The Best Remedies Against Executive Excess & Malfeasance = Activist Investors & Shortsellers

Recently, Joe Nocera politely explained how Warren Buffett’s de facto support of Coca Colas’ latest executive compensation plan seemed in stark contrast with Buffett’s past words regarding excessive executive compensation http://www.nytimes.com/2014/04/26/opinion/nocera-buffett-punts-on-pay.html

I’ve written about my mixed feelings regarding Buffett here , and am not surprised Buffett’s words and actions considerably differ. But the purpose of this post is not to criticize Buffett, but to answer the following question Joe Nocera poses at the conclusion of his editorial: “How sad. If Warren Buffett won’t use his unparalleled clout to rein in excessive compensation, how can we expect anyone else to?”

 

THE ANSWER: The entities that are naturally motivated to ferret out excessive compensation and malfeasance, respectively - Activist investors and Short sellers.

Make no mistake: there is no panacea for human misbehavior. I’m a firm believer in imperfect knowledge, and imperfect understanding. Activist investors and short sellers do not solve all corporate governance-related maladies. But at the very least, they are (in the Churchillian sense) “the least worst” answer. As a result, the public and regulators would be wise to protect and encourage the activities of activist investors and short sellers. Though both are profit seeking entities, there are spillover benefits resulting from their natural activities.