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?
Resurrecting Democracy
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.
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“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.”
Would the government interference into setting salaries for private corporations get past any Supreme Court, liberal or conservative? If not, then the comment “thanks to corporate lobbying” holds no meaning.
However, if it would pass the legal smell test, then Dodd Frank writers are just as much in the back pockets of big business as the first year house member from “Backwater LA”.
RP,
Government isn’t involved in the setting of salaries at all. This is for a shareholder vote on executive salaries and if I’m not mistaken, the shareholders are the owners of the company…why shouldn’t they get a binding say? If you own your company but someone else is running it for you, wouldn’t you want a say in what they are compensated that was actually binding? I know I would.
Yea I think you misread that RP. Also very many times the officers of the company making these decisions about executive compensation are also the executives themselves. Which means they are voting to give themselves raises and the common shareholder is simply not involved at all during many of these meetings, and is informed of it after the fact. One guy I was in business with has sat on 3 director meetings while he was an officer and said on numerous meetings they would assign themselves bonuses or additional stock options, often BEFORE they went over other company business. Such as how well they were doing that quarter or year. Its a bit of a racket.
Sorry, my friend has sat on the board of directors of 3 companies, not sat in on 3 meetings, lol.
I think the focus on the executive salaries is a bit misplaced as I don’t think they are the biggest problem that businesses face today. That said, I do think there is an that issue boards of directors have become more responsive to corporate executives than to share holders.
“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.”
So what is the “centrist position” on the top marginal tax rate, which was 70%+ when Reagan stepped into office and all through ought the previous 40 or so years (90% during the post WW2 boom). If Republicans won’ even allow the Bush tax cuts on the top earners to expire on the wealthiest Americans (meaning rolling them back to 39% from their current 35%) what is the “centrist position here?” Is a 37% top marginal tax rate “centrist” given that every Republican President between WW2 and before Reagan presided over a top marginal tax rate of over 70%? If Reagan’s tax cuts ushered in an era of deficit spending, and the CBO shows that the growing deficit has more to do with lowered revenues than increased spending, where is the “centrist position” between the Democrat’s willingness to cut $4 of spending (or more) for every $1 of revenue they raise, and Republican insistence that the deficit be handed through spending cuts ONLY?
It seems to me that in terms of economic policy, the Centrist position is now to the “left” of the Democratic Party.
Pretty true Hux. The conservatives have decidely won the debate over the years on what is a reasonable rate of taxation and what isn’t. And the 90% rate wasn’t just post WWII, it lasted up until Kennedy’s time in office. But the conservatives have pretty much gotten enough of the population to believe that anything over the current tax rates is going to destroy the economy. When in fact, such relatively low levels of taxation on the upper earners, especially on cap gains, has resulted in massive wealth transfer from the bottom to the top, and as a result we have an economy that simply doesn’t have enough money in the hands of those who spend it on goods and services to sustain itself at the pace that we in the US have come to consider “normal”.
The GOP has pulled it off. Working the refs is a valid strategy, and now even raising the rates to a fraction of what they used to be when we had a handle on the budget is considered heresy on the right. Forget that Reagan raised taxes when we needed to, and the HW Bush did so as well, both of whom were shepherding this nation when during economic mis-steps a fraction of the size of the current crisis. The right can no longer see the forest for the trees when it comes to economic policy.
Hux and Slam, the facts are not on your side. Government revenue relative to GDP is at an all-time high, despite the lower marginal federal income tax rate. Your “centrist” belief that government must be enlarged still further would actually put us at a new extreme.
@ Dr J
Your link doesn’t support your claim. This link doesn’t show the GDP ratio at an all time high.
http://www.garynorth.com/public/8265.cfm
Rudi, you are right, I’m oversimplifying my claim. Let me clarify. The usgovernmentrevenue.com chart I linked includes projections to 2015, where it puts government about 35% of GDP, matching the peaks in 2000 and 2007. That is pretty much an all-time high, but it’s based on their projections.
To look more strictly at today, 2012 is a few points lower at 32%. Which means it’s still three points higher than it was 40 years ago.
Your chart is correct as well, it’s just looking only at federal government. As the second chart from my link shows, federal government has grown roughly with GDP (ie flat on that chart) since WWII. The government (or at least taxation) has expanded at the state and local levels.
So Huxley is right that the top marginal rate on federal household income tax is lower than it was 40 years ago, that’s just one piece of the picture. Taxes are nevertheless higher today.