Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried. Cambridge: Harvard University Press. 2004. Cloth, ISBN 0674016653, $24.95. 278 pages.
A Long and (Dis)Respectful Tradition
The argument in this book comes from a long and (dis)respectful tradition that has looked askance at the influence of corporate management for over 200 years. The tradition easily can be traced back at least to Adam Smith's criticism of the avarice and waste of the agents of the British East India Company ( 1937, 710-13). At about the same time that Smith was writing, an angry band of Americans who fancied themselves "the sons of liberty," and who may or may not have read Smith, took revenge on the East India Company by destroying company property in a grand display of outrage. In what we Americans like to call the Boston Tea Party, these wild "sons of liberty" dumped the company's tea into Boston Harbor. This disrespectful treatment of the company's merchandise was a bit too much for those who respected property more than they loved liberty. The tradition of disrespect has been considered more or less disrespectable ever since first the American revolution, then the French, and, much later, the Russian revolutions ruffled the feathers of the powers that be. Smith has been forgiven for his intellectual participation in the tradition. Most respectable people do not even know that he sinned. The dalliance with heterodoxy by the father of modern economics is just not mentioned in polite circles. Nor do the affluent offspring of the sons of liberty give much thought to the actions of their forefathers when defending their own modern intellectual property rights in the ports of present-day third world countries.
In spite of its disrespectability and suppression, the critical tradition still resurfaces from time to time and in sometimes more and sometimes less disrespectful forms. The sideways glance at corporate management is a mainstay of institutional economic theory, which is considered disrespectable even without it. The sideways glance currently is referred to as the "Berle-Means" hypothesis by institutionalists. In their 1932 book on the continued evolution of private property and the corporation, Adolf Berle and Gardiner Means pointed out that a gap was widening between corporate management and corporate ownership. The gap was making management more independent because ownership was becoming widely...