At a session on financial sector governance, former Federal Reserve Chairman Paul Volcker said that bank directors werent mainly responsible for the bad decisions made by financial firms management was.
Part of the problem is that top managers are paid too much, he told a conference organized by the Center for Strategic and International Studies, so changing incentives doesnt make a big difference. If youre making $20 million a year, it doesnt matter if you spread it out over one year, three years or five years, or have provisions to claw back some of the pay later on.
Part of the problem is that top managers are too frequently blind to the moral dimension of their jobs. He derided the idea that the more you make, the more qualified you are.
Theres a loss of pure pride in profession, Mr. Volcker said.
Another part of the problem is the complexity of the instruments financial firms peddle and the decisions they make. Directors are often at a loss to keep up, he said. Mr. Volcker recommended that boards hire groups of experts to advise them on new products, mergers and other issues, though he doubted that most companies would approve the expense.
Management will reject it, he said. They dont want alternative sources of expertise.
Another recommendation: dont let corporate compensation experts advise board compensation committees. Invariably, Mr. Volcker said, the experts recommend paying top managers higher than the average for the industry.