Posted on 07/01/2002 12:21:55 PM PDT by GeneD
The corporate world is now embroiled in two controversies. There's the fraud at Enron, WorldCom, Arthur Andersen, and elsewhere; and there's the payment of absurd sums to CEOs. Both developments threaten the free-market system--you're kidding yourself if you don't think that big firms deliberately duping investors, or CEOs awarding themselves hundreds of millions of dollars that should have gone to stockholders, does anything other than erode the reputation of market economics. Both practices also trample important principles of conservative economics, as we'll see in a moment.
But the two controversies really aren't separate--they are one and the same. The motive for almost all the corporate deceit now being exposed was not "the pressure of quarterly profit statements," as spin has it. Yes, shareholders exert demands for positive earnings statements. But they would be irrational if they wanted to be deceived, which is what the unpersuasive "quarterly profits pressure" pretext boils down to. The motive for almost all the corporate cheating was not to issue pleasant earning statements but to run up the pay of CEOs.
Top managers of firms such as Enron, Global Crossing, and, it now appears, Xerox systematically lied about the condition of their enterprises to rationalize granting themselves huge sums diverted from equity. If this isn't common theft--lying in order to abscond with someone else's money--what is? While, we assume at this point, most CEOs haven't lied, many have exploited the lying-triggered "exuberance" to pay themselves exorbitant amounts. All the corporate lying has been devastating to shareholders, to the United States economy, and to the world standing of market economics. But, boy, has it been great for CEOs! Systematic corporate lying has created an environment in which top managers feel justified in paying themselves $100 million or more per year. And, amazingly enough, this cash-grab now continues even as business fortunes turn down.
The overt cheaters have profited brazenly: Kenneth Lay of Enron pocketing an extra $101 million in the months before Enron's collapse wiped out shareholders; Bernard Ebbers of WorldCom "loaning" himself $366 million in the months before his cooked books wiped out shareholders; L. Dennis Kozlowski of Tyco paying himself $426 million, from 1998 to 2002, even as his self-serving decisions were wiping out shareholders and driving the company into the ground.
Yet reach-and-grab by presumably respectable CEOs has been just as shameless. In 2000, to cite a few of many examples, John Welch of General Electric paid himself $144 million, Stanford Weill of Citigroup paid himself $90 million, Rueben Mack of Colgate paid himself $85 million, Louis Gerstner Jr. of IBM paid himself $102 million. The top ten CEOs in earnings for 2000 averaged $154 million, versus a top ten average of $3.5 million in 1980--a 20-fold increase, adjusting for inflation.
Originally, some of these huge paydays were rationalized as rewards for raising returns. Since then, big firms such as Xerox, Sunbeam, and Sun Microsystems have begun "restating" prior claims of returns--that is, admitting they lied about profits. (More than 500 corporate profit restatements have occurred in the last two years, dozens of times the historic rate.) Yet after phony profit claims are redrawn, the CEOs get to keep the cash effectively stolen. Ken Lay retains the millions he made by lying about Enron. Paul Allaire of Xerox picked up $16 million in 1998 and 1999 by cashing options when the company's stock price was artificially inflated based on fake profit numbers. Now the company has "restated," wiping out four-fifths of shareholder value, but Allaire gets to keep his tainted money.
The genteel larceny has reached the point that CEOs pay themselves enormous amounts even when there is zero pretense of management success. Establishing this premise, in 2000 overall CEO pay rose by 22 percent even as the broad market declined by 12 percent. The next year, 2001, John Chambers of Cisco Systems paid himself $154 million as his company was losing $1 billion. Edward Whitacre of SBC Communications, one of the Baby Bell offshoots, paid himself $80 million in 2001, even as his firm's stock price fell for the third consecutive year. That same year at AOL Time Warner, joint CEOs Gerald Levin and Steve Case paid themselves $148 million and $128 million, respectively, even as the combined company's valuation was contracting by $56 billion because of the two men's decision to merge. Fifty-six billion is almost as much money as disappeared in the entire Enron bankruptcy, meaning the AOL Time Warner CEOs lavished lucre on themselves while doing almost as much harm to stockholders as Enron did. (For notes on CEO pay numbers, click here.)
Such swindles ought to enrage conservatives and other champions of the free-market. After all, counterfeit corporate bookkeeping and unjustified CEO self-enrichment both represent lack of character--don't conservatives care about character?--and discourage investors from offering their capital. Yet we've heard almost nothing from conservatives denouncing the revelations of widespread corporate quasi-theft. Where for example are the voices of Gary Becker of the University of Chicago or of Milton Friedman--why are the great living conservative economists silent as big business pulls the wool over the free market? Has conservatism reached the point that any development that transfers money to white male CEOs is deemed acceptable?
This silence is even more startling when you think about how the CEO deceptions violate the basic precepts of the free market. Economic theory says markets work best with "transparency"--information must be accurate and must flow openly in order for markets to be efficient. Markets can't be efficient if corporations are lying about their financial condition, clouding the air with disinformation. "Clearing," one of the essential tenets of free market economics--driving all prices to their true value--can also happen only in the presence of accurate information available to anyone.
Next, consider the two standard rationalizations that CEOs have used to justify high pay--that top managers possess incredibly valuable expertise, and that the market price of executives is simply rising. The supposed incredibly valuable skills are increasingly turning out to be the willingness to lie and cheat. When Lay and other Enron executives defended themselves by insisting they were so totally, utterly stupid they had no idea what was going on around them, it might have been pointed out that these same inspiring felons originally justified their high pay on the grounds they were extraordinarily skilled financial geniuses.
Meanwhile, the headhunter market can't set accurate prices for what managers should be paid if that market if it is fogged over by falsified information. An executive who creates billions in value really is worth millions in pay. But jackpots are now going to CEOs who only seem to create extra value. CEOs said the soaring pay of the 1990s was warranted by skyrocketing profits; but adjusted for "restatements," it's now looking like big-company profits rose at little more than the historical rate in the 1990s. Through the huge, deceit-based runaway in executive pay, top managers have fostered an assumption that it's only natural for a CEO to make $50 million or $100 million a year merely for showing up at his desk. In fact this is an aberration--maybe, in some cases, a crime.
Richard Puntillo, a professor at the University of San Francisco business school, has noted that under U.S. securities law, in theory, publicly traded corporations have shareholders as their kings, boards of directors as the sword-wielding knights who protect the shareholders and managers as the vassals who carry out orders. In practice in the last decade, managers have become kings who lavish upon themselves gold, boards of directors have become fawning courtiers who take coin in return for an uncritical yes-man function, and shareholders have become peasants whose property may be seized at management's whim. The relationship between false corporate claims and CEO wealth is the driving factor. Why aren't the defenders of the free market rising up to oppose this systematic fleecing of the system that made American rich?
Gregg Easterbrook is a senior editor at TNR.
Greed should properly be defined as those who want to take YOUR money and spend on things that they want to spend it on.
It is far more greedy to want to take someone elses money than it is to want to keep more of your own money.
How much did both Clintons make on their book deals?
How much did their homes cost?
Were there any corporate "atrosities" during the Clinton years?
Were the Dot.com billionaires of the 90s, "greedy"?
Did their phony over-valued "paper" fortunes have anything to do with the "Clinton Economy"?
Guess we'll never know.
I believe that he's been doing exactly that. He wants people IN JAIL over the WorldCom mess.
Compare what corporate America has looted to what HUD has looted. Just that one agency alone. Then add up what the rest of the Federal government has managed to simply LOSE over the last decade. Can you say "trillions"? I knew you could!
Oh yes, government is going to ride in and save us all from the greedy businessmen. But who is going to protect us from the freakin' government?
I hope he says it like he means it. We will get hammered over this BS....no matter that it was Clinton's 'leadership' that helped this crap along.
I don't begrudge anyone an honest buck, but when CEO's get millions of dollars for wiping out jobs in mergers, then run the companies completely into the ground, it stinks to high heaven. Campaign contributions to elected officials should not be buying them immunity.
If our government contented itself with doing the few jobs it is supposed to do, we would all be much better off. Then they would have not only the resources, but the credibility to effectively prosecute these corporate pirates. Instead, we have a situation where we have theives with no credibility supposedly protecting our interesting by prosecuting theives with no credibility for the crime of stealing. Hoo boy! This is going to be like a real-life version of "Celebrity Deathmatch" before this is all over, mark my words! Some senator is going to be accusing some CEO of fraud, and that CEO is going to retort with some harsh accusations about that particular senators favorite piece of pork, and the accounting procedures of that particular branch of the government. It is going to get very ugly very fast, folks. You'll see.
Says who? Stockholders had plenty of time -- years, more than a decade -- to demand otherwise. They remained blissfully and lazily ignorant as long as their stocks appreciated.
"But they would be irrational if they wanted to be deceived, which is what the unpersuasive 'quarterly profits pressure' pretext boils down to."
Two answers to this: One, who says most investors are rational? Two, what people claim they want and what behavior they actually reward can be very different things.
If you do not do your own homework, you might end up rewarding lying.
"Establishing this premise, in 2000 overall CEO pay rose by 22 percent even as the broad market declined by 12 percent."
Why should anyone's pay be tied to their company stock's value, let alone the broad market? I thought that was part of the problem!
"Economic theory says markets work best with "transparency"--information must be accurate and must flow openly in order for markets to be efficient. Markets can't be efficient if corporations are lying about their financial condition, clouding the air with disinformation. "Clearing," one of the essential tenets of free market economics--driving all prices to their true value--can also happen only in the presence of accurate information available to anyone."
What is the definition of "efficient" here, or of "true" value? The market is efficient at one thing and one thing only: promulgating through the price mechanism the aggregative relative values that people place upon things. Period. There is one other error here: transparency itself is not a free or costless good. A free market will not have perfect transparency, or much transparency at all, necessarily.
"Richard Puntillo, a professor at the University of San Francisco business school, has noted that under U.S. securities law, in theory, publicly traded corporations have shareholders as their kings, boards of directors as the sword-wielding knights who protect the shareholders and managers as the vassals who carry out orders. "
That is still true. Not much can be done when the king abdicates his responsibilties.
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