Corporate Ownership by Shareholders? Not a Chance
One of the myths of capitalism is that shareholders own corporations and that a majority can determine policy and the compensation of the top executives. While theoretically this may be true, in practice it’s blatantly false. Shareholders are passive investors in companies along for the ride with the top executives in the drivers’ seat.
Of course, one wouldn’t expect shareholders to play a role in running a company on a day to day basis, as that would result in chaos and corporate destruction. Top executives should be responsible for all corporate decisions, hopefully resulting in successful business models and profitability. But shareholders should be able to periodically review companies’ trajectories and executive compensation and vote their approval or disapproval, with adherence to their judgments. This would ensure that success of the corporation and remuneration of its leadership were aligned.
Mutual funds and holders of large blocks of stock such as state pension funds can make their pleasure or displeasure with corporate governance known, but even their dissatisfaction does not always lead to the desired corporate changes. It is more likely that disgruntled stockholders, whether large or small, will vote with their feet and sell their shares in the corporation, still leaving the executives in charge.
Under Dodd-Frank, public companies must hold periodic non-binding shareholder votes on executive compensation. Because they are non-binding (thanks to corporate lobbying), they have little meaning, as they can be overridden by corporate directors. It is true, however, that the directors, fearful of public opprobrium, may go along with shareholders at times and lower executive compensation. But this can be manipulated to circumvent shareholders’ wishes and give executives additional remuneration in various ways. One must remember that most directors of public companies are nominated for their positions (and the fees they receive) by the executives themselves and are beholden to the company officers. Compensation committees come from these boards of directors and the outside firms that suggest the levels of executive compensation are also tied into the executives. If they don’t arrive at figures that please the executives, they may not be asked to do the assessments (and other work for the company) the next time around.
A recent report that shareholder votes on executive pay in Britain are to be binding on companies in the future, contrasts with the situation in the U.S. (http://goo.gl/Fh3IO) In America there’s little question that executives are the real owners of our corporations and that shareholders have little leverage over corporate policy or executive pay. As long as corporate lobbyists are able to get Congress to do their bidding, there’s not much shareholders and the public can do. Why did things change in Great Britain under a conservative government?
em>A VietNam vet and a Columbia history major who became a medical doctor, Bob Levine has watched the evolution of American politics over the past 40 years with increasing alarm. He knows he’s not alone. Partisan grid-lock, massive cash contributions and even more massive expenditures on lobbyists have undermined real democracy, and there is more than just a whiff of corruption emanating from Washington. If the nation is to overcome lockstep partisanship, restore growth to the economy and bring its debt under control, Levine argues that it will require a strong centrist third party to bring about the necessary reforms. Levine’s previous book, Shock Therapy For the American Health Care System took a realist approach to health care from a physician’s informed point of view; Resurrecting Democracy takes a similar pragmatic approach, putting aside ideology and taking a hard look at facts on the ground. In his latest book, Levine shines a light that cuts through the miasma of party propaganda and reactionary thinking, and reveals a new path for American politics. This post is cross posted from his blog.