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Home Publications Blogs Beat the Press Harold Meyerson Says Management Is Ripping Off Shareholders

Harold Meyerson Says Management Is Ripping Off Shareholders

Thursday, 14 August 2014 04:58

Harold Meyerson had an interesting column about how the problem of inequality is not just about low wages at the bottom, but also about people at the top ripping us off. However part of his story is not exactly right.   

At one point the column tells readers:

"As a recent study in the Harvard Business Review concluded, a 'survey of chief financial officers showed that 78% would "give up economic value" and 55% would cancel a project with a positive net present value — that is, willingly harm their companies — to meet Wall Street’s targets and fulfill its desire for "smooth" earnings.'"

While Meyerson portrays this smoothing as benefiting shareholders, as he describes the process, it is actually coming at the expense of shareholders. If the company is sacrificing long-term profitability to meet earnings targets then most shareholders are likely losing in this deal. The most likely winners would be top managers whose bonuses are tied to meeting earnings targets or who have options coming due at specified times.

This distinction is important since it describes alternative political paths. The situation as Meyerson describes it clearly indicates the potential of an alliance with shareholders against top management. Since CEOs and other top management are an important part of the 0.1 percent, reducing their pay could have a substantial impact on income distribution, especially when the spillover effects are taken into account.

In this case, the nature of the problem is a corporate governance structure in which the directors, who are the immediate governing body of the corporation, act in the interest of top management instead of shareholders. Empowering shareholders would then be an effective way to rein in CEO pay.

Comments (12)Add Comment
written by JSeydl, August 14, 2014 5:31
That HBR article by William Lazonick is quite elucidating. It really raised my blood pressure yesterday.
It's complicated
written by s ken brown, August 14, 2014 7:05
Employers pay low wages because they are greedy. They don't have to pay higher wages because their competitors won't pay them either so the effect is collusion by culture and not by conspiracy and that's not against the law. Almost without exception, company directors are executives from other companies. That makes them birds of a feather with the executives they are directing. Meeting Wall Street expectations is a more powerful motivator than long term organizational goals. It's easy to argue that near term share price gains are not in the long term interests of a company as they are disruptive by their nature causing perturbations of those same prices. Perturbations imply lack of control which is regarded negatively by the management profession. Most shares are not held by individuals but by other businesses so who is empowered?
Link to Lazonick article
written by VicJane, August 14, 2014 7:19
How much dumb money is there
written by Dave, August 14, 2014 8:37
I'd like to know how much of the money invested in the stock market is dumb money.

I would define dumb money as all money invested through intermediaries, which includes all retirement money.

Assuming there was a movement of the majority of stock holders to get rid of the bad directors, who would be behind it? Certainly not dumb money.
And we wondered why Ford did better
written by Joe T., August 14, 2014 8:49
than the other American car companies to weather the crisis. The board full of Fords is vested in the company's long term success.

Corporate dividends, stock buybacks, etc
written by Ellis, August 14, 2014 12:32
Dean Baker says that shareholders are being ripped off. But what is his proof? Corporate dividends have tripled in real terms over the last 15 years. A lot of companies are actually borrowing billions of dollars in order to fund higher dividends. And more companies are buying back their own shares. According to the Washington Post, the 30 companies that comprise the Dow Jones Industrial Index, all by themselves, bought back 211 billion dollars worth of their stock in 2013, handing a great big gift to those who sold and driving up the price of the stock of those who held on to it. That’s nearly three times the amount of money these 30 companies spent on research and development.

Obviously for Dean Baker, that isn't enough. Shareholders should get more!
The CEOs are getting paid more than necessary
written by Dean, August 14, 2014 1:01

If CEOs in the U.S. get more than their market value than the shareholders are being ripped off, end of story. There is good reason to believe this is the case (see Pay Without Performance by Bebchuk and Fried ). Our CEOs get paid far more than CEOs of companies that are as big and successful in Europe and Asia. There's plenty of proof in the book.

This isn't a question of liking shareholders or CEOs. The point is that huge CEO pay is not a market outcome, it is the result of them putting their cronies in as the directors who decide their pay.

Redivide the Booty?
written by Ellis, August 14, 2014 1:47
Is the real problem how the people at the very,very top redivide the fabulous wealth that they have grabbed by impoverishing their workforce through pay and pension cuts, outsourcing to low wage companies, driving their workforces harder, eviscerating government social programs? Is that really the issue?

Yes, CEO salaries are outrageously. But so are the corporate dividends and interest payments and... whatever.
The issue is what the market did versus what policy did
written by Dean, August 14, 2014 2:13
Yes, it is a huge issue whether CEOs get really high pay because they are so productive or because they rigged the deck. The high pay to CEOs means higher pay for other top executives and also for top executives at hospitals, universities, and other areas of the economy. It's a big chunk of change in total -- way more than is at stake in issues like food stamps or UI benefits.
The shareholder value maximization is not actually being followed
written by John Wright, August 14, 2014 2:21
If the executives truly believed in shareholder value maximization, they would also look at their own pay structures and ask if they would work for less, or if their fellow executives would work for less.

And if all companies followed this guideline, USA executive pay would drop in concert.

"Pay for performance" assumes more compensation necessarily leads to better performance.

But this does not allow for what is actually achievable.

For example, a corporation could give a 60 year old executive an incentive package of 10 million dollars to run a 4 minute mile, and most people would see this as an impossible goal for a middle aged executive with a huge monetary incentive.

Executive pay structures may be an embellished variation of "you get what you pay for".

Most people know you can pay too much for something.

It is time for US corporations to acknowledge that for executive pay.
It's Bigger Than High CEO Pay
written by Ellis, August 14, 2014 4:30

I have no doubt that everything you say about CEO pay in this country is true.

But the real problems are much deeper than that. Just look at the places where you say that CEO's make much less. Working people are still facing crisis conditions there also -- even as the wealthy grow wealthier.

The problems are systemic. The economy is not only based on the enrichment of a few, their drive to enrich themselves is creating ever worsening crises and chaos.
written by JimV, August 15, 2014 10:23
Speaking anecdotally as a long-term shareholder in General Electric (via my employee 401k) I did feel ripped off after Welch spent the 1990's inflating the stock price with smoke and mirrors while slashing R&D, closing five of the eight manufacturing plants in GE's power-generation business, and turning GE into a financial-resources business just in time for the financial crisis, during which my GE stock dropped from its high of $60/share down to $5/share. (Meanwhile Welch had retired with something like a $200 million retirement bonus.)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.