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I wrote last week that Wall Street bonuses should be cut back by the shareholders, not by the government.
Well, a reader wrote back correctly to remind me that the majority of shareholders are institutions that would not want to antagonize major corporations that gave out fund management mandates for their pension funds and 401(k)s by agitating against top management bonuses.
Good point. Very good point. And it highlights a central flaw in today's capitalism. It's far too controlled by corporate management. And it's time something was done about it.
Well, a reader wrote back correctly to remind me that the majority of shareholders are institutions that would not want to antagonize major corporations that gave out fund management mandates for their pension funds and 401(k)s by agitating against top management bonuses.
Good point. Very good point. And it highlights a central flaw in today's capitalism. It's far too controlled by corporate management. And it's time something was done about it.
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Adam Smith showed that the free market works in general, but he wasn't a great fan of large companies (of which there were a few in his day) where the shareholders don't control the management. He wrote: "The directors of such companies ... being the managers of other people's money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance ... Negligence and profusion must always prevail, more or less, in the management of such a company."
Even fifty years ago, individuals remained the main power behind most corporations. Institutions in 1950 controlled only 15% of shares in U.S. publicly quoted companies. Then two forces turned that around, so that by 1980 institutions controlled 50% of shares in U.S. publicly quoted companies, a percentage that has tended to increase since.
First, estate taxes started eating away at individual fortunes. The modern estate tax was introduced in 1916, but it went above a 20% rate only with Herbert Hoover's ill-starred 1932 tax increase. Even by the 1950s, there were many individual fortunes associated with major corporations that had not yet suffered its depredations.
As the decades went on, however, fortunes were decimated by the estate tax. Even more damaging, rich people started putting their money in trusts or giving it to charitable foundations in order to avoid the estate tax. The result was that large individual shareholdings in public companies became much less important.
Then, starting in the 1950s, middle class people had pensions through their jobs – first in funded systems and later in 401(k) plans. As a result the amount of money that was invested on behalf of middle class savers grew exponentially and at the expense of the savings they accumulated on their own, which became less important. Rising house prices, encouraging people to build their net worth through real estate investment, intensified this effect.
Theoretically, managers of investment funds have the incentive to behave just like individual shareholders, voting their fund's shares to maximize shareholder value. In practice, they don't. And it's easy to see why not. Institutional fund managers aren't the best and brightest in the financial services business – those guys are on Wall Street or in hedge funds, where the money is better – they are competent bureaucrats working their way up the gently sloping career structure of the investment management business.
So there is really no incentive for them to rock the boat by entering into a dispute with the greedy management of a company whose shares they own. It's much better just to sell the shares, or to hold them, but keep voting for management and ignoring the greed.
No amount of "good corporate governance" initiative will energize institutional investors into beating corporate management about the head with a two-by-four; it's not in their nature. However, without institutional shareholder aggression, the current situation will get worse. Egged on by compensation consultants, management will get ever greedier, pushing up its rewards by 8-10% per annum at a time when others' pay is flat.
That will be bad for the U.S. economy.
Whereas shareholder capitalism has been shown time and again to produce optimal results, there is no equivalent theory praising the results from managerial capitalism, where the ownership of capital and the management of resources have become so detached from each other.
There are, however, two things that can be done to improve matters.
First, the U.S. Federal Reserve can set interest rates at a sensible level, so there isn't this huge surplus of money sloshing around everywhere. Corporate empire-building – like Kraft Food Inc.'s (NYSE: KFT) bid for Cadbury PLC (NYSE ADR: CBY) – or huge profits by pointless rent-seeking trading are both products of the current very cheap money environment. Once interest rates rise, it will be tougher for companies to build empires and impossible to make such exorbitant returns through leverage and excessive lending.
The second change needed is the repeal of the estate tax, or at least its reduction to a 20% maximum rate. Ideally, this should be combined with the elimination of income tax deductions for home mortgage interest and charitable donations. That will ensure that modest middle class fortunes will be invested in productive enterprises and not frittered away on expensive houses and wasteful charity.
With these changes, the shareholdings of ordinary investors and of families whose ancestors found companies will gradually increase at the expense of institutional money. That in turn will make management more responsive to individual shareholders, and less likely to waste shareholder money.
The kind reader was quite right about institutional shareholdings preventing capitalism from working properly. It's time something was done about it.
News and Related Story Links:
Even fifty years ago, individuals remained the main power behind most corporations. Institutions in 1950 controlled only 15% of shares in U.S. publicly quoted companies. Then two forces turned that around, so that by 1980 institutions controlled 50% of shares in U.S. publicly quoted companies, a percentage that has tended to increase since.
First, estate taxes started eating away at individual fortunes. The modern estate tax was introduced in 1916, but it went above a 20% rate only with Herbert Hoover's ill-starred 1932 tax increase. Even by the 1950s, there were many individual fortunes associated with major corporations that had not yet suffered its depredations.
As the decades went on, however, fortunes were decimated by the estate tax. Even more damaging, rich people started putting their money in trusts or giving it to charitable foundations in order to avoid the estate tax. The result was that large individual shareholdings in public companies became much less important.
Then, starting in the 1950s, middle class people had pensions through their jobs – first in funded systems and later in 401(k) plans. As a result the amount of money that was invested on behalf of middle class savers grew exponentially and at the expense of the savings they accumulated on their own, which became less important. Rising house prices, encouraging people to build their net worth through real estate investment, intensified this effect.
Theoretically, managers of investment funds have the incentive to behave just like individual shareholders, voting their fund's shares to maximize shareholder value. In practice, they don't. And it's easy to see why not. Institutional fund managers aren't the best and brightest in the financial services business – those guys are on Wall Street or in hedge funds, where the money is better – they are competent bureaucrats working their way up the gently sloping career structure of the investment management business.
So there is really no incentive for them to rock the boat by entering into a dispute with the greedy management of a company whose shares they own. It's much better just to sell the shares, or to hold them, but keep voting for management and ignoring the greed.
No amount of "good corporate governance" initiative will energize institutional investors into beating corporate management about the head with a two-by-four; it's not in their nature. However, without institutional shareholder aggression, the current situation will get worse. Egged on by compensation consultants, management will get ever greedier, pushing up its rewards by 8-10% per annum at a time when others' pay is flat.
That will be bad for the U.S. economy.
Whereas shareholder capitalism has been shown time and again to produce optimal results, there is no equivalent theory praising the results from managerial capitalism, where the ownership of capital and the management of resources have become so detached from each other.
There are, however, two things that can be done to improve matters.
First, the U.S. Federal Reserve can set interest rates at a sensible level, so there isn't this huge surplus of money sloshing around everywhere. Corporate empire-building – like Kraft Food Inc.'s (NYSE: KFT) bid for Cadbury PLC (NYSE ADR: CBY) – or huge profits by pointless rent-seeking trading are both products of the current very cheap money environment. Once interest rates rise, it will be tougher for companies to build empires and impossible to make such exorbitant returns through leverage and excessive lending.
The second change needed is the repeal of the estate tax, or at least its reduction to a 20% maximum rate. Ideally, this should be combined with the elimination of income tax deductions for home mortgage interest and charitable donations. That will ensure that modest middle class fortunes will be invested in productive enterprises and not frittered away on expensive houses and wasteful charity.
With these changes, the shareholdings of ordinary investors and of families whose ancestors found companies will gradually increase at the expense of institutional money. That in turn will make management more responsive to individual shareholders, and less likely to waste shareholder money.
The kind reader was quite right about institutional shareholdings preventing capitalism from working properly. It's time something was done about it.
News and Related Story Links:
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(Barel Karsan, 1/15/12)
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Wall Street Employees Threaten To Quit If Bonuses Aren’t Up To Snuff
(Value Investing, 1/10/12)
Tags: Bonuses, Martin Hutchinson, Shareholders, Wall Street
HERE, HERE !!! You've hit on the root cause of our present predicament; Profesional Management's Unbridled Greed. But much more should and can be done about it, and given shareholding profiles now'er days I'm afraid it would have to be through legislation.
No doudt your right up there with hedge fund managers, greedy ceo's, and the typical attitude of what ever is good for me is best. I'm a chairman of one of those"wasteful charities" where nobody gets paid and all money goes to cancer patients. Maybe everybody should donate to the rich so they can buy another yacht. Use your words carefully; people will think you are a moran. Good-bye moran.
to cancer patients
Here's just the reason that chariities may be considered "wasteful" – the author of this message claims that no one connected with the "charity" of which he is chairman is paid and all the money goes to cancer patients. Yet he can't spell "doudt" for doubt, "your" for you're, and, significantly "moran" for MORON!
It's spelled Moron not moran.
I worked for a wastefull charity for a number of years, they depended on faith and ignored sound business practices, however his quote still upset me.
Dear Mr. Hutchinson,
I cannot agree with you more with respect to destructive influence of "managerial capitalism". I have argued for years with "anti capitalism" friends that captalism and open markets in not the problem but rather "corporate governance". Management in "widely-held" companies, especially noticeable starting in the late 1980's, were becoming less and less accountable to shareholders. As a consequence, top management compensation started to rachet up – slowly at first but with snowballing effect – until all hell broke loose in the last decade.
Thank you for this and an earlier related article a week or so back. Resolving this "governance issue" is fundamental to maintaining a healthy western world style economy and bringing investment confidence back in the financial markets. Please, for all our sakes, do not leave this issue drop off our collective radar screens.
Regards,
Paul Daigle
Moncton, NB CANADA
Limit interest deduction on homes to 25000, then reduce by 5000 per year.
I've advocated the opposite. Eliminate the Mortgage interest deduction. Then replace it with a flat home owners tax credit.
Promote home ownership, not debt.
Right now 30% tax rate, 5% mortgage, and a $1 million dollar home = $15,000 yearly tax subsidy to a millionaire paid for by the taxpayers to live in that million dollar home.
Give homeowners a tax credit of $3,000 for owning the home, regardless of wheter they have a mortgage or not. – Promote home ownership not mortgage debt.
there is something more that is needed – there needs to be a website that includes the laws governing share holders relationships to their brokers. This also should provide instructions to share holders of how to give orders to their brokers – I just discovered with a shock that oral orders to my broker – in Switzerland were not followed – and there was not a law in Switzerland evidently – that they had to keep records -
The broker was member of a bank – and banks in Switzerland are evidently not regulated in such a way that the client is protected.
Constance Blackwell
Martin,
Excellent article on the problem of shareholding and the discontect through today's set of circumstances. However, I would caution your use of the phrase "wasteful charity". People in the US, as oppsoed to Europe, look for holes in serivce to the community. They set up organizations that fill these holes much more effectivly than any government bureaucracy, thus freeing up capital to be used in productive enterprise. The tax deduction is still less expensive that government running these programs.
On your comment about executive compensation "Egged on by compensation consultants, management will get ever greedier, pushing up its rewards by 8-10% per annum at a time when others' pay is flat."
Compensation consultants are paid by the very same management whose salaries the compensation consultant is trying to recommend. Do you see the problem? I know a compensation consultant working for Hewitt Assoicates who went to make a presentation to the board's compendation commitee of a large corporation. The presentation was about the current comparative executive compensation iin the Indutry and what this corporation's executives should be receiving. At the end of his presentation, the CEO told my consultant friend 'wrong answer', go back and rework your compensation recommendations!!!!!!!
My consultant friend couldn't believe such arrogance and came out saying there is no system of checks and balances in these corporations. These guys are just paying themselves what they want! Unfortunately, he had no choice but to go back and 'rework' his recommendation as he was being paid by this very same corporation (and their CEO)!!!!!!
I agree with you entirely, except your comment about charities. Most charities are legitimate and their management self-sacrificing. Unfortunately, many worthy causes are unable to use a high enough percentage of their revenue for the causes they espouse. The cost of fundraising is exhorbitant!! Eliminating the charitable deduction would increase the problem tenfold!!
I have long had doubts about the merit of tax deduction for charitable contributions and home interest on the grounds that home interest deduction distorts the economy. As a lifelong church member in several different cities, it appears to me that charitable contributions results in opulence in buildings and large church staffs, which allows members to abdicate responsibilities to employees of the churches. Deductibility of charitable contributions has resulted in empires in higher education, the size and cost of which far outweigh their contribution of society.
Since you are mentioning money going to college endowments. The whole government funded higher ed system should be reworked. The more the government subsidies, the higher the cost. If you charge $10,000 per year tuition and the government come along and says education is too expensive, here's $10,000 per student, you will quickly find the cost rising to $20,000 per student.
It seems that large fund families (Vanguard comes to mind) could do a lot to promote their commercial interests (with the investing public) and the interests of all shareholders by taking every opportunity to see that corporate management's interests are more aligned with shareholders. Voting down any stock incentive giveaways to management would be a start. Employment contracts that require management to use some fixed percentage of their "hard earned" pay to buy stock would be much more constructive. Management should also be limited on how quickly they can liquidate their stock when they leave the company. I won't hold my breath!
Randy
Say On Pay is having an effect. Several hundred corporations now give their share holders the rightr to vote on the make up of their boards Promote Say on Pay!!!
And now the green light the Supreme Court has given corporate management on the road to controlling election outcomes with "big money" greatly adds to their arsenal of weapons to further diminish individul shareholder influence.
This problem is way over stated. Corporatiions already have a out of control share of the say in elections. In 2006 and 2008 5 companies GE, Disney, Viacon, Time Warner, and NY Times, controlled 90% of the political speech, thanks to McCain-Feingold. And Union money controlled half of the rest.
What a threat, in 2010 some of the other 5,000 companies might get a say as well.
Should the US Senate guide? 2 votes Rhode Island, 2 votes California.
If shares were banded into say 10,000 blocks worth one vote to a maximum voting block of 10,000,000 .
Very small holders would have no vote, mid size some influence and large blocks reduced say.
Some balance restored.
Do not confuse capitalism with the free market. The free market is what makes our modern economies work. Capitalism, as it has evolved, is sand in the gears. It is left over from the age when royalty and their lackeys, the landed gentry, owned everything. Its major institution, the stock market, doesn’t even serve a legitimate function for established corporations. Its major function is supposed to be as a mechanism for corporations to raise capital for growth. The reality is that, for well over a half century now, it has provided a large net flow of capital out of corporations into the pockets of stockholders. I’m not talking about via capital appreciation, but via the purchase of stocks by the corporate treasury. This, of course, is one of the major drivers of capital appreciation.
Modern corporations are eager to claim that their employees are their greatest assets. But employees don’t even rate the same status as such assets as a factory or a coffee maker. At least these play an important part in the capital structure of the corporation. Employees are nothing more than expenses. And as expenses, they are simply to be minimized in quantity. A truly productive system of ownership would include labor rather than simply dollars fed into the corporate slot machines. Labor is far more important to a corporation than capital, and especially to established corporations whose capital requirements are negative. And yet capital is still the only source of ownership. And owners make all the important decisions.
You are entirely correct that the present system of "capitalism" virtually excludes labor from its decisionmaking, except for contracts which try to minimize their costs to the corporation. In a recent board candidate nomination process for Avondale Industries, the steelworkers nominated several lawyers with ties to labor for seats. The ballots stridently stated that "management strongly opposes" these candidates. Considering the inclusion of labor in corporate boards could markedly decrease the hostility associated with contract negotiations, whereby the true fiscal picture and future strategy of the corporation would then become transparent. Keeping everyone in the dark until "insider sales" reveal the actual reality is why we had Enron and its successors.
Unfortunately we can now forget about this. After yesterday's Supreme Court decision, we will no longer have the senator from Texas, but now the senator from (you supply the name of the oil company) or the senator from Connecticut, but now the senator from (you supply the name of the insurance company.) If there is a way that the average shareholder will be able to have their voice heard, it just went away as if the institutions, as the questioner posed, are reluctant to question management, how do you think the politicians (and their appointed regulators) will react.
Stock holders should require elected management to own a percentage of the company bought with their own money, and eliminate stock options.
May I make a recommendation on this issue. How about instead take any compensation over say $250,000 in a year to any manager or executive. And use it to buy as many shares on the open market based on the all time high price of the share.
Say the CEO of Citi gats $1,250,000 salary and bonus this year. He gets $250,000 in cash the rest gets divided by the "all time high" (let's say for example it was $50 per share before the market crashed) $1,000,000 / $50 per share = 20,000 shares. So the company buys him 20,000 shares of Citi at market price on a defined day (say 15 business days after the anniversary of his employment). Let's say it was $3.50 per share. That's $75,000. The remainder ($1,000,000 – $75,000 = $925,000 goes to pay back the individual shareholders who via special dividend with an ex-div date being 1 day before the shares are purchased for the CEO and all other managers.) Now the only way he get's to recoupe his loss on the shares to to actually amke the company grow. Then 6 years after he leaves the job (provided he makes sure his replacement is competant) he is allowed sell the shares.
The voting power needs to be returned to the people who own the shares and not the company that holds the shares for you inside a pension or mutual fund 401K.
You own the shares (through your pension or 401K) why should you not have the right to vote at the share holders meeting or by mail for the shares that you own instead of the holding company that just holds the shares for you in their fund ????
I believe in a free market. If compensation is too large, it's the stockholders business, not the government's. Get your nose out of this story.
If you don't agree with me, I don't want to hear from you again. You do what you need to do. That's it. Live with it.
If you can tell me how to multiply my stock holdings by 4 or 5 next year, I'll be interested, but I'm not interested in anything that suggests government control of anything. It is the stupidest part of our country.
John Hunter
Wichita, KS
Large mutual funds that vote their many,many shares in a company, invariably in accord with the company's board/management's wishes, are certainly very much to blame for the outrageously large salaries and bonuses. What if the funds were required by law to solicit the shareholders on all questions regarding pay and/or bonuses, or, alternatively, to vote their large blocks of stock as ABSTAINING?
I don't understand "fund management mandates for their pension funds and 401(k)s". What is this? Why are institutional investors scared of these?
Many will agree that income tax deductions for mortgage interest are indefensible. For you to take pot shots at the deductions for contribution to charities is also indefensible, and makes many of us wonder where you are coming from. Until now I had great respect for your opinions
You propose eliminating estate taxes and deductions for mortgage interest and charitable contributions would solve the problem of exorbitant management bonuses. I agree with eliminating estate taxes because it may be assumed that all applicable taxes have already been paid on the income and it ought not be taxed twice. (If some of it was not taxed because it was tax exempt, the amount of the income was probably less because it WAS tax-exempt.)
I agree with the elimination of mortgage interest. The decision to buy a home is a personal decision that ought not be affected by the income tax laws Allowing such deductions is an effort to torque personal decisions. This results in those who do not have a mortgage providing welfare to those who do have a mortgage.
Charitable deductions should be allowed. If you give it away to a TRUE charity, it ought not be taxed. The operable word here is "true". A true charity – in my opinion – excludes t hose supposed-to-be apolitical organizations that attempt to influence public policy but claim to be unbiased politically. A true charity would include gifts to eliminate poverty, hunger, disease and similar objectives.
Now, a comment the size of management compensation and the lack of stockholder control in other than closely held organizations
In the final analysis, Top Management selects the Board of Directors. The nominees are selected by the current Board (through its nominating committee). No nominee would be selected were it known that nominee would not support management and the current Board.
Top Management determines compensation in one of the following ways
1. They devise compensation plans and then present them to the Board. These plans are based on at least two rationales: (a) The base compensation is comparable with other similar companies ("Other people are paying their top management at this level, therefore, so should we.) or (b) We employed a consultant to evaluate/recommend compensation plans and this is in accordance with their recommendation (Of course, they would not stay in business if they regularly recommended plans not acceptable to Management.)
2. They devise "incentive/bonus" plans that are based on "targets" which Management determines. By low-balling the target, they assure themselves of a bonus. These plans seldom include such relevant things as growth in profits per share or growth in stock price. They do sometimes include in growth in total sales dollars and total profits. That growth may be achieved by mergers or purchase of other companies for stock – which may or may not result in increased profits per share or stock price. Inflation may cause a growth in dollar amounts but that is almost universally not a factor in these bonus plans.
It seems to me the higher in the organization is an executive the more should his/her bonus pay be affected by how the stockholders have fared!
In widely held stock, I know not how to give individual stockholders more input into these compensation plans. I believe there is presently a dollar limit on the amount of base compensation that is allowable as a deduction for corporate Federal income tax purposes. (Some companies pay their top executive more than this top limit and just forgo the deduction.) But there is no limit on the amount of "incentive" compensation that meets Federal guidelines that do not require the consideration of factors related to stockholder interests – such as profit per share and changes in stock price. Just like there is often a thin line between tax avoidance and tax evasion, these bonus plans are almost always manipulated to the advantage of Management.
Presently, the foxes are om charge of the hen house!!!! And it is difficult to blame them entirely for their deplorable behavior. They can thereby increase their compensation and there is no meaningful restriction on their power to do it. How many people who had legal and unrestricted access to a pool of cash would not take all they could carry – and continue coming back for more??????
There should definitely be a high correlation between the improvement in stockholder interests and management bonus compensation. How this is accomplished I do not know. One way might to be to establish an incentive pool that considered changes in profits per share and stock price – taking into account the current year and the average for some preceding period (to take into account negative changes also). This could then be distributed in accord with the Board's decision, the decision of the CEO, or a committee of the Board and management.
The best example of this was the $1 per year base compensation of Lee Iacocca, the new CEO of Chrysler many years ago when Chrysler was having serious difficulties and was facing probable failure. He accepted an incentive plan that depended almost entirely on growth in profits, profits per share, and stock price. I think no investor felt the resulting compensation was unreasonable – considering the alternative. He made money only because the stockholders did. A similar arrangement should be a major component of most bonus plans for top management. The problem is: WHO IS GOING TO MONITOR THE COMPLIANCE WITH THE SPIRIT OF THIS PRINCIPLE? Presently,
This is a most interesting piece which makes total sense as to how and why there are few limits on big corporations salaries and bonuses today. That most individuals own stocks through big funds and investment companies whose fund managers won't rock corporate management's boats is a major revelation for me. In addition, there are individuals that trade stocks in their own online accounts taking short-term gains/losses with time frames for ownership so short they have little or no interest in managment accountability.
One last thing regarding charities: I have to agree with some of your commenters. While charities run the gamet of efficiency and purpose, many do fill invaluable gaps that government shouldn't and couldn't do as well. Donors and members of such non-profits should hold managment accountable as they can. Unfortunately many big 501-C3s get tons of grant and government funding, again making them less willing to be accountable to smaller individuals and donors.
The problem is that THE FOXES ARE IN CHARGE OF THE HEN HOUSE.
Board of Director nominees are selected by the Board Nominating Committee. The nominees are proposed by present Board members or members of Top Management – who are members of the Board and most probably proposed all members of the current Board (including the Nominating Committee). Top Management does not knowingly propose nominees who they believe will not support their proposals. Therefore, Top Management selects those who are supposed to monitor their performance and compensation – and those "monitors" serve pretty much at the pleasure of Top Management or the "monitors" are replaced.
Since they are effectively in full control of their decisions and compensation, they have few effective restraints on their actions. Therefore, they can and do structure their compensation plans as they choose. Their ultimate bosses should be the stockholders but stockholder interest are seldom a meaningful part of executive management's bonus plan factors. For example, changes in profit per share and share prices are seldom the most important parts of the bonus plans. Sales and profits are considered only as totals – if at all. Total sales and profits can be increased by buying companies for cash and/or stock even though profit per share and market price per share are not increased or even decreased.
But do not entirely blame Top Management. The present system gives top management legal and unrestricted access to a pool of cash. We ought not be surprised they take as much as they can get today and come back for another load tomorrow.
The answer to this deplorable behavior is (A) REQUIRE that stockholder oriented factors such as changes in profit per share and market price be major factors of management incentive plans, and (B) establish some INDEPENDENT method of incorporating these factors – to the extent the beneficiaries of a plan determine the structure of that plan there will be little restriction of its benefits.
results of corporate greed and in general attitudes created an economic mess equivalent for US and associate economies of a lost war…. unfortunately home made. Losses will be funded by tax payers and sinking life standards.
20% flat tax no matter what you make. One person, one vote, no electoral college nonsense. Cancel corporate and individual funding of elections: allow only public funds, three weeks tops, like Canada. Abolish farm subsidies. Abolish the Fed. Can you imagine a lean America?
This would put an end to the Washington bloat, foreign policy adventuring, bailouts of failing enterprises . . . oh don't get me started! My feeling is less money, less power and both the political parties would have some high-stepping to do.
I Agree with John Hunter it is government interfering with the free market –They causd the meltdown with Fannie and Freddie– Also if they tax executives excessive amounts, they will increase their salary to make up for the difference -to pay the tax! Therefore widening the gap between them and to the detriment of the lower levels –GET IT ? –
Nice article good thinking however, Wall Street CEO's are greedy, the boards are worthless, and mutual funds and pension plan manager do not have a clue, why would we thinks they would. Funds managers went to the same schools as the Wall Street CEO's, they all scratch each others backs.
I think that compensation consultants need to be put on a leach, as they are the spark plugs for the larger pay checks that we keep talking about.
Oh great, more bad advice. The problem is not that interest rates are too low, it is that the FED keeps printing money like crazy. if you keep the M-1 money supply growing at 1% per year, and set the prime rate at 1%, you will not have a problem.
If you really want to fix the problem, you have to prohibit nepotism and conflict of interest. No spouses of Executives sitting on Boards of Directors for example. No execs from one company sitting on that board or any other board. prohibit elected official, and former elected officials from sitting on boards. End the process of "outside" directors. The only people who should be allowed on the boards are individual investors who have owned their shared for some long period of time. say 7 years. Likewise ban any member of a board from increasein or decreseing his number of shares during his stay on a board and for some period afterwards, again sy 7 years for example. Require positive votes from the shareholders to be elected to the board.
Most importantly require certain things be voted on by the shareholders in a"co-operative" manner, (each shareholder get 1 vote regardless of the number of shares), things like mergers and acquisitions, executive compensation, whether or not the executives earned theri bonus each year, wheter to spinn off or sell assets, splits and reverse splits, issuance of more stock, raisning coprorate debt, etc. basically anything that directly effects the shareholder.
There is nothing that makes me madder as an investor, than when the execs cut inside deals with themselves to the economic harm of the investors. For example when 2 companies merge and huge fees and bonuses are paid to the execs that did the deal, then a few years later it doesn't work out and the company splits off or sold at a loss, and the execs that made the bad deal and got the bonuses, not only don't have to pay them back, but get even more bonuses for selling or spinning it off. M&A rare now are done in the interest of the investors, they are done primarily to generate fees and bonuses for executives.
I liked the way Martin puts it- "Shareholder Capitalism" vs. "Managerial Capitalism". That "shareholder capitalism" will evolve into "managerial capitalism" is inevitable as the initial founders (Ford, Morgan, and even the latest ones like Bill Gates, Steve Jobs, et al) age and retire leaving the fate of the organizations in the hands of "competent bureaucrats."
Agency Theory is supposed to be dealing with the kind of 'conflict of interest' that Martin mentions, between shareholders and managers of a corporation. That the current rewarding structure (cash + stock options) of managers of corporations is not resolving this conflict has become glaringly evident during the last Wall Street crisis.
The other inevitable phenomenon is that middle classes (no matter how much their savings rise) will be forced to depend on institutional investors who many mutual and trust funds. Any small individual investor – who trades in the stock market – knows that the amount of data & information that is out there to be first acquired and then processed to come up with optimum portfolio management is simply not possible. Hence, individuals are and will be more and more forced to rely on the data/information acquisition and processing powers of institutional investors. None of us can simply cannot come out of this inevitability.
As far as I can see, there is no option other than having an umbrella policy to curb obnoxious bonuses offered to managers. An umbrella policy will insure that all sectors are equally impacted – unless the government by design wants to push more skilled and better brains into selected sectors, say away from Wall Street toward Green Tech innovative companies.
Obnoxiously high bonuses (in cash or in stock options) will have to be taxed at prohibitive rates – such as, 75% tax rate on cash amounts above USD 450K (the President's salary) and 90% of the value of stocks on the offer day if the valuation crosses USD 0.5 million.
The above figures are merely illustrative. Actuarial methods may be used to arrive at the exact formula to prevent bleeding of corporations and shareholder wealth by competent or incompetent managers. If greed cannot be curbed then entrepreneurship will be pushed more and more to the back burners and the very driving forces of capitalism – hard work, thrift and innovation – will be reduced to ashes.
Hope somebody listens.
The problem is the same in the political field as in the corporate world. Both constituents and share holders are ignored because management, and party control most of the funding. The Supreme court's decision makes the problem worse.
Many shareholders vote with management because they do not understand what management is doing, they tell it in complicated methods and language. I do not give to charities anymore due to how much the charity CEO's make. A local regional charity CEO makes over $100,000. I am sure that a recent college graduate could handle running a local charity for half of that.
As for boards of directors — ha! The second biggest bunch of crooks in America. Talk about an establishment! For thirty years, I dutifully read and studied the directors meeting proxy statements for various corporations I owned stock in. For thirty years, I analyzed the issues and then voted prudently. For thirty years, I voted for six candidates for six vacant seats on the boards. The number of seats always equaled the number of candidates. But now I save time and am thru the proxy ballot in about thirty seconds. I simply look at how management advises me to vote and then vote the opposite. Voting for the candidates takes a little longer. I vote FOR ALL EXCEPT and then write in the numbers of all the candidates. But it makes absolutely no difference what or who I vote for or against. I even found a website a few years or so ago where some guy tracked all the proxy issues of all or some major part of the American corporations, like maybe the S&P 500 or something. He listed all these issues, like thousands of them, how management recommended to vote, and what the tally turned out to be. Do you know how many issues pass over the opposition of management. Not just zero, but absolutely, identically zero. As I recall, there was one issue that got over 20 percent of the vote. That was the highest. There were maybe a dozen with more than 10 percent, maybe a hundred with more than one percent, and then the masses with less than one percent. I cant remember what the website was now.
My favorite board is Disney. They hired a bum, Michael Ovitz, at some salary like 70 million or so. He was there 14 months and just about ran them into chap 11, so they fired him and gave him his 190 M severance package. Then they just reelected each other to the board and back to business as usual. Walt Disney was a dedicated visionary, and if he could see the bums running his company today, he'd probably strangle Mickey Mouse for just being a part of it.
We do not " need " legal voting rights . We do need trustworthy analysts capable of assessing company actions that could significantly affect share value and thereby provide a reasonable basis for deciding whether to buy/sell – the ultimate vote .
I would like to offer two different ideas which I believe would also work the desired result:
1. Director's compensation will be paid only in stock or stock options, to be vested 5 years into the future;
2. Change the Internal Revenue Code so that:
a. Compensation in stock or stock options is not taxable until the stock is sold;
b. Repeal the capital gains tax.
I think these would have a much better effect of aligning shareholder's interests to that of managers and directors.