Gregg Easterbrook wonders where the free-market conservative outrage at CEO overpay is. He's right: there should be a lot of it by now. At least, a bunch of conservative columnists should be ranting and raving about how CEO overpayments are another scandal produced by excessive government interference of some sort with the free market.
TNR Online | Greed Isn't Good (print)|
...The genteel larceny has reached the point that CEOs pay themselves enormous amounts even when there is zero pretense of management success. Establishing this premise, in 2000 overall CEO pay rose by 22 percent even as the broad market declined by 12 percent. The next year, 2001, John Chambers of Cisco Systems paid himself $154 million as his company was losing $1 billion. Edward Whitacre of SBC Communications, one of the Baby Bell offshoots, paid himself $80 million in 2001, even as his firm's stock price fell for the third consecutive year. That same year at AOL Time Warner, joint CEOs Gerald Levin and Steve Case paid themselves $148 million and $128 million, respectively, even as the combined company's valuation was contracting by $56 billion because of the two men's decision to merge. Fifty-six billion is almost as much money as disappeared in the entire Enron bankruptcy, meaning the AOL Time Warner CEOs lavished lucre on themselves while doing almost as much harm to stockholders as Enron did.
Such swindles ought to enrage conservatives and other champions of the free-market. After all, counterfeit corporate bookkeeping and unjustified CEO self-enrichment both represent lack of character--don't conservatives care about character?--and discourage investors from offering their capital. Yet we've heard almost nothing from conservatives denouncing the revelations of widespread corporate quasi-theft. Where for example are the voices of Gary Becker of the University of Chicago or of Milton Friedman--why are the great living conservative economists silent as big business pulls the wool over the free market? Has conservatism reached the point that any development that transfers money to white male CEOs is deemed acceptable?...
DAILY EXPRESS
Greed Isn't Good
by Gregg Easterbrook
Only at TNR Online
Post date: 07.01.02The corporate world is now embroiled in two controversies. There's the fraud at Enron, WorldCom, Arthur Andersen, and elsewhere; and there's the payment of absurd sums to CEOs. Both developments threaten the free-market system--you're kidding yourself if you don't think that big firms deliberately duping investors, or CEOs awarding themselves hundreds of millions of dollars that should have gone to stockholders, does anything other than erode the reputation of market economics. Both practices also trample important principles of conservative economics, as we'll see in a moment.
But the two controversies really aren't separate--they are one and the same. The motive for almost all the corporate deceit now being exposed was not "the pressure of quarterly profit statements," as spin has it. Yes, shareholders exert demands for positive earnings statements. But they would be irrational if they wanted to be deceived, which is what the unpersuasive "quarterly profits pressure" pretext boils down to. The motive for almost all the corporate cheating was not to issue pleasant earning statements but to run up the pay of CEOs.
Top managers of firms such as Enron, Global Crossing, and, it now appears, Xerox systematically lied about the condition of their enterprises to rationalize granting themselves huge sums diverted from equity. If this isn't common theft--lying in order to abscond with someone else's money--what is? While, we assume at this point, most CEOs haven't lied, many have exploited the lying-triggered "exuberance" to pay themselves exorbitant amounts. All the corporate lying has been devastating to shareholders, to the United States economy, and to the world standing of market economics. But, boy, has it been great for CEOs! Systematic corporate lying has created an environment in which top managers feel justified in paying themselves $100 million or more per year. And, amazingly enough, this cash-grab now continues even as business fortunes turn down.
The overt cheaters have profited brazenly: Kenneth Lay of Enron pocketing an extra $101 million in the months before Enron's collapse wiped out shareholders; Bernard Ebbers of WorldCom "loaning" himself $366 million in the months before his cooked books wiped out shareholders; L. Dennis Kozlowski of Tyco paying himself $426 million, from 1998 to 2002, even as his self-serving decisions were wiping out shareholders and driving the company into the ground.
Yet reach-and-grab by presumably respectable CEOs has been just as shameless. In 2000, to cite a few of many examples, John Welch of General Electric paid himself $144 million, Stanford Weill of Citigroup paid himself $90 million, Rueben Mack of Colgate paid himself $85 million, Louis Gerstner Jr. of IBM paid himself $102 million. The top ten CEOs in earnings for 2000 averaged $154 million, versus a top ten average of $3.5 million in 1980--a 20-fold increase, adjusting for inflation.
Originally, some of these huge paydays were rationalized as rewards for raising returns. Since then, big firms such as Xerox, Sunbeam, and Sun Microsystems have begun "restating" prior claims of returns--that is, admitting they lied about profits. (More than 500 corporate profit restatements have occurred in the last two years, dozens of times the historic rate.) Yet after phony profit claims are redrawn, the CEOs get to keep the cash effectively stolen. Ken Lay retains the millions he made by lying about Enron. Paul Allaire of Xerox picked up $16 million in 1998 and 1999 by cashing options when the company's stock price was artificially inflated based on fake profit numbers. Now the company has "restated," wiping out four-fifths of shareholder value, but Allaire gets to keep his tainted money.
The genteel larceny has reached the point that CEOs pay themselves enormous amounts even when there is zero pretense of management success. Establishing this premise, in 2000 overall CEO pay rose by 22 percent even as the broad market declined by 12 percent. The next year, 2001, John Chambers of Cisco Systems paid himself $154 million as his company was losing $1 billion. Edward Whitacre of SBC Communications, one of the Baby Bell offshoots, paid himself $80 million in 2001, even as his firm's stock price fell for the third consecutive year. That same year at AOL Time Warner, joint CEOs Gerald Levin and Steve Case paid themselves $148 million and $128 million, respectively, even as the combined company's valuation was contracting by $56 billion because of the two men's decision to merge. Fifty-six billion is almost as much money as disappeared in the entire Enron bankruptcy, meaning the AOL Time Warner CEOs lavished lucre on themselves while doing almost as much harm to stockholders as Enron did. (For notes on CEO pay numbers, click here.)
Such swindles ought to enrage conservatives and other champions of the free-market. After all, counterfeit corporate bookkeeping and unjustified CEO self-enrichment both represent lack of character--don't conservatives care about character?--and discourage investors from offering their capital. Yet we've heard almost nothing from conservatives denouncing the revelations of widespread corporate quasi-theft. Where for example are the voices of Gary Becker of the University of Chicago or of Milton Friedman--why are the great living conservative economists silent as big business pulls the wool over the free market? Has conservatism reached the point that any development that transfers money to white male CEOs is deemed acceptable?
his silence is even more startling when you think about how the CEO deceptions violate the basic precepts of the free market. Economic theory says markets work best with "transparency"--information must be accurate and must flow openly in order for markets to be efficient. Markets can't be efficient if corporations are lying about their financial condition, clouding the air with disinformation. "Clearing," one of the essential tenets of free market economics--driving all prices to their true value--can also happen only in the presence of accurate information available to anyone.
Next, consider the two standard rationalizations that CEOs have used to justify high pay--that top managers possess incredibly valuable expertise, and that the market price of executives is simply rising. The supposed incredibly valuable skills are increasingly turning out to be the willingness to lie and cheat. When Lay and other Enron executives defended themselves by insisting they were so totally, utterly stupid they had no idea what was going on around them, it might have been pointed out that these same inspiring felons originally justified their high pay on the grounds they were extraordinarily skilled financial geniuses.
Meanwhile, the headhunter market can't set accurate prices for what managers should be paid if that market if it is fogged over by falsified information. An executive who creates billions in value really is worth millions in pay. But jackpots are now going to CEOs who only seem to create extra value. CEOs said the soaring pay of the 1990s was warranted by skyrocketing profits; but adjusted for "restatements," it's now looking like big-company profits rose at little more than the historical rate in the 1990s. Through the huge, deceit-based runaway in executive pay, top managers have fostered an assumption that it's only natural for a CEO to make $50 million or $100 million a year merely for showing up at his desk. In fact this is an aberration--maybe, in some cases, a crime.
Richard Puntillo, a professor at the University of San Francisco business school, has noted that under U.S. securities law, in theory, publicly traded corporations have shareholders as their kings, boards of directors as the sword-wielding knights who protect the shareholders and managers as the vassals who carry out orders. In practice in the last decade, managers have become kings who lavish upon themselves gold, boards of directors have become fawning courtiers who take coin in return for an uncritical yes-man function, and shareholders have become peasants whose property may be seized at management's whim. The relationship between false corporate claims and CEO wealth is the driving factor. Why aren't the defenders of the free market rising up to oppose this systematic fleecing of the system that made American rich?
Gregg Easterbrook is a senior editor at TNR.
Posted by DeLong at July 03, 2002 09:51 AM