December 13, 2005
Excerpts: The Battle For The Soul of Capitalism - Part XX
Managers’ Capitalism in the Driver’s Seat
Clearly, owners’ capitalism had been superseded by managers’ capitalism, and managers’ capitalism has created great distortions in our business world and our society alike. Our imperial chief executives, with all their fame, their jet planes, their perquisites, their pension plans, their club dues, their Park Avenue apartments, appear to have forgotten that they are employees of the corporation’s owners. The owners seem to have forgotten it, too. But executive character has not gone unnoticed. CEOs are now close to the bottom of the barrel in public trust. One survey showed that while 75 percent of the general public trust shopkeepers, 73 percent trust the military, and 60 percent trust doctors, only 25 percent trust corporate executives—slightly above the 23 percent that trust used-car dealers.
These self-styled lions of capitalism, often so powerful, charismatic, and demanding that they earned the title “imperial” CEOs, typically drew compensation that suggested that they alone controlled the fates of their companies. As silly as this claim is, more than a few were willing contributors to this fantasy, too often arrogant, greedy, and vainglorious, convinced that “they did it all by themselves” and are worth every penny they were paid.
But while so many business managers took the credit (and the cash) for themselves, it was our expanding national economy and our booming stock market that made them look good. So long as their own wealth was growing, investors accepted uncritically the idea that the high rewards generated in CEO compensation were well deserved.
The reality was far different: While our CEOs created enormous wealth for themselves, far beyond what our thriving economy delivered, they had failed to create extra wealth for their shareowners. And when the bubble burst and the stock market values melted away, these operators had long since sold hundreds of billions of dollars worth of their own stock to the public (and even to their own companies), leaving the new owners holding the bag.
Executive pay is out of control because compensation committees aren’t doing their job. But the consultants are doing theirs. They are paid by management to advise management how much management should be paid. Small wonder that in 2000, for example, we observed awards for achievement for CEOs running from as high as $92 million, to $125 million, to $151 million, and to, believe it or not, $872 million. For a single individual in a single year! These numbers, of course, find their way into the great compensation database, which in turn ratchets up when awards for 2001 are considered, moving formerly average awards into below average territory. And so the compensation norms rise again. It is truly a sick system, all the more difficult to cure since “everyone is doing it,” and the process has the superficial appearance of being rational.
Managers’ capitalism, then, is more than just aprovocative idea. It carries a high cost to corporate owners that can be measured. A study by two professors from Harvard Law School and Cornell University recently found that the compensation of the five highest-paid executives in each of the 1,500 companies included in the Standard & Poor’s 500, Mid-Cap 400, and Small-Cap 600 indexes during 1993–2003 alone was in excess of $300 billion. What is more, despite the fact that the reported corporate earnings grew at a puny 1.9 percent nominal annual rate during the period they examined, the share of corporate profits consumed by these executives not only rose, but more than doubled—from 4.8 percent of profits in 1993–95 to 10.3 percent in 2001–3. A long time ago, even as staunch a conservative as former president Herbert Hoover said, “You know, the only trouble with capitalism is capitalists. They’re too darn greedy.” Just imagine what he’d say today.
link to book