(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
I just watched the new HBO movie Too Big to Fail, based on the book by Andrew Ross Sorkin about the events behind the financial crisis. In just over 90 minutes, the film has to gloss over some of the details, but it’s surprisingly entertaining. The film brought back memories of following the unfolding events of late 2008 - the Lehman Brothers collapse, the AIG bailout and many others that were happening every day. There are some classic scenes, such as Treasury Secretary Henry Paulson, played by William Hurt, basically locking the chairmen of the biggest banks in a conference room until they accepted TARP funds (whether they needed it or not).
The film is really well acted. Hurt’s performance as Paulson and Paul Giamatti as Fed Chairman Ben Bernanke are both great. But the film is especially worth watching for the performance of James Woods as Richard Fuld, the Chairman and CEO of Lehman Brothers. Whether he’s flatly dismissing Paulson’s demands that Lehman raise capital, or barging into the negotiation of the failed sale of Lehman to the Koreans, Woods paints a fascinating picture of an officer who can’t read the writing on the wall.
HBO also produced a companion documentary, Too Big to Fail: Opening the Vault on the Financial Crisis, featuring interviews with commentators and the actors. There’s a message in this commentary for everyone who sets compensation policy. Sorkin says the following about Fuld:
Dick Fuld had a billion dollars of stock in the company. He had more skin in the game than anyone else. He had every incentive to always do what you would think would be the right thing. He rode his billion dollars of stock down to $56,000.
Certainly, it’s helpful when executives have “skin in the game”. When executives receive a significant amount of their compensation in the form of equity, and they are required to hold much of the equity until after requirement, these features probably do help the company discourage excessive risk-taking behavior. This only goes so far, however - many Wall Street executives like Fuld had huge amounts of equity at risk, and it still didn't prevent the financial collapse.