In what way specifically are US CEO's able to engage in rent-seeking and exploit corporate governance to increase compensation?

Question

I've seen videos where Prof. Stiglitz mentions CEO compensation associated with rent-seeking:

https://youtu.be/b7wIw1VNjSk?t=29m58s
https://youtu.be/heOVJM2JZxI?t=41m28s

I looked on the web and saw a story about how government subsidies meant for workers are absorbed by the executives and that the company's lobbyists are seeking these rents. However, I don't understand how exactly that's done. What are some examples?

I also remember seeing an interview with either him or Prof. Krugman where they mentioned that CEO's are able to exploit the structure of corporate governance (using the board of directors) to artificially increase their compensation. How exactly is this done if it does occur?

Answer 1

Pre-Sarbanes-Oxley it was common for CEOs to nominate the members of the board of directors of their firms. A sub-committee of the board would determine the CEO's compensation, so a CEO could choose people loyal to him (even employees working under the CEO) for the board and those people could boost his compensation. And if they did not do so, he might also ensure that board members that failed to boost his pay did not serve renewed terms. In addition, they could potentially ensure that even when performance was poor that the compensation was high. Sarbanes-Oxley, along with changes from the major US stock exchanges, required independent nominating and compensation committees for boards of directors. It is generally seen in the literature that these rule changes curtailed this practice. However, some dispute that this was ever an economically important channel for self-dealing.