Editor’s note: Massachusetts Democrat Barney Frank, who chairs the House Financial Services Committee, got his “say-on-pay” bill through the House last year by a 269-134 vote. A companion bill in the Senate, filed by Barack Obama, has been blocked by Republicans. President Bush threatens to veto the bill, if it does get through the Senate, because he “does not believe that Congress should mandate the process by which executive compensation is approved.” That Frank’s modest proposal—providing shareholders with a non-binding vote on the compensation packages of corporate executives—can’t succeed in the Congress suggests how difficult it will be to pass anything that resembles a shareholders’ bill of rights. In this issue, Ian Williams argues that the folks owning the shares might be ahead of elected officials in demanding accountability in corporate boardrooms.
“PITY THE POOR SHAREHOLDER!” ISN’T A CRY to get progressive blood pumping—except perhaps in indignation. But it should be. The battle for shareholders’ rights in corporations is an integral part of the unending campaign for democracy in American society.
For years, supporters of free enterprise have claimed that the West has been moving toward a “shareholder democracy,” in which many citizens—possibly even a majority—are also shareholders in the companies that dominate the economy. Left to their own devices for pensions, employees have come to own shares in mutual funds and personal pension plans. They “own” substantial portions of major companies, so at least the shareholder part is coming true.
However, even as share ownership spreads across the country, there is less democracy than ever before in the boardroom. Corporate executives have been gaining unfettered control over their companies and through them are exercising greater influence over the political process, to consolidate their organizational and financial control. Their influence is often exercised through checks written to political campaigns.
Some of that money is already visible in the primaries, where costs have far surpassed predictions we made in the Washington Spectator last year. The price tag for the Democratic nomination, for example, is far beyond $100 million, and the presidential candidates have already spent almost $600 million, with months to go before the general election campaign. Corporate finance has been the major funding source for almost all the candidates, as they go to corporate donors for the same reason the robber Willie Sutton went to banks: “That’s where the money is.” In fact, successful candidates do not have to make the trip. Corporations go to them, and often the same donors hedge their bets by sending contributions to the nominees of both major parties.
DOORWAY TO POWER—What’s true for presidential candidates is also true for elected officials at the federal and state levels. Money comes their way too. These contributions, along with generously funded “non-political” campaigns such as those against the Kyoto accords or universal healthcare, have bought access for lobbyists and protection for management that cheats workers, pensioners and shareholders alike.
Equally significant, executives have looted pension funds, abandoned responsibilities for health benefits, off-shored production and slashed work forces while rewarding themselves beyond all measure—all under the cover of the political protection they have bought and paid for.
Their lobbyists thwart attempts at regulation in Congress and in state capitols, and sometimes actually draft the legislation they desire. If perchance interfering laws are enacted, industry personnel move through the revolving door to manage and staff the agencies, such as the FDA, USDA, the Environmental Protection Agency, Federal Communications Commission, and Securities and Exchange Commission—to ensure that laws passed do them little harm.
The lax enforcement of existing securities law by the SEC highlights the question: just who are the corporations? In law, and in the traditional mythology of the free enterprise system, corporations are entities owned by their shareholders. But between the SEC, the courts of Delaware (where most major corporations’ jurisdiction-shopping has led them), and the federal judiciary, it has become clear that the shareholders have as much power as customers—the power to walk away if they do not like what the CEO and his associates are doing.
The federal courts, in a position as scandalous as their misreading of “original intent” that provides First Amendment free-speech rights to multimillion-dollar political spending, refuse to reconsider the position that the Fourteenth Amendment—adopted to secure the rights of former slaves—also provides “personhood” and citizens’ rights to corporations.
It is usually rights and privileges and not duties that corporations invoke. Corporations litigate their own free-speech rights and even sue for libel to silence their critics. But when was the last time you heard of a corporation being imprisoned, let alone executed, for any crime it committed?
At most, financial penalties apply, which leads to the contradictory phenomenon of shareholder suits in which the company, allegedly a collective of shareholders, diverts shareholders’ funds to pay for executive misdeeds. Indeed, the company, i.e., the shareholders, will pay the legal costs of management, either to defend against shareholder suits or to restrict shareholder rights to nominate board members or discuss company policies. Management not only escapes without penalty but is generously rewarded for its misdeeds.
Corporate apologists usually justify management “compensation” packages with rhetoric that ties executives’ interests to the interests of shareholders—although management is often handsomely compensated even when the stock they are husbanding plummets. Looting pension funds, slicing off health benefits, slashing workforces, and shipping jobs overseas are equally well rewarded.
In 2006 Henry McKinnell of Pfizer “earned” $198 million for resigning as CEO of the company after its share price dropped 40 percent. That was to cushion the blow of his barebones existence on the $5.9 million annual pension his board had approved without informing shareholders. This February, American Express CEO Ken Chenault doubled his take to over $50 million while his company’s stock went down by a quarter and its telephone operations were off-shored to India.
The airline industry, which stays aloft by persuading employees to work longer hours for less money, and persuading the courts and Congress to free companies from pension obligations, deserves special scrutiny. Consider that during American Airlines’ 2007 annual stockholder meeting, CEO Gerard Arpey claimed that $160 million in company shares given to executives was a “motivational tool” to turn American Airlines around. It does raise the question of why the workers who fill, maintain and fly the planes are motivated by pay cuts and the executives by pay hikes.
Executives argue that their exorbitant pay is approved by directors, upon the recommendation of compensation committees, who are in turn advised by compensation consultants. This involves more smoke and mirrors than a cigar bar bathroom and gets to the heart of the lack of any real shareholder democracy. As Alan Greenspan admitted with uncommon clarity: “Few directors in modern times have seen their interests as separate from those of the CEO, who effectively appointed them and, presumably, could remove them from future slates of directors submitted to shareholders.”
(Did such coerced loyalty motivate longtime Wal-Mart board member Hillary Clinton, who never protested lack of healthcare for employees or the company’s ferociously anti-union policies?)
Compensation consultants’ consistent recommendations of higher pay for the head honchos are always based on “prevailing industry standards”—always rising, because boards and consultants always justify higher executive pay by warning that rival companies may tempt away managers. Yet the same executives presumed to be in such demand have created elaborate structures that make it almost impossible for shareholders to get rid of them without highly rewarding them in the unlikely event that they do go.
COVER OF DARKNESS—As CEOs have given themselves higher pay packages than ever before, their influence on government has produced round after round of tax cuts that have only served to benefit those who already have money coming out of their ears. It has become the received orthodoxy that the solution to any problem is tax cuts. Democrats have insisted that proposed tax cuts benefit the less wealthy as well, but it would be nice to hear them call for increasing taxes on those in the upper brackets, or even to mention that the quickest way to guarantee long-term solvency for Social Security is to end the contribution cap that excludes payment of Social Security taxes on earnings above $90,000.
Bob Monks, a veteran corporate-governance activist, makes a convincing case for this in his latest book,Corpocracy. In it he outlines the mechanisms that protect CEOs’ privileges and prerogatives and ensure that government bends to their will. “Out of control CEO compensation is the symptom, the smoking gun,” Monks writes, “but corpocracy and the discontinuity it has created with our political traditions is the real disease, the ultimate reality.”
Monks argues persuasively that the core of modern robber baronage is the Business Roundtable, an association that restricts its membership to CEOs of major companies. It is possibly the most effective union in the country. He points out that in 1970, before the knights of industry sat at the Roundtable, the average CEO earned thirty times as much as the average worker. Executive compensation is now 300 times that of average worker compensation, and growing—even before tax breaks are figured in.
Citing a BusinessWeek report, Monk relates that 10 percent of the shares of the top 200 companies has been set aside for executive compensation, and claims that this has amounted to a transfer of $1 trillion in “the largest peacetime movement of wealth ever recorded.” Much of this money is moved under cover of darkness, so to speak, with compensation hidden in stock options that are hard to quantify and often invisible because management is not required to identify it in reports to shareholders.
The Roundtable and its allies have fought every attempt to require that the cost of stock options be “expensed,” i.e., shown in the accounts where shareholders can see them clearly. One ally on this front, Senator Joe Lieberman (I-CT) led fifteen co-sponsors in a Senate resolution effectively calling for these executive extras to remain under the table. On a similar issue, when the SEC proposed to make it possible for shareholders to nominate directors on corporate boards, the Roundtable spent $13 million to thwart this very modest measure.
Monks sees this as part of a comprehensive campaign, whose blueprint can be found in a 1971 “Confidential Memorandum: Attack of American Free Enterprise System,” written for the U.S. Chamber of Commerce by Lewis Powell months before Richard Nixon nominated him to the Supreme Court. Powell outlined a campaign to make American politics, education, and media more amenable to what he considered the neglected interests of American business.
Monks is too astute to subscribe to conspiracy theories, but while noting the interesting coincidence that the Business Roundtable was set up shortly after Powell’s call for a long march of business through the institutions, he concludes: “At the least, every man and woman who heads up the Washington office of a Fortune 500 company should say a little prayer to Powell on the way to bed at night.”
We could add that that what Powell has written has come to pass. You do not have to entertain 1930s visions of top-hatted capitalists ruling the world from Wall Street to understand that the country suffers from a dangerously unhealthy concentration of power. Money talks in American politics, and the imperial CEOs and their allies are the ventriloquists.
SHAREHOLDER REVOLTS—The good news is that despite the growing imperial power of management, there are unions, pension funds, foundations and socially conscious mutual funds that have achieved some successes in reining it in. Shareholder pressure was instrumental in breaking the cabal of global-warming deniers at the oil companies, for example, leaving Exxon pretty much alone in its denial. It is relevant that Exxon’s management has been notoriously ruthless in thwarting shareholder resolutions and stage-managing annual company meetings.
But Exxon notwithstanding, these campaigns are beginning to have an effect. This year promises to be the busiest proxy season ever, with a record number of resolutions spurred partly by demands for justice; they are also informed by recession fears that corporate management and their shills in government have led us all to the edge of the precipice.
There is a long way to go. Many of the 28 resolutions filed by the Laborers’ International Union this proxy season were kept off board agendas with the connivance of an SEC that allows boards to block votes on resolutions they declare “ordinary business” and to ignore the outcome if such votes occur.
Yet unions and activists once dismissed as “special interests” (unlike the most successful union of all time, the Business Roundtable) are now aligned with hedge fund operators like Carl Icahn, who told me a year ago: “The trouble in America is, these guys try to give themselves options at cheaper prices even when the stock goes down. And this great gap between what the regular employee earns and what the CEO earns, it’s just ridiculous. Every day the gap gets bigger. But there’s no accountability.” Icahn makes the obvious point that lack of accountability produces lack of efficiency in most organizations. Warren Buffet’s eloquently expressed views on executive pay, corporate democracy and social responsibility also put him firmly against the CEO cabal.
On the political side, the battle lines are clearer than ever, as the GOP has increasingly become the political wing of the Business Roundtable. John Sweeny of the AFL-CIO pointed out last November that the SEC’s chairman Christopher Cox, “caved to political pressure to take away a fundamental investor right,” the right to nominate directors.
As long as one of the major political parties is totally committed to advancing the interest of the super-rich, which the CEOs have now become—and the other is only half-hearted in resisting their power, democracy is at risk. In effect, like independent nominees for boards of directors, it often appears that candidates for political office, despite rare and refreshing examples, can now only appear on a slate if corporate interests approve them.
The secret that allows corporate domination to continue is those citizens and shareholders who fail to use their votes and influence to push for improvement. Citizens concerned about democracy should carefully read the middle section of their newspapers—the bit between politics and sports—and follow corporate politics, and where they have shares, or influence, vote for better policies, if they don’t want their inactivity at annual meetings to negate their votes in the polling booth.