Perspective
New Thompson Professor Invested Tying executive pay to bank debt could curb risk-taking, Tung says
“I
suggest that we could blunt bank managers’ risk-taking tendencies by paying them not just with the equity securities of their banks but also with their banks’ publicly traded debt securities,” said Professor Fredrick Tung. Tung, the new Robert T. Thompson Professor in Business Law, addressed executive compensation at banks during his Oct. 7 investiture lecture, “Financial Crisis, Financial Regulation and Financial Executives’ Compensation.” “The idea with stock-based compensation is to try to align managers’ incentives with those of stockholders, so that when the stockholders do well, the managers also do well,” Tung said. “This conventional approach could lead to excessive risk taking.” Banks are heavily leveraged, which means they have low equity capital
“Fred’s scholarship is so timely. His work at the intersection of bankruptcy and corporate governance could not have been more perfectly attuned.” — DEAN DAVID F. PARTLETT
relative to their amount of liabilities or assets, Tung said. The federal government also guarantees banks’ major liabilities — their customer deposits — through deposit insurance. “Deposit insurance has some nasty side effects, though,” Tung said. “It gives bank managers special incentives to take risks. “Because banks’ major creditors, 18
emory lawyer
depositors, enjoy a government guarantee, these creditors don’t impose the same constraints on risk-taking that private creditors of ordinary companies do,” Tung said. Tung proposed including subordinate debt in banking executives’ compensation packages to curb risktaking with federally insured deposits. “If a bank fails, the subordinated debt holders don’t get paid Robert T. Thompson Jr. 72C 75L 89G congratulates until all the deposiFrederick Tung after his investiture and lecture. tors are made whole,” for the Hon. Stanley A. Weigel in the Tung said. “The U.S. District Court for the Northern market price of the subordinated debt is going to fluctuate with bank manag- District of California and then practiced corporate and bankruptcy law ers’ risk-taking.” with Gibson, Dunn & Crutcher in Los One study shows that large ceo Angeles and San Francisco. holdings of company debt in the The Robert T. Thompson form of pensions are associated with Professorship in Business Law, hondecreased risk-taking, Tung said. Tung is the third person to hold the oring Thompson Sr. 51c 52l, was established by his three sons, Robert Robert T. Thompson Professorship T. Thompson Jr. 72c 75l 89g, Randall in Business Law. Professor Fred S. C. Thomason 76c 80m and David McChesney held the chair from 1988 L. Thompson 79c, and his three to 1997 and Professor Andrew Kull daughters-in-law. from 2001 to 2005. “My son, Bobby, said he would do “Fred’s scholarship is so timely that almost anything for Professor Tung,” it’s almost uncanny,” said Dean David said Thompson Jr. during the investiF. Partlett. “For example, his work ture ceremony. “Bobby said of Fred, at the intersection of bankruptcy and ‘he’s wonderful. He’s one of the smartcorporate governance could not have est people I’ve ever met in my life.’ been more perfectly attuned.” That really says something if Robert On faculty since 2005, Tung Thompson iii gives you an A+.” serves as an adviser to the Emory Thompson Sr. was a leading Bankruptcy Developments Journal. spokesman for business interests in He has taught at Peking University Washington, D.C. He was a foundand consulted on corporate and coming partner of Thompson, Mann & mercial law reform for the Ethiopian Hutson, a labor relations firm based Ministry of Justice, Indonesia’s Center in Atlanta, Greenville, S.C., and for Commercial Law and Economics Washington, D.C. He served as chair and the California Law Revision of the U.S. Chamber of Commerce. Commission. — Wendy R. Cromwell Prior to teaching law, Tung clerked