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07/24/2005

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Palooka

"Insofar as one might posit a metaphysical duty to engage in charity, that duty would fall on shareholders themselves, not officers fancying up their own idea of what that duty might be or how far that duty might go."

Well said.

N.E.Hatfield

It's not quite a "metaphysical" duty, but I'll let that slide. And how does "charity" fall out of the equation when a Society requires its members (corporate or individual) to repay in kind for the benefits it has received by living and operating in that Society?

There is a power in collective action as opposed to individual action. As Trotsky once observed, "Quantity has a quality all its own."

Mwebb

Wes you are confusing accounting and economic profits. Profits in the accounting sense represent the opportunity cost of capital (adjusted of course for risk). These type of profits are what motivate investors to invest. when economsits talk about profits we mean profits above and beyond the opportunity cost of capital. In other words if project A pays a return of 20% and project B, C, D... which ahve exactly the same risk characteristics and such all pay a return of 10% project A is probably generating an economic profit. If there is comeptition people will enter whatever busienss project A is in driving the return (i.e. profits) down to 10%. If there is a barrier to entry project A will continue to earn economic profits (and all the projects will continue to earn accounting profits).

Palooka

There's nothing wrong with collective action. Let the individuals donate to charities which are devoted to their flavor of "social responsibility." The best place for that "collective action" is in specialized charities, supported by the individual. Again, why deny individuals the right to donoate their funds where they think those funds are best spent? Why does a CEO need to make that choice for them?

ben

"Regarding excessive CEO packages, I think they are unnecessarily high..."

Are you saying CEOs are not that valuable to the company, or that they are but it is wrong to pay an individual that much more than everyone else?

"...but that is the result of the failure of the shareholders to protect their interests by electing pro-shareholder board members."

I see. Some questions:

If shareholders invest to make money, why do they so consistently fail to protect their interests in this respect but not others? Since CEOs are regularly fired for other indiscretions or poor performance, what prevents them being fired for being overpaid? And why do boards go to the trouble to offer seven figure salaries if five or six will do?

I've always thought the claim that managers are overpaid reflects a failure to stop and think about the problem for more than 20 seconds, but perhaps you can point out what I'm missing.

ben

Also why would shareholders fail to elect pro-shareholder board members? Generosity? Stupidity?

David

I got these numbers from the web, but the source seems credible: a 2001 Baltimore Sun article. And these numbers are now 5 years old. Also, the comparison point is 1990; try comparing current executive salaries with 1950-era levels, and the difference is even more dramatic. I, for one, have a hard time believing that top executives are so valuable. And we're not even counting the private planes, skyscraper offices, skyboxes, expense accounts, 2-martini lunches at the 21 Club, and so forth. Shareholder money is helping an entire generation of executives live like kings, while their workers struggle to get health care and watch their 401(k)s dwindle in value..

----------------

The salaries of top executives are 531 times the pay of the average worker.

CEO pay rose 571 percent from 1990 to 2000.

As of 2001, the average CEO pay of the top 365 firms was $13.1 million.

If the pay of production workers had risen proportionately to that of CEOs in the '90s, their average income would now be $120,491 instead of $24,688. The minimum wage would have risen to $25.20 an hour.

N.E.Hatfield

Palooka, In the real world it's called tax avoidance. There are benefits to be derived by the corporation for donating, not only money, but time and capital goods as well and receiving incentives for them. In the end, someones got to pay for all the infra-structure, security and other services that Society supplies a gratis. Try to run a business in the depths of a Civil War. Opps! didn't mean to bring up the Afrika issue again.

But the share holders know all, see all. Right?Quite frankly, I don't have the time.

ben

David

Your theory is that CEOs are paid more than they are worth.

So all shareholders, large and small, can make money by reducing their CEO's salary.

Why haven't they?

Isn't the more plausible theory that a) business leaders' decisions materially affect the value of the company they lead b) good skills in this position are rare, and c) competition between businesses for the gems drives up wages and conditions?

Notwithstanding mistakes in hiring decisions, I don't think your theory has any logical grounds whatsoever. But prove me wrong.

David

There is absolutely no question in my mind that top managers do not need to be paid 500 times the salary of the average worker. For instance, the Chairman of the Joint Chiefs of Staff does not receive 500 times the salary of the average non-commissioned officer. In fact, he probably doesn't receive 10 times that salary. But he still does the job, and most would say he does it pretty well. If he feels that the pay is not good enough and quits, there are plenty of others willing to take his place. I would guess that the "power trip" alone of running a large corporation would ensure the availability of many high-quality candidates, even if the salaries were a fraction of what they are today.

In many ways, government is more efficient than the private sector. Salaries are one of them. Look at the return that the fed gov't gets for Judge Posner's salary, for instance. But I will not get into the public vs. private sector debate here.

Of course, the "value" of anything, including the services of a manager, is largely a matter of supply and demand. Maybe the "demand" side of the executive compensation curve is skewed; comapanies are willing to pay too much for the "rock stars" of corporate management. Or maybe its just an old boys game: the boards are used to passing around the goodies, so they pay whatever the company can afford. After all, it's easy to be generous with someone else's money. Or maybe corporate values are just skewed. I really don't know; there are others who have studied this much more than I.

In the end, I don't want courts or ethical rules to micromanage any of this. It's the job of the board to pay executives, and it's the job of the executives to set corporate policy (including charitable donations, advertising, skyboxes, whether to buy coffee from Central America, whether to use recycled paper, etc., etc.). But shareholders should get involved, if they care. They should vote their proxies and air their concerns. Institutional investors are starting to do this; in the future, they might take a hard look at corporate expenditures of all sorts. That would not be a bad thing.

Wes

Responding to random comments...There is no justification to coerce the minority to support charity when the individuals which make up the corporation may personally support whatever charity they want.Right, and when the charity in question was imposing democracy on Iraq and the cost was hundreds of billions of dollars, then the common response in the USA was "If you don't like it you can leave."Corporations are not designed to be government-like in that they tax the minority because the majority believes they should be.Actually, while it is very difficult for a citizen to leave their country (both in terms of feasibility and hardship), it is trivially easy for a stockholder to "leave" a corporation. If anything, it should be more acceptable to tax a minority in a corporation.Also why would shareholders fail to elect pro-shareholder board members? Generosity? Stupidity?Many dictators hold regular elections that they always win. Elections, by themselves, can not be used to argue that voters are getting what they want.Since stockholders can express their preferences by either voting or buying and selling stock, an interesting question is whether voting is even necessary. Suppose 70% of all stockholders want social responsibility and 30% want ruthless profits, stock market forces could conceivably force an equilibrium where 70% of corporations were socially responsible and 30% were ruthless.Then again, the only value stockholders have to corporations is their lending and since the government sets lending rates, corporations can tell stockholders to get lost and still get loans at comparable rates from other sources.

ben

David

My experience in free society is that in a commercial arrangement people won't hand over two cents much less several million dollars without getting something in return.

But according to you, those rules go out the window when it comes to senior management in corporations. Shareholders just hand over their money to a person they never met in exchange for not much of anything. They offer millions to some schmuck when $40,000 will do.

I'd say this is a theory right up there with flat earthism and creationism for explanatory power. There isn't a part of it that makes sense. We know shareholders buy shares in big companies to make money, not to give it away. Boards sack CEOs and shareholders sack boards and companies are taken over. But they still offer the next guy about as much. Your reason? Old boys clubs and skewed demand. Laughable.

ben

Wes

"Many dictators hold regular elections that they always win."

They're also usually backed by armies. Modern corporations rely on mutual cooperation not coercion.

As you correctly note later, shareholders are free to divert their money to other companies. So even if board elections are rigged, nothing prevents investors diverting their funds to companies that do everything the same except overpay their CEO. Sooner or later, the corrupt companies must either fix the problem or go out of business if shareholder go where returns are highest.

What is preventing companies that pay their CEOs only what they are worth from ruling the corporate world? The answer, my friends, is that they are already here. It is demonstrably cheaper to pay what it takes for the right person than to be run by a schmuck.

What's your theory Wes?

The whole view that shareholders are being systematically duped by CEOs out of millions ignores competition for inputs and implies coercion that simply does not exist.

mw

I recognize that the question posed for criticism aims toward profundity, but I must unfortunately answer it in a quite quotidian way. Corporations are state-created legal entities that states may fashion into whatever shape they please. Corporations as a result have whatever obligations toward the wider community, the public interest, public health, or society-at-large that their states of incorporation demand of them. It is a very simple matter, then. Vote for a legislator who will enact legislation that obligates corporations to do xyz if you believe that corporations should do xyz.

To the extent that corporations participate in (and arguably corrupt) elections, legislatures can provide public funding for natural persons to air their contrary opinions. Such public funding can be provided by raising the state's corporate tax rate.

John V

This is lengthy. Humor me.

Poor children do not perform as well on standardized tests as do the children of the rich, which stunts their social mobility. Wait. Am I saying that poor kids are dumb?

It is not so difficult a gap to bridge. I think we all understand that money can be exchanged for goods, and that acquiring greater amounts of money, up to a certain point, grants us greater access to goods. If the good at issue is a tutor, and the tutor costs $500, someone with $500 can afford the tutor, whereas someone with $300 cannot. A tutor, clearly, can help one pass a test. One might reasonably call Princeton Review and Bar/Bri tutoring services.

Another way to think about how poverty impacts test scores is to consider how standard of living intersects with language. If all of my friends are rich and we yacht on the weekends, chances are we are all familiar with the word "keel". "Keel" is not a particularly difficult word, like, say, tenesmus. Because tenesmus is obscure and technical, a question requiring knowledge of this word is apt to flunk almost all test-takers. By contrast, a question employing the word "keel" will flunk only those test-takers unfamiliar with the word. Because all of my rich friends and I are familiar with the word, due entirely to our standard of living, the test has given an advantage to the rich.

So: while I agree that poverty does not cause stupidity, poverty does entail exclusion from certain social circles, which means the ignorance of certain parlance that middle-class exam-makers may employ in drafting a biased exam. It also increases the likelihood that one has been less adequately prepared, in comparison to richer students, for the exam.

One must also consider the causes of poverty. Poverty is often caused by divorce. A child in a single-parent family not only has a lower standard of living, but also has a decreased likelihood of being imparted secondhand knowledge. A family with a mother who is a doctor and a father who is a janitor offers a child a greater opportunity to receive competent help with his mathematics homework than a family consisting of only a father who is a janitor. Note that in the foregoing example even if the disappearing mother were the janitor, the father, as a single-parent doctor, would have greater responsibilty (indeed, the burdens of two parents), and thus less quality time to spend with the child. It is also that case that even in intact families, poor families are poor because their wage-earners have not attained advanced degrees. In general, a family comprised of two MIT microbiologists will offer an evironment more conducive to scholastic achievement than one comprised of a daylaborer and a hot dog vendor. While this is not true in every case, as poor families often transmit concrete values, such as a strong work ethic, to their children, it is undeniably the general rule.

Lest any reader suspect I am calling for any radical political regime, let me assuage your fears. All I suggest is the following: bias should be eliminated from exams, strong families and marriages should be encouraged and promoted by the state, quick and easy divorce should be discouraged by the state, and private tutoring courses should be compelled to admit some percentage of poorer students who cannot afford their exam preparation services, in exchange for a voucher.

Corporations should be compelled to provide these vouchers; to subsidize the intellectual accomplishment of the poor. Promote marriage and aid the poor: since when did the core of most of the world's major religions become a radical notion?

Jeremy

@Ben and others

Also why would shareholders fail to elect pro-shareholder board members? Generosity? Stupidity?

The most simple answer is simple market failure. Informational deficiencies and assymetries, a lack of bargaining power (shareholders have difficulty effecting co-ordinated action especially for less obvious "sins" such as skimming too much off the top, rather than blatant violations of company rules) and monopoly power on behalf of a certain class of high profile, well experienced CEOs. There's also likely a lack of rationality caused by cults of personality and the unjustified belief that certain celebrity CEOs need to be attracted or just a belief in the power of the CEO as a psychological defence mechanism against the overwhelmingly complicated mass of factors which affect a modern company's performance. So that's 3 out of 4 "classic" market failures.

Moreover there could well be a prisoners dillema going on here. Very high level executives with a certain level of experience are in reasonably short supply so companies get in a spiralling bidding war where the necessary salary needed to attract what is believed to be a necessary person gets ever higher without regard to the CEOs fundamental value.

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