Cowen on Bebchuk and Fried

Tyler Cowen reviews Bebchuk and Fried's Pay without Performance in yesterday's WSJ.  Professor Bainbridge previews his own review.

As Tyler summarizes, Bebchuk and Fried attack the "cozy deals between CEOs and their boards." But, Tyler says:

If the problem were a big one, surely some firms would set up truly rational and fair executive-pay incentives to attract capital at a lower cost. And over time we would expect those firms to succeed in the marketplace. But there is no evidence of this happening. One would think that new firms would be in the best position to correct the inefficient status quo, but the data do not suggest that they are set up with more "rational" models of governance.

But there's a problem with this analysis:  What if there is an incomplete menu of "rational" pay packages that firms can offer to the market?  I argue in my imminently forthcoming Why Corporations? that corporate governance is fundamentally flawed in giving owners inadequate checks on managerial agency costs compared to the alternative partnership form.  At the same time, there are regulatory and tax constraints on the availability of the partnership alternative, most importantly the double corporate tax that is applied to most publicly held firms, regardless of organizational form.  I will soon be posting the first draft of a followup to this article, tentantively titled Partnership Social Responsibility.

Which is not to say that Bebchuk and Fried are right, but only that Cowen's criticism is incomplete. I suspect that Professor B's forthcoming review will give us the full picture.