January 6, 2010 16:24 Age: 4 yrs

PERSPECTIVE: New Thompson Professor Invested

By: Wendy R. Cromwell

Tying executive pay to bank debt could curb risk-taking, Tung says

Robert T. Thompson Jr. 72C 75L 89G congratulates Frederick Tung after his investiture and lecture.

“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 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, 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 risk-taking with federally insured deposits.

“If a bank fails, the subordinated debt holders don’t get paid until all the depositors are made whole,” Tung said. “The market price of the subordinated debt is going to fluctuate with bank managers’ risk-taking.”

One study shows that large ceo holdings of company debt in the form of pensions are associated with decreased risk-taking, Tung said.

Tung is the third person to hold the Robert T. Thompson Professorship in Business Law. Professor Fred S. McChesney held the chair from 1988 to 1997 and Professor Andrew Kull from 2001 to 2005.

“Fred’s scholarship is so timely that it’s almost uncanny,” said Dean David F. Partlett. “For example, his work at the intersection of bankruptcy and corporate governance could not have been more perfectly attuned.”

On faculty since 2005, Tung serves as an adviser to the Emory Bankruptcy Developments Journal. He has taught at Peking University and consulted on corporate and commercial law reform for the Ethiopian Ministry of Justice, Indonesia’s Center for Commercial Law and Economics and the California Law Revision Commission.

Prior to teaching law, Tung clerked for the Hon. Stanley A. Weigel in the U.S. District Court for the Northern District of California and then practiced corporate and bankruptcy law with Gibson, Dunn & Crutcher in Los Angeles and San Francisco.

The Robert T. Thompson Professorship in Business Law, honoring Thompson Sr. 51C 52L, was established by his three sons, Robert T. Thompson Jr. 72C 75L 89G, Randall C. Thomason 76C 80M and David L. Thompson 79C, and his three daughters-in-law.

“My son, Bobby, said he would do almost anything for Professor Tung,” said Thompson Jr. during the investiture ceremony. “Bobby said of Fred, ‘he’s wonderful. He’s one of the smartest people I’ve ever met in my life.’ That really says something if Robert Thompson III gives you an A+.”

Thompson Sr. was a leading spokesman for business interests in Washington, D.C. He was a founding partner of Thompson, Mann & Hutson, a labor relations firm based in Atlanta, Greenville, S.C., and Washington, D.C. He served as chair of the U.S. Chamber of Commerce.

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