
No value: Investing, CEO pay and the economy - known
http://www.economist.com/blogs/buttonwood/2014/12/investing-ceo-pay-and-economy
======
iwwr
There have been great legal barriers erected to protect management from
shareholders. Without restrictions on hostile or silent(unannounced)
takeovers, management would not be able to employ tactics like overloading
with debt or emergency stock repurchase (effectively harming the company to
prevent being taken over).

[http://en.wikipedia.org/wiki/Shareholder_rights_plan](http://en.wikipedia.org/wiki/Shareholder_rights_plan)

[http://www.investopedia.com/terms/s/sharkrepellent.asp](http://www.investopedia.com/terms/s/sharkrepellent.asp)

~~~
Zigurd
That assumes that hostile takeovers are good, even relative to entrenched and
entitled management. It could amount to one fox keeping another out of the hen
house.

~~~
ddeck
Whether "good" or "bad" (not sure what that means in this context), it should
be the owners of the company that decide whether or not to accept a bid for
their ownership, not the company's management. Management and shareholder
incentives are not often aligned when it comes to a change of control.

Management operates the company for the benefit of the owners. Preempting the
owners' decision to sell by making the company a less attractive target should
not be within their remit.

~~~
wpietri
I don't think I agree.

If a company's "owner" is mainly short-term money, then any publicly traded
company is vulnerable to takeovers that destroy long-term value in favor of
extracting cash in the short term.

For example, imagine a scotch distillery. For the last couple hundred years
they've been reliably producing scotch, with their most common version aged 12
years. They've got solid people, many of whom spend their whole careers there.
They have a very well-regarded brand; sales and profits are solid and
consistent.

A corporate raider buys them. They immediately stop putting new whiskey in
barrels, fire anybody who has been there more than a few years, and start
selling off property and distilling gear. This frees up a lot of cash, making
quarterly results look great. They then increase sales volume 3x by buying
inferior whiskeys and selling it under their brand while increasing marketing.
Quarterly numbers look even better. The raiders load the company up with debt,
extracting cash, then take the company public. There is some grumbling from
whiskey aficionados that it's "not the same", but the public, looking at the
strong numbers and the beloved brand name, eagerly buys the stock.

A few years later, as the aging whiskey runs out and the lowered quality harms
the brand, sales fall. Interest rates go up, making the debt hard to manage.
The house of cards comes tumbling down and the company declares bankruptcy.
People mourn the loss of a once-great distillery, many good people are out of
jobs, and a lot of stockholders take a loss on their tax forms. The raider
uses its now-larger cache hoard to repeat the process elsewhere.

An outcome like that is within the current rules of business, and is
depressingly common. But it's not why we as a society provide for and support
the whole notion of companies. Sure, sometimes takeover defenses are
management getting comfortable. But "management operates the company for the
benefit of the owners" is an ideological statement, not a descriptive one.

~~~
iwwr
>If a company's "owner" is mainly short-term money, then any publicly traded
company is vulnerable to takeovers that destroy long-term value in favor of
extracting cash in the short term.

That just means companies have to be valued high enough so they're not
vulnerable to the 'raiders'. However, if that's not the case then there may be
a fundamental problem with the long term prospects of the company. It may be
better indeed to use the capital of it for something else.

~~~
wpietri
My issue with answers of this sort is that they seem circular. If the concern
is about the cult of shareholder value, answering with the dogma of
shareholder value doesn't enlighten.

I get that economic theory can be a useful way to look at actual productive
relations in the world. But it's just a theoretical model. If we find that
following the theory leads us to behaviors that destroy the things economics
was created to describe, we should stop to ask ourselves whether we could use
a better theory.

------
fennecfoxen
With plenty of respect to the conclusion (stock options to pay CEOs are wildly
exploited) I'm not sure how that's supposed to be a failure of the idea that
"companies exist merely to generate economic returns to their owners". It
sounds more like a failure of a common mechanism used to seek that goal.

~~~
Retric
It's a critique of a movement not an idea.

I would argue executives should receive stock with long vesting schedules (as
in 30 years) not options. However, options are nominally cheap up front so
they tend to look more appealing for boards.

~~~
pflats
While I agree with your sentiment, 30 years seems unreasonably long to me. At
that point, you might as well just require the stock be put in a trust for the
CEO's heirs.

~~~
Arubis
Doing exactly that would select specifically for people that care enough about
future generations and those to follow to make personal sacrifices: "you won't
end up filthy rich, but your children can escape the bonds of debt." Obviously
not universally appealing, but I would go out of my way to work with someone
like that, and would attach a level of personal trust to an organization under
their guidance.

I wonder what situations this would apply well to? It doesn't greatly bother
me that CEOs of oil companies are profit-driven, but the concept of rewarding
someone's work by enriching the people that they love, rather than just
creating short-term incentives, would fit especially well with nonprofits and
NGOs, which oftentimes seem like their primary mission is to justify their
continued existence.

~~~
tormeh
10 or even 5 years would be long enough. That's far longer than most CEO's
stay in the job.

~~~
wpietri
That's not the correct yardstick. CEOs are supposed to be making strategic
decisions with decades of impact. If they are compensated based on short-term
results, then they will have a strong incentive to make short-term decisions.

~~~
tormeh
I think this is an unsolvable problem. I don't understand how anyone could
accept such a delay in payment. Remember most companies aren't alive for 30
years. IBM, GE, etc. are exceptions to the rule.

Maybe the best thing to do is to abandon performance-based compensation
entirely, because it can't be done over long timescales and over short ones it
is an abomination.

~~~
wpietri
I think you have it backwards. Perhaps the reason most companies no longer
last is that the people running them have no financial interest in their long-
term survival.

Note that plenty of founder CEOs are happy to accept near-infinite delays in
payment. 90% of Jeff Bezos's wealth is still in Amazon stock despite being
there 20 years. And Amazon has been kicking the asses of its competitors for
decades precisely because it has been willing to make very long-term
investments.

~~~
pflats
>90% of Jeff Bezos's wealth is still in Amazon stock despite being there 20
years.

With Bezos, we are talking about amounts of money so large that I (and I
assume you) can't truly conceive of them. If 90% of his net worth is Amazon,
Jeff Bezos has ~$3 billion dollars invested in companies other than his own.
He's plenty diversified and if that 3 billion is properly managed, he'll never
want for anything, ever. Even if Amazon stock falls to 1/10th of its value,
Bezos's life won't appreciably change, he'll just have slightly less leeway
when building his multi-million-dollar cave clocks.

~~~
wpietri
So? Median CEO pay in 2000-2011 was over $2m/year. That's excluding another
$6m in stock and stock options. If that equity is locked up such that they get
1/30th every year for 30 years, they still won't be eating cat food.

I'll note that the companies of the post-war economic boom (1946-1980) did
well enough even though median CEO compensation (cash, stock, and options) was
around $1m annually in real terms. So it's reasonable to think that we'll
still be able to attract decent talent for the merely 2x that CEOs are getting
in cash. The long-term stock would be an incentive for long-term behavior.

------
pcurve
Long vesting schedule isn't a viable solution for many companies. I think 3
year is reasonable.

But this is what I would do if I were in charge.

\- Eliminate options grant because if share price declines, execs are not
exposed to downside. Yet when share price goes up, it can be a complete boon.

\- Cap ratio of base salary to incentives so that bonus is no more than 100%
of your base. When much of your total compensation derives from your bonus,
you are not incentivized to make 'right' decisions.

\- If you want to participate in equity sharing, execs need to make conscious
decision to spend part of their after-tax paycheck. This is having true skin
in the game.

------
simon_
Without saying anything about the broader thrust of an argument, I'll
highlight a pet peeve: the drawing of wildly overconfident conclusions from
social science research.

The economics experiment on how rural Indian farmers respond to financial
incentives is interesting, but... is it really applicable here? How solid is
the unstated assumption that elite CEOs have similar ability to perform under
pressure as random subsistence farmers? Doesn't sound that solid to me...

------
carsongross
If returns were in terms of dividends, with owners actually sharing in
profits, rather than more easily manipulated and leverage level dependent
capital gains, the problem would solve itself.

Make dividends tax deductible for companies (effectively treat them as big
LLCs), eliminate the capital gains tax advantage, and watch sanity return to
c-suite comp.

~~~
maxxxxx
I have been think about that too. Then investing would also be less of a
gamble on the stock market.

------
michaelochurch
What this is really about, to me, is trust and its tendency toward self-
fulfilling prophecy. This isn't about a major change in the philosophical
concept of a business. It's about CEOs no longer being trusted to make long-
term decisions (and the culture of moronic short-termism trickles down to
programmers dealing with "scrum" and "sprints" and shit.)

When people are trusted, most will keep the self-dealing to a minimum in order
to continually earn that trust. But once they sense that their organizations
or managers don't trust them, it's just natural to conclude, "I don't care for
them either" and maximize for short-term personal yield. At scale, this leads
to macroscopic underperformance and everyone loses.

~~~
api
I feel like there's been a general collapse in trust in at least America in
the past 40 years. Short-term behavior is a logical individual response to
that. I smell game theory.

~~~
throwaway9931
Your feeling is correct, and numerous polls and studies quantify
it.[[http://www.usatoday.com/story/news/nation/2013/11/30/poll-
am...](http://www.usatoday.com/story/news/nation/2013/11/30/poll-americans-
dont-trust-one-another/3792179/)]
[[http://www.npr.org/2014/03/10/288712990/social-distrust-
bloo...](http://www.npr.org/2014/03/10/288712990/social-distrust-blooms-among-
millennials-but-where-are-its-roots)] Robert Putnam in Bowling Alone was just
one of the people who explored this effect. Putative causes include
potentially "de-socializing" technology like TV, increasing income inequality,
emergence of suburban living, and fear-heavy media.

The vastly increased level of racial and ethnic heterogeneity in America can
not be ignored as a potential cause, either. Diversity may hinder social
cohesion and a sense of community. [[http://www.hks.harvard.edu/news-
events/publications/insight/...](http://www.hks.harvard.edu/news-
events/publications/insight/democratic/robert-putnam)]
[[https://www.msu.edu/~zpneal/publications/neal-
diversitysoc.p...](https://www.msu.edu/~zpneal/publications/neal-
diversitysoc.pdf)]

~~~
api
I personally feel like all the causes you list are secondary. Primary, at
least for me, is abuse of trust and power. People seem to earn trust in our
culture only so that it can be "spent" later in abusive ways. Our relationship
with our political and business leadership is the classic "abuse, then make
up, then abuse again" pattern seen in abusive family relationships, but writ
large.

Every event of large-scale deception -- or even incompetence that gives the
appearance of deception -- has a _huge_ negative effect on the overall level
of trust in a society. It's sort of like the "bad neighborhood effect." If you
experience one mugging, that location is forever a "bad neighborhood" even if
99.9% of its inhabitants are perfectly peaceful law abiding citizens. It takes
one act of official misconduct to undo the goodwill of thousands of noble and
responsible acts.

I think the term is "elite deviancy" \-- the condition in a society when that
society's elite no longer believe the rules apply to them and no longer have
any sense of shared pride or loyalty to the society at large.

But these things have a way of being recursive-- it's possible that this elite
deviancy is a response to growing alienation. This condition could also arise
if our elite think they're on a sinking ship. I wonder sometimes about things
like the Limits to Growth and what effect that had on the belief systems of
those at the top. The timing matches pretty well-- it seems as if everything
went to short-term hell shortly after 1970. "Get as much as you can and get
out" is a rational strategy in a civilization one believes is dying.

I wonder... did you make a throwaway because of the ethnic/race part of your
response? I don't think you're wrong. People do tend to cooperate far more
readily with people who look like them and have the same cultural values. It's
something I find deeply depressing though... what are we, social insects? Can
we only cooperate in homogeneous hives?

