Economic Intelligence (U.S. News & World Report), April 20, 2012
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In a wake-up call to corporate boards across the United States, Citigroup's shareholders recently took advantage of the new "say-on-pay" provisions of the Dodd-Frank law to vote down CEO Vikram Pandit's $15 million pay package. Shareholders have been surprisingly quiet as corporate executives, investment bankers, and investment fund managers have captured a huge and rapidly growing slice of corporate profits. The massive increase in inequality in the United States over the past three decades as the nation's gains in productivity have gone to further enrich the top 1 percent has been well-documented. Less well known is that the lion's share of those income gains have gone to the 0.1 percent at the tippy top. The shareholders at Citigroup have said, "Enough!"
Many of the practices of American corporations—from moving production offshore to cutting employment, holding down wages, and reducing benefits—have been carried out in the name of maximizing shareholder value. Yet the institutional investors who control most of the shares in public companies have stood quietly by as shareholder returns have been reduced by the outsized pay packages of corporate executives. Given the opportunity to vote on CEO pay, Citigroup's shareholders have made clear that they find it exorbitant.
It's fitting that this effort to rein in executive excess should occur at Citigroup. The company was formed in 1998 through the merger of Travelers Group (with its investment banking division) and Citibank (a commercial bank), in defiance of Glass-Steagall's prohibition against merging investment and commercial banks while the law was still in effect. The newly formed Citigroup got a temporary waiver from the Federal Reserve under Alan Greenspan while it waited for its lobbyists to persuade Congress and the president to pass the measure that reversed Glass-Steagall in 1999 and made the merger legal. Glass-Steagall is the Depression-era law that prevented investment bankers from gambling on high risk investments with deposits insured by the federal government. The law served successfully for half a century to ensure that problems that arose from trading stocks, bonds, and later, derivatives didn't spill over into the rest of the financial system. Deregulation set the stage for the no-holds barred version of capitalism that let the top 1/10th of 1 percent capture so much of the nation's income growth and led to the financial crisis from which the country is still only slowly emerging.
It is too soon to tell whether the shareholder revolt at Citigroup over executive compensation will be repeated at other major companies. But the new "say-on-pay" provision of Dodd-Frank, in force since Jan. 21, 2011, certainly makes this more likely. Tuesday's shareholder vote is not binding on Citigroup's board of directors, but it is likely that they—and boards at other corporations—are hearing the message.
As for Dodd-Frank, lobbyists for corporate executives, bankers, and investment fund managers are working hard to get around the law's clear intent to place mild restrictions on the activities of banks and CEOs as federal regulators write the rules that interpret its provisions. If this end-run around the law is to be stopped, the 0.99 percent will have to join the 99 percent in standing up for a more equitable division of the economic pie.
Eileen Appelbaum is a senior economist at the Center for Economic and Policy Research.