Man Without Qualities

Saturday, February 16, 2002

What's $500,000 Worth?

It should be clear that an offer of a $500,000 bribe to Bill Gates is highly unlikely to induce him to breach his fiduciary duties as a director of MicroSoft. This is not because $500,000 doesn't have at least as much gross value to Mr. Gates as it has to you and me, despite his immense wealth. There is no observable "diminishing marginal utitlity" to money. A person's acquisition of a huge fortune rather suggests that he (or she) obtains rather MORE utility than others from the acquisition of a huge fortune.

Mr. Gates is unlikely to be affected by such an offer because the net value of the $500,000 offer is actually negative, and that is a function of his great wealth. This is not hard to see. Suppose a breach of his fiduciary duty would expose him to, say, $10,000,000 in liability if he is discovered. If the chances that he will be discovered are greater than 5%, then the before-the-fact cost to him of the taking the bribe is more than the $500,000 offer - so the net "benefit" of the offer to Mr. Gates is less than zero. Further, since Mr. Gates has more than enough assets to pay even a huge liability, he has no chance of escaping his obligation through his own bankruptcy. So he probably won't take the bribe on economic grounds alone.

In this sense Mr. Gates differs seriously from a director without substantial assets. Such a director never needs to be concerned that the net value of the bribe will be less than zero - since he cannot pay more than the $500,000 bribe he receives in any event. Indeed, if he spends the bribe quickly, he may have no economic downside at all. Monetizable economics are not everything in life. But, on the other hand, one does not normally expect a person who is not affected by money to join the board of a public company.

It is worth keeping the above considerations in mind in considering whether the reported $500,000 compensation paid to the Enron board members was enough to induce them to breach their fiduciary duty to the extent asserted by Enron's critics. These members were for the most part already wealthy. The breaches they have been accused of were of a nature very likely to be exposed. They must have known that the liability to them from such a breach would be huge. And because of their wealth, they would have to pay quite a lot before being entitled to seek protection under the bankruptcy laws. Also, the Enron board was and is of unusually high quality - so they could have gone elsewhere, made perhaps somewhat less money, but been exposed to vastly less risk.

So, although $500,000 is a lot as a gross amount no matter how wealthy you are, it is very hard to imagine that such an amount was enough to induce EVERY SINGLE ONE of the Enron board members to breach his and her duties in the manner suggested by Enron's harsher critics.

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