The time has come to stop criticizing the SEC. It was very late on regulating the leverage which large financial companies took on. It was equally tardy in asking that credit default swaps be kept on some kind of regulatory radar.
No matter how easy people would like to go on the agency, it appears to be late again. Yesterday, senior SEC officials said that want companies to look more carefully at compensation. This would apply to all public companies, not just banks.
According to The Wall Street Journal, the agency thinks "all U.S. companies, not just those in finance, should consider limiting compensation packages that reward excessive risk-taking by executives."
The SEC’s request is a sticky wicket. One of the goals of management at most companies is to take risk. Progress requires a certain dose of the stuff. Steve Jobs probably took excessive risks when he bet the future of Apple (AAPL) on a stupid music player back when the digital song business was still young. Toyota (TM) spending hundreds of millions of dollars creating the hybrid was risky as well.
The SEC wants to be seen as having caught up on the big issues of the day instead of being years behind judging what is important in overseeing public companies. There may be a smattering of applause for that. But, there is something perverse in trying to regulate risk, at least to the extent that risk is dangerous in some cases and critical to success in others. It is risk because it sometimes has catastrophic outcomes.
The current banking and credit crisis could be attributed to boards not reigning in management risk. It could be attributed to stupidity. Executives may have had too superficial an understanding of what their egg heads were doing with all of those derivatives which they kept down in the basement. The SEC is right on one count. If it had spent more time peaking into the danger of the financial instruments banks where using to pump up earnings, they might have been early to see the causes of the impending disaster.
Risk is ruinous, part of the time. It is also the foundation of progress. It is risk because its chances cannot be seen ahead of time. If the economy and the stock market want the good, they are bound to get a taste of the bad.
Douglas A. McIntyre
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