criminal conduct buried in the accounting and and distinct from the run-of-the-mill unfaithfulness of their colleagues.

That makes me think I should be worrying more about the prosecutors than whether I'm getting routinely or nonroutinely swindled thanks to corporate law "working" as "intended."

This is as good a moment as any to take another thwack at the Gabaix and Landier corporate executive pay theory — the growth of CEO pay is a "natural" consequence of CEO labor markets frictionlessly sorting CEOs with higher talent to large-capitalization firms. Here's a dose of unreality from the local reaction to the verdict:
"Just about every report on Lay is that he is one of the nicest guys in the world and that Skilling is one of the smartest guys in the world," said [Edgewood College business professor Denis] Collins...

Albert Schweitzer and Albert Einstein. Sure.
Several other Enron-related books are already on the market. But Collins said his work stands apart from those that present Lay and Skilling as nasty characters.

"These were actually very good business people," he said. "But it shows crime doesn't pay. Even $30 million lawyers couldn't get them off the hook."

If you believed the compensation committees and compensation consultants, all of the CEOs are above average. What's worth explaining is the collection of CEOs who joined their companies long before the firms should have been shelling out for top executive talent and subsequently rode the market cap rocket to riches without their boards replacing them with someone more talented along the way. There are reasonable explanations for that, of course, but frictionless sorting of CEOs by talent in the labor market isn't one of them.
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