Who should guard the hen house?
While we don’t deal professionally with the world of security, it is certainly an area of interest. One of the people to whom we look for an appropriate philosophy of security is Bruce Schneier, who in a recent article in his excellent Crypto-Gram (http://www.schneier.com/crypto-gram.html) suggested that we should all send letters to our elected officials saying
I am not afraid of terrorism, and I want you to stop being afraid on my behalf. Please start scaling back the official government war on terror. Please replace it with a smaller, more focused anti-terrorist police effort in keeping with the rule of law. Please stop overreacting. I understand that it will not be possible to stop all terrorist acts. I accept that. I am not afraid.
Since we believe that if you made a list of America’s top ten issues, terrorism wouldn’t be on it, we agree heartily with Bruce’s suggestion, and support his recommendation.
If terrorism isn’t a significant problem, what is? At the top of our list today would be corporate governance, or the lack thereof. Capitalism is a delicate balance among three sets of participants. The first is greedy corporations looking to maximize payback for senior managers. (While corporations used to try to maximize payback for the owners, the increased number of shareholders, combined with their lack of power in influencing boards, has made corporations de facto ownerless.) The second is greedy employees trying to get the best living they can get. As even the most semi-literate employee is aware, in the past the CEO of a company would earn roughly 40 times what the average worker made, and today he (and on rare occasion she) makes roughly 400 times as much as the average worker. Putting aside the philosophical question of whether any CEO should be earning $34,000 an hour, this is more a symptom of lack of board independence than of value for service or competitive pay (you could doubtless hire an equally competent CEO from Taiwan or India for $600,000 a year). The third is the government, which intervenes – often over-intervenes – when the greed of the other two participants becomes fraud, theft, misfeasance, and malfeasance. Keep in mind that we are saddled with Sarbanes –Oxley not because corporations were bad bookkeepers, but because senior managers were guilty of theft and fraud, and boards were guilty of misfeasance.
There are two things that we would like to see happen. First, make boards of directors independent of management. If the CEO of a corporation is also chairman of the board, and is responsible for the picking of the board, then
the board will never be able to be independent, and will have difficulty working for the good of the shareholders rather than the good of the senior managers. If we simply prohibit an officer of a corporation from serving on their corporation’s board, we will have taken a giant step forward.
The second thing would be the elimination of option re-pricing. While we would certainly like to be in a situation where we would profit independent of our incompetence, rewarding bad performance does not encourage good performance. By eliminating options re-pricing, we could make it more financially rewarding for a CEO to do his job over the long haul, rather than being unable to look past the next quarter.
The combination of these two factors alone would go a long way to assure:
A) that CEOs will NOT be financially rewarded better for failing and being fired than for growing the company, thus giving them incentive to perform;
B) that companies will no longer be constrained to looking no further into the future than the next quarter;
C) that social considerations will not be excluded from a company’s planning in favor of short-term considerations. In less than a century we have gone from Henry Ford’s strategy of paying employees enough to allow them to buy his products to Wal-Mart’s apparent strategy of moving all manufacturing to China, forcing people into low paying jobs so that consumers have no option other than to buy the low cost products.
Since there are a relatively small number of senior managers, does this really represent an actual social problem? Well, according to NYU economics professor Edward Wolff, in the United States, in the Federal Reserve Board’s Survey of Consumer Finances survey year 2004, the richest one percent of households owned 34.3 percent of all wealth and the richest five percent owned 58.9 percent of all wealth. The top 20 percent owned 84.7 percent of all wealth. The bottom 40 percent owned a whopping 0.2 percent of all wealth.
Since, for most of us, our home is our major asset, it is more telling to look at non-home wealth. The 2004 data indicate that the richest one percent of households owned 42.2 percent of all non-home wealth and the richest five percent owned 68.9 percent of all non-home wealth. The top 20 percent owned 92.5 percent of all non-home wealth. The bottom 40 percent of American households are burdened with a painful negative 1.1 percent of all non-home wealth. This likely indicates that if we got rid of every illegal immigrant (to put the effect of illegal immigration into perspective, we were at a party where someone said that the annual revenue loss to American workers caused by illegal immigrants was equivalent to seventeen hours of the job loss caused by WalMart exporting jobs to China, a figure for which we cannot vouch), the bottom 40 percent of households could either creep up toward zero percent of all non-home wealth or perhaps even get worse if they had more credit available! And it wouldn’t have much effect on their income, either, since the bottom 40 percent of households take in only 12.1 percent of the income.
Clearly trickle-down isn’t trickling much past the really wealthy. This bodes ill for the economic future of the American dream. Even most conservatives who are politically to the right of Attila the Hun believe it is time for a correction in the other direction.
There are many ways to rationalize the inequitable distribution of both income and wealth. Someone recently said, as an example, that if we didn’t grossly overpay senior managers—even average or incompetent ones – they wouldn’t take the jobs. This conjures up visions of CEOs quitting two- million-dollars-a-year jobs to take work flipping burgers, just because they couldn’t get the extra fifteen million they wanted. We remain unconvinced.
While economic policy should be handled by the government, long term economic policy aimed at the American people has been absent from the playing field for quite some time. We hope it stages a return at some point. Oh, and if you decide to elect us to deal with the problem, our first action will be to demand a recount!
