Every time there’s an economic downturn, the spotlight shines on the super-rich and their out-of-touch lifestyles.  The iconic moment of the 1991/1992 recession was then President George Bush looking bewildered at the supermarket checkout line during the 1992 “It’s the Economy, Stupid” presidential campaign.  In 2001/2002, it was Tyco’s CEO Dennis Koszlowski spending $1 million of shareholder money on his wife’s 40^th birthday party (mine is coming up this summer, by the way, and I don’t think it will cost my LPs very much at all, really).

But this latest financial crisis has seen an unparalleled amount of grotesque behavior.  First, we learn that auto industry executives flew into Washington DC to ask for taxpayer bailout money on corporate jets.  Then, it’s discovered that Merrill Lynch CEO John Thain spends $1.2 of his shareholder’s money redecorating his office (Michelle Obama’s redecoration efforts, using the same designer, is apparently only $100,000 for the entire White House!).  And most recently, we learn that AIG executives plan a junket with their bailout money and then seek to pay out bonuses to the tune of $165 million – and if Congress doesn’t intervene, we taxpayers are going to end up getting stuck with the bill.

Why is it that so many Fortune 500 CEOs simply don’t get that they are simply agents of their shareholders, not Masters of the Universe that deserve to be put on a pedestal?  Harvard Business School professor Michael Jensen has written about this time and time again in his seminal work on Agency Theory and human nature – the shareholder is the boss.  The CEO is merely a well-paid agent.  Can anyone imagine this behavior if the money they were throwing around was actually their money, as opposed to some collective of nameless, faceless shareholders?  And yet time and time again, corporate boards with their cozy inter-relationships don’t seem to get it.

I have a simple solution.  Have every Fortune 500 compensation committee run by a start-up CEO.

Perhaps the most successful venture capitalist in history, Sequoia’s Mike Mortiz (backer of Google, Yahoo, Paypal, to name a few reasonable wins), said in a recent interview that one of the ways he decides whether to invest in an entrepreneur is how much they plan on paying themselves.  Moritz views high salaries with immense suspicion.  If the founder takes a modest salary (in start-up land, that’s typically $100-200k per year – well below even President Obama’s $500k cap), he knows they believe in the future value of their business.  We at Flybridge Capital Partners are currently looking at a new deal with DFJ and one of the general partners there reported that her best CEOs are proactively, voluntarily dropping their annual salaries to $75-100k in this environment.  Last month, one of my CEOs informed me that he has decided to forgo his 2008 bonus, which he earned by beating plan (how many Fortune 500 companies beat their plans this year?).

Why this seemingly irrational behavior from entrepreneurs?  Remember, entrepreneurs aren’t saints or selfless do-gooders.  They typically work 80-100 hours per week for two reasons.  First, they are PASSIONATE about their venture for the sake of the business and its impact on the world more than the money (“Ask me about my business and you can’t shut me up,” confessed my friend Scott Savitz, CEO/founder of Shoebuy.com, the other day).  Reid Hoffman, CEO/founder of LinkedIn and an early executive at PayPal, told me last week that his whole motivation in life has been to create products or services that impact millions and millions of people.  Second, when it comes to the formula for making money, they care only about the value of their equity – current cash is to pay the bills (in some cases, not even that).  They want every possible dollar to go towards building shareholder value.  They want to prove to their investors and employees that the risk they took in investing in them and joining their cause will pay off.

Why don’t Fortune 500 CEOs feel the same way?  Why is it that they don’t view their role in life to prove to the shareholder that buys their stock in the public market that they took a worthy risk and they’ll be darned sure it pays off?  Instead, they think it’s culturally acceptable to take outsized pay packages and perks that no educated, rational shareholder would ever approve if given the chance.

The behavior is in such stark contrast to what’s going on in the small business, job-creating end of the economy, it’s absurd.  The public is understandably outraged.  I am too.  That’s why I’d fire all the compensation committee heads and turn the reigns over the start-up CEOs.  After forgoing a $50k annual bonus, can you imagine my portfolio CEO’s reaction if he were the chairman of the compensation committee on the board of Merrill Lynch and learned that John Thain spent $1,400 on a wastebasket?  But do me a favor – if this actually gets implemented – please don’t choose any of Flybridge Capital’s portfolio CEOs.  They’re too busy working 80-100 hours a week trying to build equity value for our investors that we VCs are accountable to:  our own shareholders/limited partners!

FYI:  you can follow me on Twitter at www.twitter.com/bussgang.

When I was a kid, I was obsessed with the newly invented personal computer.  In 1982, I used my paper route and Bar Mitzvah money to purchase an Apple II+ PC (my parents did subsidize the purchase somewhat, I confess).  I was mesmerized by the magic of the personal computer and all its possibilities:  games, programming, communications and more.  But what I really fell in love with was this new, magical thing called the reset button.  Don’t like where you find yourself in the middle of Space Invaders?  Hit the reset button.  Frozen out in the midst of trying to log on to a bulletin board?  Hit the reset button.  Mad at your older sister for messing with your top score in Asteroids?  Hit the reset button.  This magical button represented a unique opportunity to erase the past and begin anew with a clean slate.

Will these efforts work?  On the economic front, there are pernicious, cascading effects to these “resets”.  A rather depressing but insightful recent Merrill Lynch report, titled "Some Inconvenient Truths", suggests there is $6 trillion in private sector (household and corporate) debt that needs to be eliminated before we can embark on a fresh credit cycle.  To date, there has been “only” $1 trillion in write downs.  The implication?  We are nowhere close to hitting bottom, and hitting the reset button is a necessary but painful part of the process.

That’s the macro picture.  At the micro level, I am seeing people hitting the reset button all over the place as well.  For many, the wealth trajectory they thought they were on is no longer the case.  The expectations they may have had for themselves or their children are being re-examined.  Many are sitting down and revisiting all the assumptions they had made a year ago about their assets, retirement and job security.  My portfolio companies are all questioning their old assumptions and making tough choices about how much to invest ahead of revenue, and how many products and markets they can pursue in parallel.

But my rabbi made an interesting point to me this weekend.  He pointed out that there is a silver lining in hitting the rest button.  Rather than simply wallow in the bad news, people can view hitting the reset button as an opportunity, rather than a burden.  It allows them to let go of unrealistic expectations and focus on reality in a new way.  It allows them to reset priorities, zoning in on what really matters to them and eliminating distractions.  An economist’s view of this sage rabbinical advice would be to observe that when your opportunity cost to pursue alternative paths has plummeted around you, anything is possible.

As a result of the opportunity for deep personal growth and new direction, hitting the reset button all around the world should mean more entrepreneurship everywhere.  This trend appears to be playing out.  I met with the co-head of Harvard’s Entrepreneurship Forum last week and she couldn’t have been more excited to tell me about the burgeoning entrepreneurial culture that’s emerged at Harvard.  “The current economic environment has freed people up to do what they really want to do,” she observed, “not just follow a certain path that they think they ought to follow.”  She reports that submissions to Harvard’s business plan competition are double this year as compared to last year.  Similarly, participation at the MIT $100k competition was stronger than ever.

Many economists are pointing to the parallels between our current recession and that of the one in 1982.  That was the year I learned the magic benefits of the reset button.  Hopefully others will as well.

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