Monday, November 02, 2009
Klepto-Capitalism, and How to Fight It
by Jeff Strabone
Two weeks ago, the NBC television program 30 Rock devoted an episode to a theme on many Americans' minds: executive pay (episode 59, broadcast October 15, 2009). In the episode, Kenneth the Page (played by Jack McBrayer) discovered that division head Jack Donaghy (Alec Baldwin) had received a huge corporate bonus with "All those zeroes!" while the pages were newly restricted from working overtime due to corporate cost-cutting. The ensuing argument between Kenneth and Jack followed the usual script: Jack said he was entitled to his massive bonus because of his talents, and Kenneth cited the unfairness of the income disparity between them.
The episode is funny, but it wholly misses the crux of the problem of excessive executive pay. It is not a question of merit, talent, fairness, or income disparity; it is a question of theft. Corporate executives are raiding their companies' coffers, and the victims are you and me. What we have in the United States is no longer capitalism but klepto-capitalism: a system where publicly traded corporations are run not to produce value for shareholders but to provide loot for a new class of corporate mega-thieves. How do we stop this rampant pilfering, particularly in an era of American politics when at least half the nation's political class is averse to government intervention in the economy? By being as greedy and as smart as the thieves.
In 1992, the Twenty-seventh Amendment to the U.S. Constitution was ratified, 203 years after it was drafted in 1789. It holds two historical distinctions: it took the longest route to ratification, and it is the one amendment least likely to produce any case law whatsoever. Here it is in full:
No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of Representatives shall have intervened.
Translation: whenever Congress votes itself a raise, the raise cannot go into effect until after the voters have had a chance to throw the bums out who voted themselves a raise.
The base salary of members of the House and Senate is currently $174,000 a year, according to the Congressional Research Service. Anytime the members give themselves a raise, they are subject to a potential backlash by the electorate, even though the amounts of money are only in the thousands. If members of Congress were ever to pay themselves in the millions of dollars, we would have 535 new members come the next election.
Yet somehow, eight- and nine-figure compensation packages for corporate executives go unpunished. Why do we tolerate as shareholders what we would never tolerate as voters? Everyone with a 401(K) or other retirement account, which the tax code induces working Americans to have, is a shareholder and thus a potential victim. I don't think we can still call it capitalism when you and I buy shares in a corporation whose directors' main goal is not to make us rich but to enrich themselves.
Think about it: every dollar that goes into employee compensation is a dollar that is not paid to shareholders in the form of dividends. If executive bonuses total nine gajillion dollars, that's nine gajillion dollars not paid to the people who took the risk of buying the shares. I expect people to be paid, but I want to get paid, too.
So then, how do we stop the crime wave and direct more money to the shareholders? Many people's first instinct is to pass a law or regulation of some sort limiting corporate pay. While I am not one of those Americans with an obsessive-compulsive disorder against all forms of government intervention, I don't know how much teeth it would have, whether Congress could pass it given the aforesaid national mental illness, or how long it would remain effective given the ingenuity and greed that would be aligned against it.
I recently read a valuable article by David Owen in the October 12, 2009 issue of The New Yorker, 'The Money Issue'. The article profiles Nell Minow, co-founder of The Corporate Library, a research firm that works to advance transparency in corporate governance. In the article and in her testimony before Congress, she advocates instead for shareholder empowerment through, among other reforms, requiring that corporate directors receive a majority vote of the shares cast. In her June 11, 2009 testimony before the House Committee on Financial Services, she explained her doubts about the efficacy of reforming executive pay by statute:
The tricky part is getting there. Even if I could come up with an ideal template for executive compensation at financial companies, we have to recognize that there is no structure that cannot and will not be immediately subverted. The corporate community and its service providers, including lawyers and compensation consultants, will always be more motivated and more agile than any legislator or regulator can anticipate. While I think it could be worthwhile for Congress and the Treasury Department to come up with a template to be applied on a "comply or explain" basis, nothing meaningful will change until we change the boards of directors.
Indeed, in 1993 President Bill Clinton signed into law the Revenue Reconciliation Act, Section 13211 of the larger Omnibus Budget Reconciliation Act of 1993. Like so many bright ideas of the Clinton years, it exacerbated the problem it was meant to solve. (See also 'Don't Ask, Don't Tell', the Financial Services Modernization Act of 1999, the Commodity Futures Modernization Act of 2000, and so on.) The act prohibits tax deductions of salaries over $1 million. The result, as Minow and others have observed, was the explosion of stock options instead. Why should executives be allowed to buy shares in the company in the form of risk-free options? I don't get to buy shares risk-free, and I'm a part-owner.
Law, by its nature, is fundamentally reactive. When ingenuity and greed are united in action, law has a hard time keeping up. Pass a law against high salaries, and compensation will take a different route. Minow is right that we need changes in corporate governance, but we also need a change in the culture and politics of investment. Can we put shareholders' greed to work against that of executives?
Corporate executives pay themselves lavishly because shareholders allow them to. Our absenteeism as shareholders enables their thievery. No one should be surprised that people who can set their own pay will overpay themselves. First, we need a change in consciousness. Kenneth on 30 Rock should not have told Jack Donaghy that his salary was unfair because he made so many times more than Kenneth. Jack does not care about that. In fact, he probably relishes the fact. Instead of organizing a page strike, as he did in the episode, Kenneth should have thought about how to use the shares he holds in GE through his retirement account to force a change in the board of directors. Barack Obama was famously quoted during last year's presidential campaign saying, 'If they bring a knife to the fight, we bring a gun.' What we as shareholders have been doing is not even showing up to the fight even though we are sitting on what should be the ultimate weapon: our votes as shareholders.
Of course, it's easier said than done. Although millions of Americans now own stocks, stockholder revolts are difficult to undertake. Owens's New Yorker profile of Minow points out one of the obstacles: 'close to two-thirds of all stock is now owned not by individuals but by institutions such as mutual funds, pension funds, and employee stock-ownership plans', and these funds have little mandate or incentive to act. But is institutional shareholding an obstacle to action or a deep pool of untapped people power?
The biggest pension fund in the U.S. is the California Public Employees' Retirement System, or CalPERS. How big? According to the San Francisco Chronicle for December 8, 2008, 'The CalPERS portfolio hit a high point of $260.6 billion on Oct. 31, 2007.' That is a lot of money and a lot of unused shareholder power.
These huge city and state pension funds are not, however, faceless entities. They are managed by public servants who are, in many states, elected by the people. I was able to put a face to the fund for the first time in May 1998 when I attended a talk by New York State Comptroller Carl McCall at the Dartmouth Club in Manhattan. That was when I first learned that comptrollers could pick up the phone anytime they felt like it and scare the crap out of CEOs by threatening to sell huge amounts of stocks.
What officially does the New York State Comptroller do? According to the official website,
The State Comptroller is New York State's chief fiscal officer. The Comptroller is charged with auditing government operations and operating the Statewide Retirement Systems. His responsibilities include: […] Operating the retirement systems for State and local retirees, valued at $140.5 billion as of March 2006. These systems provide services to over 260,000 retirees and their beneficiaries, over 600,000 members, and 2,700 employers who comprise one of the world's largest public pension fund.
Curious for more? Here is the 117-page comprehensive asset listing, as of March 31, 2009.
If you have ever worked for New York State, that is your money. If you live in New York State, you can vote in 2010 for the person who oversees that money. The incumbent is Democrat Thomas DiNapoli. And if you live in New York City, you can vote tomorrow for a new NYC comptroller. The current city comptroller, William C. Thompson Jr., is running against Michael Bloomberg for mayor.
The comptrollers' first priority is always to get the maximum return on the people's investments, but isn't demanding lower salaries for executives and higher dividends for shareholders part of that maximum-return mandate? Here is my modest proposal then: we need to politicize the office of comptroller such that candidates will vow to use their power, if elected, to roll back executive pay. What if the comptrollers and fund-managers of the fifty states and the largest cities all got together and threatened to divest their hundred of billions of dollars from any corporation whose executive pay they deemed excessive? Our money is power. We need to think of ways to use it.
Call me naive, but I think this course of action would attract bipartisan support. It would make the rich richer and the working class richer, too. Only the current class of corporate thieves would lose out. It would also obviate typical Republican objections to state intervention in the market. The fifty states would not be passing new laws or regulations: they would be acting in their capacity as private investors. They would be using the tools of capitalism itself in order to overthrow the current class of corporate leaders. That would still be capitalism, wouldn't it?
Meanwhile, as long as we continue not to find ways to throw our weight around as a shareholder nation, corporate governance will continue to resemble an election where no one bothers to vote. Left to their own devices, corporate executives—like everyone else—will pay themselves whatever they feel like. That is not market behavior: it's mafia behavior.
I think it's time for a crackdown. Some bosses fire people for stealing office supplies. What should we do when the people we hire to run our companies steal the entire office? Let's at least be greedy enough to pay them less and ourselves more. Could my proposal of using the state and city pension funds as leverage against excessive pay actually work? I don't know. I do know that legislation, regulation, and exhortation have all failed. The solution to the greed and ingenuity of the corporate class may have to be, in some form, the organized greed and ingenuity of the shareholding masses. The best way to end klepto-capitalism may simply be to be better capitalists. Could the next revolution be a capitalist revolution? Shareholders of the world unite?
We have not even begun to tap our powers as a mass stock-owning class. All that's missing is a new form of class consciousness. In his years in the White House, George W. Bush liked to talk about the 'ownership society'. Now that they've turned us all into owners, let's put our newfound powers to work to catch some thieves and get our money back. Revolution has never before been so potentially profitable.
Posted by Jeff Strabone at 10:05 AM | Permalink