Bank regulators live in obscurity, diligently keeping the wheels of finance spinning. Then a crisis arrives, and they are thrust into view. No one embodied that more than William McDonough, former head of the NY Federal Reserve Bank, who died last week.
He is perhaps best known for quelling the market panic when a big hedge fund collapsed and later guiding the Fed in the aftermath of the September 11, 2001, terrorist attack.
But Mr. McDonough should also be remembered for two other things.
First, he was an early and vocal advocate for sound risk management and offered some simple principles to help companies achieve it. They will be worth reading again the next time a firm reports a trading blunder. (The principles are also useful as companies think about managing climate related financial risks, a topic I’ll address in a future post.)
Second, McDonough openly worried about excessive CEO pay. He chose the first anniversary of the 9/11 attack to deliver a speech at Trinity Church, at the edge of Ground Zero, on the moral dimension of high CEO compensation:
“I believe that most American business executives at all levels are believers in and followers of the laws of our country. It is important that we not label as sinners everybody who has been successful because a relative few have been noticeably lacking in virtue. The world depends on the economic leadership of the United States, at least as much as it does on our relative military and geopolitical strength.
I believe there is one issue in particular which requires corrective action. A recent study shows that, 20 years ago, the average chief executive officer of a publicly-traded company made 42 times more than the average production worker. Perhaps one could justify that by the additional education required, the greater dedication, perhaps even the harder work. The same study shows that the average present day CEO makes over 400 times the average employee’s income.
It is hard to find somebody more convinced than I of the superiority of the American economic system, but I can find nothing in economic theory that justifies this development. I am old enough to have known both the CEO’s of 20 years ago and those of today. I can assure you that we CEO’s of today are not 10 times better than those of 20 years ago.”
Pay levels for CEOs have continued to soar, but proxy season is right around the corner. Perhaps shareholders will give McDonough’s words fresh consideration.