Skroupa: What are your predictions for the near future? Do you think reform is imminent?
Lukomnik: The increase in both the number of agents and derivatives has attenuated us from our ownership. That is a core problem. The political lobbying that corporations endorse generally tries to maximize short-term gain and delay dealing with long-term risk, whether it’s financial, climate or reputational. This is the partially due to the sentiment that corporations don’t feel like they have owners to whom they have to answer. Let me make this very clear: they realize the shares held, but they view those holders in terms of trading and stock price, not long-term stewardship by owners who are or represent individual Americans who will be affected 5, 10 years into the future. A whole section of the book is dedicated to this. We call it “economic attention hyperactivity disorder,” in which the hyperness of the market has seeped into the boardroom through methods such as executive compensation. The result is that corporations feel enormous amounts of short-term pressure.
Skroupa: Do you think that governance in the U.S. market allows for owners to be owners?
Lukomnik: The governance system is the central point of the book. The economic-ADHD is a massive problem in keeping companies on the path for long-term value. The fact that there is a disconnect has a lot to do with it, and complexity only makes the long-term projections harder. We forget that there is this wonderful social construct–employment. With CEOs, we feel as if we need contracts for everything, however, it should be the opposite. The higher you are in the corporation, the more you understand what employment means and what you should be doing. I take blame as an institutional investor, because we have dug our own problem with this, with how we approach executive compensation, with how we define performance as short-term market performance, with how we obsess over quarterly numbers. There have been a lot of missteps along the way, such as a tax regulation known as 162(m) which was supposed to link tax deductibility of executive compensation to performance. The U.S. has always determined that stock compensation is performance based. Christopher Cox, the former chairman of the Securities and Exchange Commission, once said “In the museum of unintended consequences, 162(m) takes pride of place.” We pay our CEOs largely in a currency that goes up and down with every market move. We shouldn’t be surprised that they are short-term focused.