What is wrong with corporate governance in America is that shareholders and directors do not exercise oversight properly. That is where governments should be directing their efforts.

A top-down approach to compensation has been tried before and led to the frauds at companies such as Enron and WorldCom. Executives at those companies were paid in millions of share options, an incentive to manipulate share prices and earnings through fraud. In 1993, worries about executive pay led politicians to alter rules so that any cash in compensation over US$1m would not be tax- deductible. So companies awarded managers in options. Look what happened.

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William McDonough, former head of the New York Fed and a chief accountancy regulator until recently, told Congress in 2004 that he was concerned with a "breakthrough of greed in the 1990s." In 1980 he said, "the average Fortune 500 CEO made 40 times more than the average person who worked for him or her ... By 2000, it was between 400 and 500 times, and last year I believe... it was about 530 times. There is no economic theory on God's planet that can justify that."

And what has happened since? Nothing. That bankers have been lining their pockets while the world burns is a given. But it is to their directors that we should be turning.

Obama was right to voice outrage, but he should legislate to encourage directors to set pay in relation to company performance. A cap of US$500,000 is unworkable. Worse: it will set geniuses to work to devise ways around it, creating the next wave of fraud.

Politicians do not know the first thing about corporate governance. Governments can set pay through the board if companies are nationalized. They shouldn't pretend to be shying away from that step if they want to interfere to such an extent. Otherwise they create a tidal wave of ill-conceived regulation. THE DAILY TELEGRAPH