© The Author(s) 2018
Jack Lawrence LuzkowMonopoly Restoredhttps://doi.org/10.1007/978-3-319-93994-0_4

4. The Ascendancy of the Corporate Elite

Jack Lawrence Luzkow1  
(1)
Fontbonne University, St. Louis, MO, USA
 
 
Jack Lawrence Luzkow
Email: jacklawrenceluzkow@yahoo.com

Introduction

Hewlett -Packard had always prided itself on its egalitarianism. All employees were considered, if not as equals, at least on the same “plane.” The company believed so strongly in the value of collaboration that it could be credited—or blamed—for giving to corporate America the cubicle workplace, a touch that apparently made employees feel they were part of a caring family or team. So caring, in fact, that the original founders of the company, William Hewlett and David Packard , routinely sent a baby blanket to every employee who gave birth, or sent a silver bowl as a wedding present to newly married employees. Nor was it unusual for Mr. Hewlett and Mr. Packard to join employees for lunch in the company cafeteria.

When Carly Fiorina was brought in as CEO in mid-1999, she wasn’t interested in tradition, or the Hewlett-Packard culture. Or in meeting employees in the lunchroom. She was after all a “modern” executive, and her compensation package proved her worth. She was given a $3 million signing bonus and a stock package worth $65 million. She even asked the board to pay the cost of shipping her 52-foot yacht from the East Coast to the San Francisco area. Meanwhile, over the next six years of her tenure, she managed to lay off 30,000 employees, ending, perhaps forever, the caring culture that had been Hewlett -Packard. Her response? Progress has its price. 1 That might have made sense, if only there had been progress.

Executives Wanted: No Experience Necessary, Past Non-performance a Plus

Since the 1980s, executive compensation, especially CEO pay, has ballooned while the bottom 80% of Americans have seen their incomes stagnate at best. The disparities are not because of innovations that corporate executives have bestowed upon the larger public, but because of the political favors they have obtained and the rules changes they have themselves helped to engineer.

Beginning with the Reagan era, and especially after 1989 and the virtual collapse of any kind of utopian—or “progressive”—futures, the Left has been in sharp retreat. In the absence, or weakening, of a progressive Left, the Right has been able to challenge the Left on everything it held most sacred: the welfare state and the social contract on which it once stood, civil rights, including universal voting rights, protection of the environment—now under serious challenge from the Trump administration, affordable and universal healthcare with matching cost controls, the protection of unions and worker rights, much tighter control of the financial industry, and the reigning in of corporate power.

It is the expansion of corporate power in particular that has produced the extreme inequality of modern America, a result of the concentration of income and wealth grabbed by the super-rich, and the corresponding transfer of political power to the same group of the ultra-wealthy:

Without the active presence of liberals, there has been little public protest when corporations dismantle much of what was once called the democratic state, or when they decimate the manufacturing sector, or loot the US Treasury, or wage endless imperial wars that are undeclared, unwinnable, and unaffordable. …Americans…might wonder why government reduces taxes on corporations and then allows them to use their expanded profits to invest abroad, exporting jobs along with their investments. Or why government bails out banks and then allows the same banks to use their bailout funds to pay the bonuses of bankers who have just failed. 2

Part of the answer is that political parties, emphatically so in the USA, have become dependent on corporations to fund them, so that political agendas are routinely set by the corporate class for political campaigns and policies. In 2010, as we know, the Supreme Court in Citizens United v. Federal Election Commission gave corporations the right to spend whatever they wanted on political election campaigns: since corporations were people, or citizens, their First Amendment rights could not be abridged. This has helped to transfer considerable market power to corporations, less than a decade after the Supreme Court reached its historic decision, giving corporations license to act with impunity, without serious challenge from the parties they are funding. 3 And as corporations have globalized themselves, for well over three decades, they have been able to act with fewer restraints then ever, avoiding legislative restrictions by shifting everything from profits and production to jobs abroad. The result? Without the regulations that were part of the progressive Left agenda, corporations have exploited, polluted, and repressed, while reaping low-taxed profits around the globe. Does it come as any surprise then that, with minimal government intervention, corporations have abandoned their communities, evaded taxes, impoverished their employees by exporting their jobs, evicted people from their homes, and abandoned the uninsured, even while defending unaffordable for-profit healthcare and deregulated drugs?

Nor does it come as any surprise that corporate executives have used their expanded political and globalized market power to resist the democratization of their corporations, and to boost executive compensation for themselves, using all the tools they have preserved or won in the political arena. In order to shift income and wealth in their direction, corporations and their CEOs have done much more than manipulate tax structures. As we have observed, they have discovered something even better called stock options . These have offered management the prospect of windfalls almost beyond measure, though to take full advantage has required something of a conjuror’s trick. To earn them, management has had to improve earnings per share from one quarter to the next: in other words, corporate leaders have concentrated on the short term, ignoring everything learned in business schools about focusing on productivity growth and long-term investment. Put another way, corporate executives have abandoned everything that made the American economy bountiful in the three plus decades following World War II. George Tyler has summed up the new corporate model at the dawn of the Reagan era:

Instead, to personally strike gold, they needed to spike earnings per share over the next 90 days. The easiest way was to switch corporate outlays from expenses (such as wages and R& D) to share buybacks and risky mergers. For American executives, the long term abruptly crystallized at three months. 4

During the age of prosperity prior to the mid-1970s, American and British executives were paid modestly, with rare (and sometimes deserved) exceptions. That all changed abruptly. Overnight, beginning with the Reagan era, the highest—and often the sole—priority became the maximization of profit: community and employee goals became secondary at best. In the wake of this shift, profits did rise—as did crises—but they rose much less rapidly than executive compensation. The rewards went predominantly to the top, and they went there regardless of executive performance. Nor was this incidental, it was the result of a flawed philosophy that personal gain based on greed was good for the overall health of a firm and the economy as well. Now the incentive was to concentrate on raising profits based on short-termism , to encourage employee layoffs or part-time employment, to move companies to low-wage states or countries, to employ tax evasion schemes to boost profitability, to acquire other companies to raise market share and corporate revenues, and to use share buybacks to (artificially) raise share value.

As a consequence, the corporate super-rich have artificially boosted their income at the expense of reinvestment and research and development (R&D). They have moved employees into part-time work, or temporary employment, creating a leaner work force and reducing employee benefits. The super-rich have proved indifferent to the communities they have abandoned, often callously disregarding the increase in poverty among the workers who lost their jobs or were reduced to temporary or part-time work. The corporate elite have increasingly displayed a sense of entitlement, arguing that they are the great wealth and job creators, that they pay more than their fair share of taxes, and that they deserve the wealth they have acquired. Acting in a culture in which they often portray greed as a virtue, corporate executives have increasingly behaved like royals surrounded by undeserving sycophants. The result is that the business community has increasingly regarded itself as a celebrity class, attempting to impose narcissistic views of itself onto the public at large.

Since the Reagan era in the USA and the Thatcher era in the UK, CEOs have had almost free reign to choose their own boards. The inevitable result of servile boards has been to reinforce the trend toward short-termism , and this has accelerated the shift toward profit taking within a short one quarter horizon at the expense of most of the stakeholders.

We know from comparisons to corporate boards in Europe—for example in Germany—that board directors of all large corporations must have employee representation. Such boards tend to be contentious, but they are just as often visionary, and among the results of board democratization is a much greater tendency to rein in executive pay, invest in workers for long-term employment, maintain decent wages and benefits, and not resort to shifting as much employment abroad as possible. The result? Long-term benefits for all stakeholders, low rates of unemployment , employee loyalty, and high profitability. Just as important, executives cannot display the same kind of contempt for employees as do American and British firms, which are more concerned with accounting tricks to raise the bottom-line.

American corporations would do well to emulate Europeans. If they did so, hundreds of billions of dollars would not be drained away from employees, investors, and the communities where corporations are housed. Instead, American CEOs and their corporate boards have created incestuous relationships. CEOs appoint their friends, and many of the same CEOs also serve on other boards, ramping up their income even further in the form of outsize compensation packages, outlandish bonuses, mushrooming incomes—all distributed as perpetual Christmas stockings for corporate executives who then go into self-indulgent sprees spending their lavish sums.

There are ample illustrations of US corporate malfeasance. James Westphal, a business professor at the University of Michigan, conducted a survey over 15 years of 350 top firms comprising the S&P stock indices, and found that almost 50% of compensation committee boards members were called friends by their CEOs, and not just acquaintances. He discovered that customized boards tolerated mediocrity or worse in their CEOs. Westphal provided abundant examples. In 2007, Merrill Lynch was bankrupt, and was slated to be sold on the cheap at literally pennies on the dollar, having been driven into bankruptcy by CEO Stanley O’Neal . Inexplicably, the board decided to allow O’Neal to resign, rather than firing him for incompetence. The result? O’Neal was able to cash in $131 million in stock options . Had he been fired, he would have forfeited the gift and spared shareholders the loss. 5

David Cay Johnston, in Perfectly Legal, cited another case involving Eugene M. Isenberg , CEO of Nabors Industries, a large oil-drilling company. Nabors reported sales of $1.3 billion in 2000. Through a combination of stock options and a well-crafted compensation arrangement, Isenberg received $127 million of that cash flow, or roughly 10% of gross revenue. 6

The case of Craig Dubow is even more infamous. Dubow was CEO of Gannett, a media giant, for six years, ending with his resignation in 2011. It was a good run for Dubow. Following his tenure, he received a golden parachute worth $37.1 million and an additional $16 million in cash during the last two years of his term. Despite these lucrative paydays for Dubow, Gannett performed poorly while he was CEO. Share price fell from $75 when he arrived to $10 at the time of his departure. 7

Richard Fuld at Lehman Brothers outdid Dubow when it came to executive pay for Lilliputian performance. In 8 years at the helm, he made $484 million before driving his company into bankruptcy. In his last year, even as he was leading his company into the corporate wilderness, he earned about $45 million. 8

Merrill Lynch may have outdone Fuld. In September of 2008, the company admitted that it couldn’t pay its bills anymore. But, just before it ended its final quarter of business in 2008, Merrill Lynch gave out nearly $4 billion in executive compensation bonuses. This was especially intriguing given that CEO John Thain continued to press for a lucrative golden parachute for himself, although he admitted that Merrill had lost $15 billion just in the last quarter of 2008—the same quarter as the outsized bonuses—and $27 billion for the year. 9

But even Thain’s outsized ego seems small when compared to the titanic ambition and deceit of Angelo Mozilo at Countrywide Financial. During five years between 2001 and 2006, he made his company the number one mortgage lender in the USA, but this created a problem for his imperial adventures. His empire was based on the proverbial sub-prime loans and the flinty derivatives that were based on them. Mozilo came to the head of his class as he had wanted, but everything was based on borrowing and just when the mortgage market was collapsing. The result? He made almost half a billion dollars for himself, but the company was turned into a slag-heap, losing 91% of its value before being sold off. Asked for his comments afterward, after the destruction of many lives and loss of homes, the unrepentant Mozilo said he had no regrets. 10

Maurice R. Greenberg also was a standout in the department of not-so-creative destruction, presiding over American International Group (AIG) as it declined in value by 98%. This did not stop him, however, from siphoning off more than $130 million in executive compensation for himself. 11 As we know, AIG was saved by President Obama.

No matter the metric, the rise of executive pay in the USA is unjustified. Executive pay has increased much more rapidly than indices such as sales, profits, and returns to shareholders. Former Labor Secretary under Bill Clinton , Robert Reich has provided this shocking revelation: “By 2006, CEOs were earning, on average, eight times as much per corporate dollar of corporate profits as they did in the 1980s.” 12 Such disparities point to one of the chief reasons for inequalities in income and wealth: executive pay is largely the result not of extraordinary ability but of personal stealth and market failure.

Economist Kevin Murphy has confirmed the lack of correspondence between compensation and performance in a study evaluating the pay-for-performance of the twenty-five top earning CEOs between 2000 and 2010. He concluded that there was little if any relationship after analyzing shareholder returns. Pay was utterly random. Only five of the CEOs he studied headed companies that outperformed the Dow Jones stock index. And four of these CEOs, one each at Countrywide, Capital One, and Cendant, ran firms whose shareholders lost money during their tenure. 13 But the greatest losers were not on the list. Michael Dell enriched himself by $454 million while shareholders lost 66% of their value; Richard Fuld of Lehman Brothers, whom we have met, received $484 million for the honor of driving Lehman into bankruptcy in 2008. 14

CEOs, Boards of Directors and Their Incestuous Relationships

Board members covet their relationships with CEOs and corporations because of the many benefits and the pay. George Tyler has demonstrated just how lucrative it can be to serve as a corporate board member. In 2008, the median compensation for non-executive board members of Fortune 500 companies was $199,949. 15 This figure is even more impressive if one remembers that this was the year of the financial meltdown, a period when many Americans were driven into bankruptcy, lost their homes, and often their jobs.

Corporate America continued to thrive, nevertheless. In fact, while Americans suffered from the worst economy in decades, board directors were hardly noticing a ripple. They reaped, but not what they sowed. Board members generally escaped punishment or fines even in cases of clear corporate malfeasance and corruption. Between 1980 and 2006, there were only thirteen instances when outside directors had to settle suits using their own money. When directors were punished, often the punishment was mild. According to John Gillespie and David Zweig, in Money for Nothing, Enron directors paid only 10% of prior net gains when selling Enron stock. In other words, they retained 90% of the net earnings while presiding over the destruction of Enron and while Enron employees were losing their pensions . 16

Moreover, former Enron directors seemed more or less unaffected by their Enron connection. Four served on other boards, one became a professor at Stanford, and another became president of Brunel University in London. And then there was Wendy Gramm . She landed at George Mason University at the Mercatus Center, where she was supported in part by the Koch brothers, despite their avowed declaration that there should be punishment for market failures. 17

Boards of directors are anything but independent. They are routinely staffed by members who are obligated to the CEO, as in the case of Murdoch industries. Or they are staffed by celebrities who lack financial expertise and are unlikely to challenge corporate executive leadership, even if that is their desire. The result is that boards regularly endorse lush compensation packages. Unsurprisingly, as Harvard law Professor Lucian Bebchuk and Economist Jesse Fried have argued, boards are manipulated by CEOs because they set the compensation for the CEO. 18 The result is that boards tend to ignore performance, which all too often they are indifferent toward or incapable of judging—other than by watching the ticker tape or share price of the day. Instead of providing a conscience, or at least sound judgment, they become a kind of club whose major purpose is building the resume and income of the CEO and his or her own “cabinet.” The fussy Financial Times has agreed with this conclusion, judging that executive compensation packages are the result of clubby remuneration committees and concluding that the members of such clubs should be “slung out on the street.” 19 Richard Posner, a conservative federal appeals judge made the same point in 2008: “Executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation.” 20

Since the 1980s, CEO pay in the USA has become pathologically and disingenuously inflated, hardly consistent with pay-for-performance, or else many executives would work for nothing or even pay their companies just for the privilege of being the CEO. Among the reasons? Stock options and bonuses that have brought windfalls outrageously out of synch with performance. Once again we see the convergence of corporate behavior and rent-seeking or, as Joseph Stiglitz has referred to it, “America’s Socialism for the Rich.” 21 Columnist John Kay of the Financial Times expressed it well in November 2009 as he looked back on the recent financial collapse:

America has a new generation of rent-seekers. The modern equivalents of castles on the Rhine are first-class lounges and corporate jets. Their occupants are investment bankers and corporate executives. … The scale of corporate rent-seeking activities by business and personal rent-seeking by senior individuals in business and finance has increased sharply. The outcome can be seen in the growth of Capitol Hill lobbying and the crowded restaurants of Brussels; in the structure of industries such as pharmaceuticals, media, defense equipment, and, of course, financial services; and in the explosion of executive remuneration. 22

The use of stock options is one of the major causes of accelerating executive remuneration. Such windfalls are another form of rent-seeking: they extract value without any corresponding creation of new wealth. Executives have the option of purchasing stocks at well below the market price, which during the boom 1990s was an incentive to boost the value of share prices even further to take advantage of free money. Moreover, when options were exercised the earnings were not taxed at income tax rates but as capital gains, a considerable advantage because this tax was capped at 15% during the George W. Bush era, and today, 2018, it is capped at 20%, well below the highest marginal rate for income taxes in 2018 at 39.6% (37% after passage of the Tax Cuts and Jobs Act ).

Executive gain has often meant losses for everybody else: for shareholders because when executive stock options are exercised they dilute share value for all other share owners, and total options can be up to 20% of outstanding stock. Consumers lose also since business expenses such as premiums for executives can be passed along to the ultimate users. And then companies deduct executive remuneration from their earnings, lowering their profits and the corporate taxes they pay (detailed from the corporate side in Chapter 6).

For executives, especially the CEOs, the lure is irresistible: high compensation, low taxes, and all the benefits that are part of the corporate executive lifestyle. How critical have the stock options been as a component of CEO compensation? For the period 2003–2008, many of the top executives received bonuses in stock options that would have embarrassed Scrooge. Charles Schwab, as head of his eponymously named company, was paid $19.4 million while the chief at Charles Schwab, but earned $797.2 million from stock sale proceeds on options that he exercised. Angelo Mozilo , whom we have met, earned $92 million in regular income, but $378.5 million in stock sale earnings, a multiple of about 4 to 1. Richard Fuld reveals a similar story, earning $45.2 million in conventional earned income, but an additional sum of $139.3 million from his options. And finally Maurice Isenberg, who was paid $17.5 million income by AIG , but received a whopping addition of $115.2 million from stock options , a significant gift for failing and having to be bailed out by the taxpayer. 23

None of these earnings packages could have been realized without the outright complicity of boards of directors. Directors and the CEOs of the companies they oversaw had an incestuous relationship which is easy to explain: they were a mutual admiration society because of the remuneration that they afforded to each other, making it easier to reap what had never been sowed. Robert Reich has put it bluntly:

Directors are amply paid for the three or four times a year they meet and naturally want to remain in the good graces of their top executives. Being a board member is the best part-time job in America. In 2012, the average compensation for a board member at an S&P 500 company was $251,000. In addition, boards consist of other CEOs who have considerable interest in ensuring their compatriots are paid generously. To advise on executive pay, boards typically hire people called “compensation consultants,” whose actual roles are more akin to that of the oldest profession in the world. Such consultants typically establish benchmarks based on the pay of other CEOs, whose boards typically hire them for the same purpose. Since all boards want to demonstrate to their CEO as well as to analysts on Wall Street their willingness to pay generously for the very best, pay packages ratchet upward annually in the faux competition, conducted and directed by CEOs for CEOs, in the interest of CEOs. 24

It hardly needs to be added that under the provisions of corporate law in the USA, shareholders have only an advisory role deciding the compensation for a CEO. Dodd–Frank financial legislation gives shareholders a say on pay, but the votes are not binding. Again, Robert Reich gives an illustration of this unfortunate gap in corporate law—which of course could be easily revised in Congress if it had the will to do so. Billionaire Larry Ellison , back in 2013, was granted a pay package valued at $78.4 million by Oracle’s board. The sum was so absurd that shareholders rejected it. The rejection, however, was ignored by the board because it was, after all, controlled by Ellison. Had Oracle been in Australia, notes Reich, the outcome would probably have been different. That is because shareholders there have the right to force an entire corporate board to stand for reelection if 25% or more of a firm’s shareholders vote against a CEO pay plan two years in a row. 25

The Rise and Rise of Corporate Executive Pay

Members of corporate boards play the leading role in doling out generous rewards to CEOs, and the most significant tool in their toolbox remains the stock option. Granting this concession to CEOs provides incentives for them to pump up a firm’s shares and then to cash out following the rise in value. And here again, despite Dodd–Frank and the desire to rein in executive compensation, stock options granted to CEOs and others have continued to escalate, remaining a significant form of corporate expenditure.

Corporate executives have become expert at boosting share prices. They use company earnings or borrow additional money for share buybacks , reducing the number of outstanding stock owned by the public, inevitably raising the price of the remaining shares. William Lazonick, a professor of economics and director of the Center for Industrial Competitiveness at the University of Massachusetts-Lowell, using SEC data, has done the math. Between 2001 and 2013, corporate expenditures on share buybacks of companies in the Standard & Poor’s 500 Index accounted for outlays of $3.6 trillion dollars. 26 By law, corporations are required to announce publicly when they have approved buybacks, and the amount as well, but they are not required to disclose when they are actually entering the market to do so. The result is that buybacks are purchased anonymously, leading, routinely, to rising stock prices without investor knowledge that the cause may be the buybacks. There is a hitch in all this: CEOs can legally use their insider knowledge when buybacks will occur and exercise their stock options to coincide with the rise in share price. 27

This will sound like insider trading too many and therefore illegal. But the deceit goes even deeper than that. David Cay Johnston noticed that executives had an uncanny ability to have options awarded to them on days when the stock price was at its lowest point during each period: “The timing was too perfect to be possible were the rules being followed.” 28 Johnston had sniffed the deceptive practice: perfect timing such as he discovered was unlikely to be random. It wasn’t. Corporations had not aborted the rules, they had found a legal way to simply avoid them by backdating to a time of low or lower price. Or alternatively, they resorted to the equally pernicious insider practice of pricing options on days when adverse corporate performance was scheduled to be released to the public. 29

All this might sound like fraud and illicit stock manipulation to advantage CEOs and other executives. And for almost five decades, the SEC agreed. It believed that stock buybacks could lead readily to stock manipulation, which was why it required companies to disclose the volume of their buybacks and prevented them from repurchasing more than 15% in a single day—though that was hardly a significant deterrence. But even this was too much for Wall Street. In 1982, under President Reagan, the chairman of the SEC , John Shad, removed even these minor hindrances. Henceforth, corporations were free to manipulate the prices of their shares, and insider trading was unshackled to the advantage of corporate executives.

A decade later, the rules changed even more to the advantage of illicit corporate behavior. What was formerly fraudulent now became a virtue. In 1991, top executives with insider knowledge of the timing of their company’s stock buybacks were permitted to exercise their stock options with public disclosure. And then in 1993 came a fateful decision by the Clinton administration allowing companies to deduct executive pay in excess of $1 million from the company’s taxable income—as long as that income was linked to executive performance, i.e., derived from stock options and bonuses connected to share prices. In this way, as rules changed to the benefit of corporations and their top executives, remuneration skyrocketed, abetted by the government’s benevolent attitude toward Big Business. 30 But the huge wealth legally diverted toward the corporate super-rich had to come from somewhere. And indeed it did. It came directly out of the shareholders’ pockets, taxpayers who picked up the tab of reduced corporate taxes, employees who lost their jobs (not because of China ), and workers who didn’t get needed job retraining, or who received no gains in wages. Neither globalization, nor automation accounted for all these changes, but rules changes favoring the rich atop the corporate ladder created windfalls at the expense of wage bills, employment, and R&D, the better to raise share price and lift CEO compensation. Again, it was something for nothing, a modern version of rentier capitalism.

The new corporate model ultimately proved costly for employees, sometimes fatal, but it has also been a disaster for many corporations as well, which would have been much better off had they invested more in R&D and in their employees, as Germany has routinely done. IBM perfectly illustrates the lesson, and it has suffered the consequences. In 2014, Andrew Ross Sorkin, of the New York Times, explained how and why:

Since 2000, IBM spent some $108 billion on its own shares, according to its most recent annual report. It also paid out $30 billion in dividends. To help finance this share-buying spree, IBM loaded up on debt. While the company spent $138 billion on its shares and dividend payments, it spent just $59 billion on its own business through capital expenditures and $32 billion on acquisitions. 31

IBM had not always followed such laggard practices. Once upon a time, it had been committed to providing lifelong employment and long-term investments in technologies of the future. This dramatically changed in the 1990s when IBM shifted its priorities. It began laying off employees, scrimping on research, borrowing heavily, and using its cash to buy back shares. Robert Reich has pointed out that between 2000 and 2013 IBM spent $108 billion in share buybacks , raising share prices even as revenues went—and remained—flat. 32

Meanwhile, this practice continued. Between 2005 and 2013, IBM spent $125 billion on buybacks and $32 billion on dividends, more than its capital spending and R&D combined in the same period. 33 Inevitably, IBM ’s stock began its proverbial slide, while its US work force, once in the range of 150,000, was roughly cut in half. Many of those jobs have gone abroad, so globalization has taken its toll. But much of what has undermined IBM in the USA has been its corporate strategy to subsidize its senior executives and top shareholders at the expense of workers and innovation.

Karen Brettell, David Gaffen, and David Rohde have documented similar practices at Hewlett -Packard (HP).

When Carly Fiorina started at Hewlett-Packard Co in July 1999, one of her first acts as chief executive officer was to start buying back the company’s shares. By the time she was ousted in 2005, HP had snapped up $14 billion of its stock, more than its $12 billion in profits during that time. Her successor, Mark Hurd, spent even more on buybacks during his five years in charge – $43 billion, compared to profits of $36 billion. Following him, Leo Apotheker bought back $10 billion in shares before his 11-month tenure ended in 2011. The three CEOs, over the span of a dozen years, followed a strategy that has become the norm for many big companies during the past two decades: large stock buybacks to make use of cash, coupled with acquisitions to lift revenue. All those buybacks put lots of money in the hands of shareholders. How well they served HP in the long term isn’t clear. HP hasn’t had a blockbuster product in years. It has been slow to make a mark in more profitable software and services businesses. In its core businesses, revenue and margins have been contracting. 34

William Lazonick has characterized the practices of HP as self-destructive: “HP was the poster child of an innovative enterprise that retained profits and reinvested in the productive capabilities of employees. Since 1999, however, it has been destroying itself by downsizing its labor force and distributing its profits to shareholders.” 35 Indeed, “downsizing” HP’s labor force was an understatement. Between CEOs Meg Whitman and Carly Fiorina , HP laid off 80,000 workers in the wake of what was called “restructuring,” but which ultimately was what paid for the greed and extraction of wealth by the ascendant few. The failure to innovate, the high volume of extracted wealth from the corporation, ultimately fueled the failure of HP. The gains of the CEOs and top executives and high-end shareholders were paid for by the most vulnerable and least compensated in yet another advance of the rentier economy.

There were of course exceptions, but what we have seen was also typical of the corporate culture that began to emerge in the 1980s. And that culture was destructive. The windfalls that were being routinely given to CEOs and their teams were contingent on constantly improving earnings per share from one quarter to the next. Long-term investment, R&D, and the focus on productivity growth were replaced by new corporate strategies. American executives, their total earnings now tied to share price more than ever, were motivated—supported by their boards of directors—to receive their gold bricks in share buybacks and mergers, the former a dilution of value to other shareholders, the latter a method to exponentially boost gain for executives while shifting the tax burden to others lower on the totem pole: altogether another example of extraction of wealth and rent-seeking by the super-rich.

Prior to the Reagan era in the USA and the Thatcher era in the UK, executive pay had been stable for decades, and senior executives earned about thirty times the multiple of the average pay of their employees. But with Reagan and Thatcher, with their advocacy for letting the market set the wages, and their removal of any lingering commitment to social democratic values, as well as their hostility to organized labor, all obstacles for accelerating executive pay were removed. By 2000, the sea change in senior executive remuneration had contributed to the burgeoning inequality gaps that have become all too common. Top management pay escalated to more than 300 times average employee wages. George Tyler noticed that it became typical for a handful of executives at larger firms to each average $5 million in annual pay, including bonuses and stock options . 36

Well after the financial and housing market crash of 2007–2008, executives and their minions had not been shamed, nor had legislation curbed their insatiable appetites for wealth. The AFL-CIO released data in 2014 showing that American CEOs in 2013 earned an average of $11.7 million—an eye-popping 331 times the average worker’s $35,293. This was down from 2012s 354-to-1 CEO-to-worker pay ratio, but the multiple more than doubled when compared to minimum wage workers; the average CEO in 2013 out-earned this group by a multiple of 774. 37 Gillespie and Zweig, cited above, noted that CEOs were receiving 10% of all corporate profits, a staggering percentage considering that corporate executives in earlier eras were no doubt just as creative and productive, but earning far less than the income of rock stars. 38 Executives argue that they are creative and innovative, and in any case, they have to play by the same rules as everybody else. But we have already seen that they set the rules.

In other democracies, executive pay has not risen to the obscene levels of the USA. In the UK, which comes closest to emulating the USA in executive compensation, CEOs at the largest 100 firms on the UK stock exchange (FTSE 100) earned 88 times the average wage of their employees in 2009. 39 In Japan, in 2008, the top fourteen executives at Mitsubishi, Japan’s largest bank, received $8.1 million altogether, a sum that pales when compared to the pay scales of their American counterparts. 40 A Harvard Law study showed that American CEO pay packages were not only undeserved, but were well beyond what counterparts received everywhere else. This study found that American CEOs at large firms averaged $12.3 million, which contrasted with $5.9 million in Germany, $3.8 million in the UK, $3.4 million in Sweden , and $2.5 million in Norway . 41 Generally, Scandinavian countries grant their executives much less compensation, though hardly pauperizing them, by maintaining democratized boards of directors. The result is greater commitment to employees, reasonably low unemployment rates, and much greater benefit levels, including government determination to keep people who want jobs in employment.

Outlandish executive remuneration in the USA strongly suggests a disconnection between executive pay and performance. The same is true for Britain. The British Institute of Directors, hardly a proletarian organization, back in 2011 argued that business in the UK was “significantly damaged” in the view of the public because of undeserved pay packages hardly earned by performance, though average CEO pay at $3.8 million was less than 30% of what was taken in the USA. 42

During my brief stint as a “banker” or investment counselor at UBS investment bank, some of the counselors were ingenuous enough to realize and to admit that they had little idea of where the market was heading. But that didn’t stop them from making somewhat educated guesses dressed up as science, not opinion. Others had degrees in economics and were more self-confident: the result was sometimes better, even in the flat year of 2002. The degreed felt they had something of value, and therefore, when they made good commissions, they believed the earnings were merited because they brought value to the client. But when the client lost, the reasoning was that it was the fault of the market, not the advice of the investment broker. Whether the client won or lost, the broker still made money in fees and commissions: he never participated in losses, but could and often did take a percentage of the winnings. UBS itself participated in the deception, granting the title of vice president to every broker it hired. This was merely cosmetic, but somewhere there was the conviction that a title of vice president would be more convincing for UBS’ clientele.

Robert Reich was on the mark when he reminded us in Saving Capitalism of the “meritocratic myth,” the belief that executives making excessive earnings were worth their outsized incomes and wealth. In fact, as Reich demonstrates, much of the wealth taken in finance was based on insider trading. Reich cited the case of Steven A, Cohen , who in 2013 earned $2.3 billion. During Cohen’s twenty years at the helm of SAC Capital Advisors, he reaped a fortune estimated at about $11 billion. Was he really worth that sum of money other than in the most tautological sense that he must have been worth that sum if he had earned it? The Justice Department didn’t think so, and it subsequently filed a criminal complaint, noting that under Cohen’s leadership insider trading was “substantial, pervasive and on a scale without precedent in the hedge fund industry.” 43

Had Cohen and SAC Capital not cheated and gamed the system, and had insider trading been discovered and prosecuted earlier, investor confidence would have waned, returns would have diminished, and Cohen’s wealth, $11 billion, would have been much reduced. As it turned out, Cohen was fined $1.8 billion, meaning that he had succeeded in gaming the system after all. But there was one thing that could not be said for Cohen: he was hardly worth the $11 billion or the $9.2 billion he was allowed to retain. He had committed fraud, yet was richly awarded for it. He had amassed a huge pile of money, but he had not contributed anything of value to the real economy. In siphoning money, he was parasitical, and he had found the means—legal or not—to extract the wealth that others had produced, with no moral claim to that wealth. Had the rules been different, had insider trading been banned, and had that ban been enforced, Cohen ’s wealth would have been vastly diminished.

Private Equity: Stealing Wealth by Firing Workers—The New “Flexible Labor Force”

The last three plus decades in both the USA and the UK, beginning with the Reagan and Thatcher eras, have seen the emergence of strident managerial capitalism fueled by short-termism , artificially raising share price to enrich the corporate elite. But this has come at the expense of many and ultimately of corporations themselves. That is because this era has produced corporate mergers, and these have been value destroying for a number of reasons. Corporations that acquire other companies have too often done so in order to boost revenues by buying the assets that produce them. This strategy, however, means an increase in debt, which in turn has led to reducing what should have been regarded as the main assets of every company engaged in competitive capitalism: research R&D and investment in human capital—or the employees of a given company. Put in perspective, to make short-term gains that are likely to produce rising overall earnings and share prices, too many corporations have sacrificed R&D, the necessary investment in innovation which made them successful in the first place, and any serious commitment to their employees and long-term employment.

Welcome to the wonderful world of private equity and corporate mergers. Borrow large sums of money, acquire a company, sell off its assets to pay off the loan, fire thousands of workers to give yourself operating capital, use mostly flexible labor to avoid benefits, and flip the company that is now operating in the black at an enormous profit: or simply keep it if it brings enough revenue.

Seems like an exaggeration? Not at all, it is part of the ethic of modern corporate capitalism: to balance new debt incurred in acquisition, shed workers, and reduce capital investment. But look at the subtle and not so subtle risks: the more mergers, the less competition, and the less competition, the less competitive a company is bound to be. From the point of view of workers, this whole new era of capitalism has meant a disaster. Companies have less need for them, treat them as an expendable commodity, see them as an unfortunate and unnecessary expense, and convert them from important contributors of knowledge to part-time or contract workers, replaceable and easy to shed.

But what of the viewpoint of private equity corporations and companies engaging in takeovers and mergers that they are engaged in “creative destruction,” making the economy overall much stronger by restructuring failing companies and eliminating redundancies? An important study by economists Ulrike Malmendier, Enrico Moretti, and Florian Peters examined all contested US mergers between 1985 and 2009 where at least two suitors vied to acquire a company. The results were startling. The researchers found that, following the mergers, the losers—those whose bids had failed—outperformed the “winners” by roughly 50% in the three years following the merger. This was an enormous penalty for “success,” but the reason for the striking underperformance was clear to the researchers: it was the debt taken on to effect the merger. It was because of that debt and the high leverage it signified, that expenses had to be cut elsewhere in order to manage the new obligation. 44 Economists Jeffrey S. Harrison and Derek K. Oler came too much the same conclusion. The inevitable consequence of mergers was a rise in debt leverage and a corresponding reduction in the work force, replete with layoffs, conversion to more part-time jobs, and growing indifference to both the communities where companies were located and the effect that downsizing the workforce would have on them. Harrison and Oler examined 3000 mergers and found that leverage had risen on average 45%, steep enough to lead to dramatic paring of “risk” elsewhere. This meant cutting spending on R&D and wages. 45 Not surprisingly, somebody had to pay for the cost of mergers and the handsome executive rewards that were the objectives of the mergers. Typically, that meant that jobs were lost and workers were out of luck.

Some firms remain dinosaurs that need restructuring. That is part of the narrative: mergers and/or acquisitions can also revive a company by making it more efficient, more competitive, and less capital starved, enabling necessary changes. Certainly redundancies can be eliminated. And nobody can deny the impact of technology and innovation, as well as globalization. But many American corporations, in particular, including private equity firms, have shed workers, reduced R&D, and concentrated on short-term strategies in order to pump up earnings, without creating anything of corresponding value.

Since the 1980s, there has been a sea change in mergers and hostile takeovers, initially enabled by Reagan and not subsequently reversed. Ironically, government changed the rules that made piles of cash available for mergers and acquisitions. But the transformation was also promoted by corporate interests and Wall Street and was embraced by Congress as far back as 1974. In that year, Congress enacted the Employee Retirement Income Security Act at the urging of pension funds, insurance companies, and the Street, which, prior to that act, could only invest in high-grade, conservative corporate, and government bonds. This was transformed by the 1974 act, which allowed pension funds and insurance companies to invest their portfolios in the stock market. Overnight this provided mountains of fresh funds made available to Wall Street. In 1982, Congress went further along the same path, when it authorized savings and loan banks—at that time the pillar for home mortgages—to invest their deposits in any number of financial products, including junk bonds and their equivalent high risk securities, all of them promising high, and sometimes spectacular—and irresistible—gains. The temptation proved to be too great: when many of these banks went under, the taxpayer lost some $124 billion. 46

Conclusion

Wall Street and corporate America, and the City and corporate Britain, abetted by the Washington and London political elites, have cleared the way for “creative destruction,” the absorption of “less efficient and tenable” companies to make the overall economy more competitive. Driven by insatiable greed, they created a perfect storm for what would come in 2007–2008, the last hurrah for many in the middle classes and the working classes of both countries, who paid the ultimate price in the loss of homes, health, and jobs. For such workers, creative destruction meant massive unemployment , followed by work forces ever more flexible, ever more contingent, ever more at risk, increasingly without unions to protect them, or politicians to legislate for them. But for private equity companies and corporations with mountains of pension money newly available, it was a new era of acquisitive, rentier capitalism and its executive beneficiaries.

Notes

  1. 1.

    Gary Rivlin and John Markoff, “Tossing Out a Chief Executive,” New York Times, February 14, 2005.

     
  2. 2.

    Jack Lawrence Luzkow, The Great Forgetting: The Past, Present and Future of Social Democracy and the Welfare State (Manchester: Manchester University Press, 2015), 133.

     
  3. 3.

    Ibid., 136.

     
  4. 4.

    George R. Tyler, What Went Wrong: How the 1% Hijacked the American Middle Class…And What Other Countries Got Right (Dallas, TX: Benbella Books, 2013), 132–33.

     
  5. 5.

    Heather Landy, “Executives Took, But the Directors Gave,” New York Times, April 5, 2009.

     
  6. 6.

    David Cay Johnston, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—And Cheat Everybody Else (New York: Penguin/Portfolio, 2003), 250.

     
  7. 7.

    David Carr, “Why Not Occupy Newsrooms?” New York Times, October 23, 2011.

     
  8. 8.

    Nicholas Kristof, OP-ED, “Need a Job? $17,000 an Hour. No Success Required,” New York Times, September 17, 2008.

     
  9. 9.

    Andrew Sorkin, “Thain Speaks Out in Defense of Himself,” New York Times, January 26, 2009.

     
  10. 10.

    Mark Maremont, John Hechinger, and Maurice Tamman. “Before the Bust, These CEOs Took Money Off the Table,” The Wall Street Journal, November 20, 2008; “Executive Incentives.” See chart, “Executive Incentives,” comparing executive performance and compensation.

     
  11. 11.

    Ibid.

     
  12. 12.

    Rober Reich, Supercapitalism: The Transformation of Business, Democracy and Everyday Life (New York: Alfred A. Knopf, 2007), 108.

     
  13. 13.

    Tyler, What Went Wrong, 137.

     
  14. 14.

    Ibid.; See also Kevin Murphy , “Pay, Politics and the Financial Crisis,” Economics and the Financial Crisis. Russell Sage, 2012.

     
  15. 15.

    Tyler, What Went Wrong, 129.

     
  16. 16.

    John Gillespie and David Zweig, Money for Nothing: How the Failure of Corporate Boards Is Ruining America and Costing the US Trillions (New York: Free Press, 2010), 35.

     
  17. 17.

    Steven M. Davidoff, “On Boards, Little Cause of Anxiety,” New York Times, August 3, 2011.

     
  18. 18.

    Lucian A. Bebchuk and Jesse M. Fried, “Tackling the Managerial Power Problem,” Pathways, Stanford University Center for Poverty and Inequality, Summer 2010, online at http://​inequality.​stanford.​edu/​sites/​default/​files/​summer_​2010.​pdf.

     
  19. 19.

    Editors, “Executive Pay,” Financial Times, February 7, 2010.

     
  20. 20.

    Adam Liptak, “Justices to Weigh in on Corporate Culture and Its Paychecks,” New York Times, August 18, 2009.

     
  21. 21.

    Joseph E. Stiglitz, The Great Divide: Unequal Societies and What We Can Do About Them (New York: W. W. Norton, 2015), 192–95.

     
  22. 22.

    John Kay, “Powerful Interests Are Trying to Control the Market,” Financial Times, November 10, 2009.

     
  23. 23.

    Maremont et al., “Before the Bust.”

     
  24. 24.

    Robert B. Reich, Saving Capitalism: For the Many, Not the Few (New York: Alfred A. Knopf, 2015), 99.

     
  25. 25.

    Ibid., 99–100.

     
  26. 26.

    William Lazonick, Taking Stock: Why Executive Pay Results in an Unstable and Inequitable Economy (New York: Roosevelt Institute, June 5, 2014), 5, at http://​www.​theairnet.​org/​v3/​backbone/​uploads/​2014/​08/​Lazonick_​Executive_​Pay_​White_​Paper_​Roosevelt_​Institute.​pdf.

     
  27. 27.

    Reich, Saving Capitalism, 101.

     
  28. 28.

    David Cay Johnston, Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense—And Stick You With the Bill (New York: Portfolio/Penguin, 2008), 263.

     
  29. 29.

    Peter Lattman, “Prosecutions in Backdating Scandal Bring Mixed Results,” New York Times, November 12, 2010.

     
  30. 30.

    Reich, Saving Capitalism, 101; Steven Balsam, Taxes and Executive Compensation, Briefing Paper #344 (Washington, DC: Economic Policy Institute, August 4, 2012), online at http://​www.​epi.​org/​publication/​taxes-executive-compensation/​.

     
  31. 31.

    Andrew Ross Sorkin, “The Truth Hidden by IBM ’s Buyback,” New York Times, October 20, 2014.

     
  32. 32.

    Reich, Saving Capitalism, 102.

     
  33. 33.

    Karen Brettell, David Gaffen, and David Rohde, “As Stock Buybacks Reach Historic Levels, Signs That Corporate America Is Undermining Itself,” Reuters, November 16, 2015, online at http://​www.​reuters.​com/​investigates/​special-report/​usa-buybacks-cannibalized/​.

     
  34. 34.

    Ibid.

     
  35. 35.

    Ibid.

     
  36. 36.

    Tyler, What Went Wrong, 133.

     
  37. 37.

    Kathryn Dill, “Report: CEOs Earn 331 Times as Much as Average Workers, 774 Times as Much as Minimum Wage Earners,” Forbes Magazine, April 15, 2014.

     
  38. 38.

    Gillespie, Money for Nothing, 35.

     
  39. 39.

    Richard Lambert, “Blueprint to Put Bosses’ Pay in Order,” Financial Times, November 4, 2011.

     
  40. 40.

    Ian Verrender, “Running to Save Their Executive Bacon—Alas It May Be Too Late,” Sydney Morning Herald, October 15, 2011, online at http://​www.​smh.​com.​au/​business/​running-to-save-their-executive-bacon--alas-it-may-be-too-late-20111014-1loyo.​html?​deviceType=​text.

     
  41. 41.

    Roberto A. Ferdman, “The Pay Gap Between CEOs and Workers Is Much Worse Than You Think,” Washington Post, September 25, 2014.

     
  42. 42.

    Kate Burgess, “More Calls for Reform of Executives’ Pay,” Financial Times, November 27, 2011.

     
  43. 43.

    Cited by Robert Reich , Saving Capitalism, 90.

     
  44. 44.

    Ulrike Malmendier, Enrico Moretti, and Florian Peters, Winning by Losing: Evidence on the Long-Run Effects of Mergers, Working Paper 18024 (Cambridge, MA: National Bureau of Economic Research, 2016), at http://​emlab.​berkeley.​edu/​~moretti/​mergers.​pdf.

     
  45. 45.

    Jeffrey S. Harrison and Derek K. Oler, “The Influence of Debt on Acquisition Performance,” Academy of Management Journal, Presented at Academy of Management Annual Meeting Proceedings, August 2008, online at https://​doi.​org/​10.​5465/​ambpp.​2008.​337168, 34; see also Tyler, What Went Wrong, 143.

     
  46. 46.

    Reich, Saving Capitalism, 120–21; see also Timothy Curry and Lynn Shibut, “The Cost of the Savings and Loan Crisis: Truth and Consequences,” FDIC Banking Review 13, no. 2 (2000): 26–35.