I wouldn’t go that far, but they are in a position to exercise influence over the board of directors.
The trouble is that in many corporation, particularly large, publicly-held corporations, the shares are widely and diffusely held. So the shareholders face a collective action problem. This gives management, as a group, the opportunity to enrich itself at the expense of shareholders.
Yeah, right. I’m sure that a lot of other people would like to think that.
Look, I’m not the kind of guy who puts CEOs on a pedestal. Far from it. However, I’m not about to assume that I could do the same work as 99% of the CEOs out there. Such an extravagant claim strikes me as woefully naive, and a bit presumptuous.
Pretend that I was the CEO of McDonalds. What kind of tough decisions would I have to make?
Underling: Sir, we’re thinking about making a new burger, the Big and Tasty.
Me: Send it over to Product Research and Testing, see how the consumer focus groups like it.
One week later…
Underling: The focus groups responded positively.
Me: Ok. Send it to a few test markets and see how they like it.
Three months later…
Underling: The test markets love it.
Me: Ok, so let’s make it a part of our franchise then.
Underling: Ok, sir.
Me: Aren’t I clever?
Underling: You’re a genius, sir.
I dunno, Blalron. I really hope you were being facetious. Based on that example, I wouldn’t even hire you as a regional stupidvisor, much less a corporate executive.
You guys are embarassing yourselves. If you think this is what CEO’s do, then you’ve been getting your information from too many cartoons. No wonder you guys are so down on them - you don’t have a bleeming clue what they do.
How about this for the CEO of McDonalds - Handling labor disputes. Determining whether to move into Asia. Hiring and overseeing marketing managers throughout the world. Lighting fires under the divisions that are not meeting their numbers. Leading the planning sessions for the next year, three years, and five years. Listening to subordinates present estimates for how much market share growth they can manage - and knowing whether those numbers are realistic, optimistic, or pessimistic. Massaging contracts with new suppliers of hardware - when you’re buying for 15,000 outlets, it doesn’t take much of a mistake to cost millions.
Then there’s quality. Quality, quality, quality. It’s the mantra of business these days. Six sigma, ISO certification, etc. Internal audits, external audits. Lawsuits.
Then there’s government relations. CEOs of large companies are constantly being called on to testify about the internal operations of their companies. They have to be on the ball. A mistake here can result in a regulation that favors the competition or costs the company millions of dollars.
Then there’s the ability to groom and pick senior management. Do you replace the head of European operations, because sales are down 5%? Is it his fault? He says no. You have to do some digging. Make bad choices, and you can sour the whole executive of the corporation and make it dysfunctional. The new Ford at Ford Motor Company did that, and Ford still hasn’t recovered. Much of the blame for Ford’s woes fall directly at his feet.
Then there’s the oversight work. The CEO of a company is expected to ‘make the rounds’ and show up at various branch offices. And when he shows up, he’d damned well better be able to show that he’s up on their operations. That means tons of study. They have to be able to grasp the essence of the operation they are visiting, and the ability to spot problems and ‘flag’ them for more oversight is key to running a smooth operation.
Then there are mergers, the legal minefields they create, integration with new business units, the sales of assets, etc.
We haven’t even touched on the financial management of the company. Whether to take loans or offer stock to finance new operations. Whether to invest profits in expansion or release dividends.
In the real world, a single person can’t manage all this. So the best skill a CEO can have is knowing how to surround himself with people who can do the job. And to know how much to trust them. Sometimes, a CEO is valuable because he tends to drag a very successful team with him. An auto exec may be able to bring over the star designers he groomed at the old outfit.
All of this decisions scale up with the size of the job. At the lower levels, say the CEO of a branch office, picking the wrong PR firm might cost a few tens of thousands in sales, or offering too low a bonus package may result in the loss of a handful of employees. But if the CEO picks the wrong firm, or sets the wrong bonus structure for the entire organization, it can cost millions. Hundreds of millions. These guys have to make decisions like this daily.
But you go right ahead and keep believing that CEOs are nothing but figureheads who right around in limousine and collect huge salaries because they are connected to the old boys’ network. That will allow you to continue feeding your prejudices.
It means getting the CFO to alter the books so that it appeared that the company was making profits when it fact it was losing money. The guy was doscovered because the CFO reported it to the megacorp because he was afraid he’d get accused of being responsible for it. I heard it from the Asst. Communications Director, who heard it from the Communications Director, who was told about it along with all the other top execs after the guy was dumped. I learned about him moving to the pet retailer a couple of years later from a friend in the biz.
Also, I’m not denying that there are many lousy CEOs who end up getting peachy jobs after driving a company into the ground.
To be fair Home Depot was driving us out of biz well before the guy came along, and continued to do so after – the place went out of biz some time after I left – but the guy sure didn’t help. Point is, his ignominious departure not only didn’t end his career, it seems to have actually helped. I’m betting he had a convincing counter-story to offer if not an outright lie. So it IS possible.
**And in profit-oriented corporations as well, CEOs are very influential in bringing in board members, as well as other employees. But that doesn’t change the fact that everybody from top to bottom has a boss, with the top boss being the shareholders. **
Yeah, but in most cases their boss isn’t somebody who’s being made rich by their “employee” and given all sorts of useful and lucrative business contacts. It makes a difference. In fact, it’s very obvious the system is unfair and serves everyone except the self-serving CEOs and their boardmembers badly, and needs to change.
Here’s a case where strong government regulation, vigorously enforced with fines and maybe in jail time, would do our economy and our society some definite good.
On the first, your admonition is well taken and I will endeavor to follow.
On the second, that was not the full text and there was absolutely no reason to edit it down. I am a very careful quoter, the quote was roughly a third of the article or slightly less, well within standard limitations of fair use. I’d be very happy if it was restored.
Now, as to the substance of the debate, we have devolved to pointless bickering about whether CEOs add value – of course they do, and to think the argument is otherwise is a straw man.
The issue, which seemed to have actually emerged on the first page, before being distracted by straw man arguments and inane anectdotal recounting, is one of specific market failures in specific segments of the market, as I noted on the bloody first page.
As to addressing the issue, in essence one of corporate governance, one has to be careful not to do more harm than good.
Returning to The Economist and it’s capitalism overview for a very fair and informed discussion, they address this very issue in “CAPITALISM AND DEMOCRACY: Beyond shareholder value” 26 Jun 2003. (And for those concerned, these are selections from a very long article indeed and do not in any way approach the entire article).
Essentially what I have argued previously, and I can say in contradistinction to someone living in a Venture Capital driven corporate governance situation – where as I can say from now being on the other side of the table, active investing is the by word, but it comes at a price, it has appeared until recently that being an active owner-shareholder simply wasn’t worth the effort. This is questioned by some emperical research, cited to in the article that was cited prior:
Returning to the present article, somewhat further on:
I draw your attention to the fact that Jensen, in a sense the founder of shareholder value, sees upper management pay as having become distorted and delinked from performance by certain perverse incentives, it is then harldy some wooly liberal and anti-capitalist idea that has been advanced here (although certainly a few arguments have that characteristic). Elsewhere in the present article there are citations to Jensens research on this.
Now the problematic as the Economist notes is
Now they also recommend an alternative path on reforming Corporate Governance:
Indeed this is partly what we discussed above.
Again, the issue revolves around ending passivity by incentives and a few carrots, as well as adding tools.
Of further note, the Economist also notes
Again in regard to Boards and their independence, for as we can see from the general analyses of the issue, few the CEO in the dominant form of CEO-Chair has no small degree of leverage and the relationship is hardly one of Boss-Employee with shareholders.
Collounsbury wrote
Just so I’m clear: Should I be responding to this insult? Or was it directed elsewhere? Please be clearer in your name-calling.
The comment is general to the fact we have, on both sides of the conversation, straw men and inane anectdotes in the place of data and reasonably informed analysis. Highly regretable as the conversation began rather better.
Blalron said that, not the whole bunch of guys you been debating with. Must be fun to create a strawman and puff it down.
Based upon my knowledge of human nature and my limited experience in the business world, I feel reasonably confident in saying that some CEO’s are great, while others suck. Some work their asses off, and some play golf and eat fancy lunches.
But the question is why CEO’s get paid so much. Based upon your responses to our earlier exchange, I gather that you now concede that (1) the mere fact that CEO’s are paid a lot does not establish that they are worth a lot; and (2) CEO’s are in a position to extract extra pay from the companies they run.
Given that people are frequently greedy, and given that CEO’s are typically aggressive, ambitious people, it seems reasonable to conclude that a significant part of the reason that CEO’s are paid so much is that they are extracting extra pay from the companies they run.
**
Honestly, I believe that in many cases there’s some truth to this stereotype. But it’s not essential to the argument. It’s possible for a CEO to be (1) hard-working; (2) smart; and (3) overpaid.
As a group, CEOs are paid what they are worth. What they are worth is determined by supply and demand. Are there distortions? No doubt. Are there some CEOs who suck? No doubt. Some of them even get fired because of it.
A good analogy might be to look at sports superstars. Is a single baseball player worth 100 million dollars? As a group, the superstars in a sport bring in the fans, promote the game, and the best ones can make the difference between making the playoffs and missing. Each playoff game brings in millions in revenue. So yes, they are valuable. But sometimes, an outrageous contract is signed because the General Manager was on crack that day or whatever, and somebody gets way too much money. It happens - individual negotiations can go lots of ways, and don’t always wind up optimal. Likewise, I’m sure there are some excellent players who aren’t making what they could, because their agents have poor negotiating skills, or because they had the bad luck of having their contracts come up at a time when purses are tight.
CEOs are in a position to bargain for better salaries based on past performance, the difficulty of replacement, etc. I’m sure sometimes CEOs wind up in strong bargaining positions due to temporary issues, and play it to their advantage (for instance a big merger coming up where the CEO is necessary or has special connections). And some of them are crooks and game the system. No doubt.
I was never trying to argue that all CEOs are angels who get paid what they are worth. I was trying to dispel the myth that CEOs as a group get way too much money, that anyone could do their job, they are largely figureheads or PR men, they’re all members of the old boys’ network, etc. In fact, CEOs as a group are highly talented, and highly valuable. And by and large, that’s why they get paid what they do.
Do you have any evidence or arguments to support this beyond an assumption that the market works efficiently?
**
IMHO, CEO’s are systematically overpaid. I have no idea if this is true for sports players.
**
They are also in a position to get higher salaries based upon their relationships with board members. Do you dispute this?
How very nice, we’re back to tautologies and assertions.
Tautology, we get nowhere from this an examination of whether the markets are judging the worth properly. It’s precisely this sort of babe in the wood non-analysis that got people thinking stocks were really worth 50 times earnings, etc.
And on the last we get to the nub of the matter. The distortions.
Well, I rather believe I demonstrated that that this is fucking piss poor analogy as the markets for the two are rather different on key points. Blithely ignore as you like.
You keep recasting this in moral terms, and utterly ignoring the economics.
It’s not a fucking morality play, it’s simply an issue of agency issues and poor corporate governance.
As far as I can tell you’re trying to argue by straw men and limp analogies with little logical or analytical value.
First, it is not at all clear that upper level management rent extraction - that is delinkage of pay and performance - for a range of companies is in any way a myth - indeed serious economists and business school academics such as Jensen consider this to be a serious issue. Insofar as a certain benchmarking occurs via this group - publicly reported companies, that has a wider influence. Your assertions re the myth are just assertions.
Second, one comment re the PR role – which for some kinds of CEOs is quite important harldy makes a substantial feature of the conversation, although you did make some nice straw of it.
I don’t recall any old boys network statements, but perhaps I missed those. Certainly not the dominant feature of the debate.
Fine assertions, but they are assertions, and not terribly relevant at that insofar as one of the key features.
Again, anectdotes and poorly concieved analogies only get one so far, some rather more analytical fare might be called for.
I’ll dispute this. As someone with a few minor shareholdings, now and then I get invites to Annual General Meetings and voting forms and a set of accounts. And as a shareholder I can demand much more information. And I can vote against the directors’ remunerations. I can call for a motion of No Confidence in any or all of them.
Of course, I’m in the U.K, so things might be slightly different.
I’m not sure why you bring up the subject of directors’ remunerations, since we are talking about CEO pay. But let me ask you a few things: How much information have you demanded? How many meetings have you gone to? How many no-confidence votes have you organized and succeeded at? How much time have you spent doing these things? And what is the total value of your stakes in these companies?
Because the issue of an incestuous relationship between CEO and directors was brought up. Further, in the UK, the CEO is a director. The equivalent here is Managing Director. As to value, I’m not going to elaborate beyond ‘a few minor shareholdings’. The rest is flamebait.
No need to share. My basic point is this: Your holdings are way too small to make it worth your while to study company information; organize shareholders to vote; etc. etc. Probably it’s not even worth your while to go to shareholders’ meetings and you just did it for the novelty value. And your situation is not unique.
And that’s the basic problem: Ownership of many corporations is widespread and diffuse. There’s a collective action problem. And that’s why the remedy you describe is (IMHO) ineffective.
As far as I can tell, it has been one of the dominant themes in your posts and in the analytical studies you have excerpted from -the fact that board members have mutual interests and relationships with CEOs which hinder their objectivity. Of course, these need not necessarily arise as a result of an old-boys-network but the effect, that is, the relationship between the board and the CEO which inspires covert deals etc, is pretty much the same.
In regards to the above point, I am left wondering who takes the hit. If the Board is scratching the CEO’s back and there is a de-linkage between the CEO’s pay and performance (for whatever reasons, information distortion, nepotism…) who pays for the company’s poor performance?
As a small investor, I might sell my shares. The large investment firms might suggest that their customers change their portfolios. The company goes deeper in the red. Who pays? At some point, the market (the abstract notion) ought to kick in, right?
The second point mentioned in the analytical studies is the issue of metrics and its time sensitivity. For e.g., stock options motivate CEO policies that promote short-term gains. I really wonder how much of the CEO salary explosion is linked to the 90s boom. If much of it is, I think with the bust, we should be seeing a lot of the salary distortion due to CEO greediness/myopic policies filter out.