I read with utter disgust how automobile company CEOs utterly botched reasonable Congressional questions concerning their absurd use of private jets.

I would like to introduce the DailyKos community to a common financial practice in Japan which helps better assure that CEOs and other senior executives will manage their companies well. The principle is very simple: Japanese lenders (private and government) routinely demand personal collateral from CEOs and other senior managers as security for part of their loans. That is, lenders take liens on CEO houses, cars, yachts, and other substantial personal assets.

The U.S. Government -- and taxpayers -- should demand the same.

It's a very simple principle. If you want money from the taxpayers, and you're among the top managers, you should be willing to sacrifice. (Taxpayers certainly are.) It is intolerable to privatize gains and socialize losses. We must have a system of personal accountability, a new CEO culture that understands public responsibility and civic duty when receiving taxpayer monies.

And there's no better, more meaningful way to do that than for the CEO, Board of Directors, and top managers to pledge personal assets as partial collateral. In the context of a $25B bailout such a step is symbolic, sure. (They don't have $25B in personal assets to pledge.) But in the context of the company leadership the step is deeply and personally meaningful. That's exactly what counts here.

If CEOs are not willing to do that, then that says everything about the degree of confidence U.S. taxpayers should have in that borrower's ability to repay any loans. It also tells us about the poor quality of the company's management.

In Japan, if the CEO is fired or resigns, the new CEO has the option (but not obligation) of assuming responsibility for the liens by transferring them to his/her own personal assets. (Corporate and taxpayers funds may not be used to facilitate this transfer, and there are compensation caps in force until the lender is fully repaid.) The liens stay in place until the loans are fully repaid. Liens should be placed on a minimum of, say, 80% of personal assets, although the manager should be able to keep a minimum of, say, $2M of personal assets if there is default unless there is a finding of criminality.

It's a sensible, logical, rational approach -- and very effective in Japan. The practical effect is that CEOs must post personal bond. (Many housekeepers have to do that!) They must have some real, personal skin in the game. CEO liens should be a required element of any taxpayer bailouts from now on -- and for any additional funds supplied to companies such as AIG. Some CEOs may howl, but those that do are automatically the bad apples. The sooner we identify lousy managers, the better.

Originally posted to sipples on Thu Nov 20, 2008 at 07:08 PM PST.


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