CEO pay accountability needed

Lee Drutman: CEO pay accountability needed

01:00 AM EDT on Sunday, July 24, 2005

Providence Journal

BERKELEY, Calif.

WANT TO MAKE a hundred million dollars quick? Be such an awful CEO that a faction of your own managers revolts and wages a public campaign against you, complaining how you have driven the company stock price into the tank with a conspicuous lack of leadership, strategy and vision.

Let them force you out. Then collect your previously agreed-upon $113-million retirement package, and don't let the door catch you on your way out.

Such appears to be the story of Phillip Purcell, the dethroned Morgan Stanley CEO who is the latest tragic anti-hero in the ongoing public saga of brash executives who get paid the kind of money that we normal folks would take several thousand years to earn at our current jobs.

Even in an era when American CEOs regularly earn 300, 400, even 500 times what the average company employee earns, Purcell stands out -- not just for his outrageous compensation package, but also for the fact that, by all accounts, he was at best a mediocre CEO. So much for pay for performance.

Equally extraordinary is the boon that former Morgan Stanley Co-President Stephen S. Crawford will enjoy from being in the right place at the right time. Just 3 1/2 months ago, Crawford was rewarded for his loyalty to Purcell by being promoted to co-president.

Now, Crawford is being rewarded for his loyalty to Purcell with a $32 million golden parachute. So much for pay for performance.

So what explains these outrageous pay packages, so completely disengaged from performance that they must be in a separate galaxy entirely? A Morgan Stanley spokesman explained that Purcell's compensation was "fair, appropriate to the circumstances, and consistent with past practice."

As for Crawford's compensation, Morgan Stanley's lead director, Miles L. Marsh, insisted that "I don't think that Steve's compensation is out of the norm. It was an increase, but there was also an increase in responsibility."

Fair? Appropriate? Not out of the norm?

True, executive compensation is sky-high all across Wall Street and much of the rest of America, but it's not that high. The real answer lies in the corporate governance of Morgan Stanley. Or rather the lack thereof.

Purcell got so much money despite his stunning mediocrity as a CEO because he packed the board of directors with his friends and got rid of his enemies. No wonder they gave him an exit bonus of $42.7 million, plus $34.7 million of restricted stock, plus $20.1 million of stock options, plus a lump-sump of retirement benefits worth $11 million, plus medical benefits and $250,000 a year for the rest of his life. Sure helps to have friends in the right places.

But while Morgan Stanley may be an egregious example, it is just an exaggerated case of what continues to take place at America's largest companies. Thanks to a great extent to complicit boards, average executive pay rose from $8.3 million in 2003 to $9.6 million in 2004 (a 15 percent increase), says Business Week's annual executive-pay survey.

Average workers, meanwhile, saw their pay rise by only 2.9 percent, to $33,176 a year. And no wonder. At roughly three-quarters of U.S. companies, the CEO is also the chairman of the board of directors. It is usually the CEO who decides who gets nominated for the board and who stays on it. And as it turns out, not challenging multimillion-dollar CEO compensation packages appears to be a good way to keep their jobs as corporate directors -- which average $200,000 a year.

Additionally, many directors are also top executives or retired CEOs themselves, so they can sympathize with the importance of needing enough money to buy that $6,000 gold shower curtain.

Meanwhile, the mass of shareholders, the actual owners of the company, don't have much of a say. Though shareholders do technically get to select the directors at the annual meeting, they rarely get that supposed hallmark of free-market capitalism -- choice. Almost all corporate board elections are run Soviet-style -- one slate of director candidates, chosen by management, for management.

Shareholders who want to nominate their own directors face an expensive and difficult campaign, because management controls access to corporate proxy statements. Accordingly, one way to curtail runaway executive compensation would be to make directors accountable to shareholders -- of all things! Make it easier for shareholders to nominate candidates to the board by giving them access to the proxy statement, as former Securities and Exchange Commission Chairman William Donaldson originally proposed two years ago.

Then, if shareholders think that, say, a $113 million pay package is unreasonable, they can vote the directors who supported it out of office.

Unfortunately, the U.S. Chamber of Commerce and Business Roundtable have successfully blocked this proposal, and with Donaldson now gone and pro-business ideologue Rep. Christopher Cox (R.-Calif.) his replacement, such a reform seems unlikely. (Institutional investors, however, are trying to open up director elections on a case-by-case basis through shareholder resolutions, with mixed success).

Another Donaldson-suggested reform -- requiring companies to clearly and transparently disclose their executive pay packages -- also stands little chance of becoming law under a Cox-led SEC. Which is a shame, because the unfortunate truth is that many CEOs are now smart enough to hide their compensation in a million places on the company's financial statements (a perk here, a perk there), making it hard to know what they are getting.

Capitalism always works best when it is infused with accountability and transparency, as opposed to cronyism and obfuscation. And when it comes to runaway executive pay, a little dose of accountability and transparency would go a long way toward making capitalism work a heck of a lot better for just about everyone.

Lee Drutman, a frequent contributor, is the co-author of The People's Business: Controlling Corporations and Restoring Democracy (Berrett-Koehler, 2004).

http://www.projo.com/opinion/contributors/content/projo_20050724_24lee.31c7ec0.html

The Supreme Boardroom

The Supreme Boardroom

Lee Drutman

TomPaine.com

July 15, 2005

Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.

In 1971, soon-to-be Supreme Court Justice and then prominent corporate lawyer Lewis Powell F. Powell Jr. offered the following words of advice in a confidential memo to the Chamber of Commerce: “The judiciary may be the most important instrument for social, economic, and political change.”

While the words themselves are a good reminder of what’s at stake in the impending Supreme Court nomination, what matters most is their context. Powell’s memo is widely seen as the impetus behind a business-funded mass legal movement that has over the last 30 years worked to shape the country’s jurisprudence. The result is that with each passing year, the Courts seem to be more and more enthralled with the ideas of “free enterprise” and less and less friendly to the idea of holding corporations accountable.

Led by organizations like the National Chamber Litigation Center, the Washington Legal Foundation and about two dozen other “Free Enterprise” legal groups, big business has worked aggressively to expand its legal rights on numerous fronts: strengthening First Amendment rights for the unfettered spread of advertising; undermining government regulation by pushing arguments that regulation can amount to unconstitutional “takings” under the Fifth Amendment; weakening the ability of victims of corporate wrongdoing to hold companies accountable; and generally doing away with any notion that business might actually be legally obligated to do anything more than make more money for shareholders.

But with the resignation of Sandra Day O’Connor, big business is losing perhaps its best friend on the Supreme Court. That’s why business groups like the Chamber of Commerce and the National Association of Manufacturers (NAM) are reportedly planning to pull out all the stops when it comes to getting the judge they want, including promises to spend an $18 million war chest.

What makes this potentially tricky, however, is that the type of judge that big business wants is not necessarily the kind of judge that religious and social conservatives want. The kind of ideological purity that makes a James Dobson type salivate over a Scalia/Thomas clone makes business nervous. Such ideological purity doesn’t wash well with business’s needs for a flexible interpretation of the Constitution, where the important thing is not so much adhering to legal principle but making sure that the decision is good for business. As Quentin Riegel, spokesman for the NAM put it, “it’s helpful to have someone who understands the business implications.”

Sometimes, a limited federal government is needed. But the belief in states rights that endears Scalia and Thomas to social conservatives doesn’t always make sense for business. Business tends to prefer the consistency of federal regulation over a patchwork of 50 state regulations and 50 state regulators (easier to avoid Eliot Spitzer types that way). As the Chamber of Commerce put it in a press release on O’Connor’s resignation, “The importance of a unified regulatory structure in fostering a free enterprise system that encourages market innovation cannot be ignored.”

In his most recent column, Chamber President Tom Donahue described six legal battlegrounds for business: “civil rights [By which he likely also means “business civil rights”], insurance, federal jurisdiction/federal preemption, employment, workplace injury, and other liability issues.” He goes on to note what should be the obvious: “The breadth of these issues is immense and clearly indicates that the impact of the Supreme Court on our free enterprise system cannot be ignored -- anymore than we can ignore the other two branches of the federal government.” Progressives should take note.

Unfortunately, progressive activists have so far largely ignored the economic implications and instead focused primarily on the social issues, casting O’Connor as a moderate in the process. As the Alliance for Justice’s Nan Aron put it on her organization’s website, “Justice O’Connor has been a swing vote in significant cases involving voting rights, race and sex discrimination, privacy and reproductive rights, and criminal justice, and Congressional authority to protect us all, to name a few. With her replacement, individual rights and freedoms hang in the balance.”

Obviously, these are important, crucial issues. But let’s also not forget that roughly 40 percent of Supreme Court cases now involve business. And at stake in a nominee is also the idea of a regulatory state that properly constrains the ability of businesses to pollute the environment, exploit workers, and engage in reckless consumer abuse without fear of legal accountability.

One of the consequences of progressive groups focusing primarily on the social issues is that it allows a potential nominee like Alberto Gonzales to come out looking like a compromise choice, even earning the endorsement of leading Dems like Minority Leader Harry Reid (D-Nev.). Yet, while social conservatives have made clear that they don’t trust Gonzales on their litmus test of abortion, economic conservatives must be quietly salivating at the prospect of Gonzales, who slavishly found in favor of businesses all the time as a Texas Supreme Court justice. There, he supported rulings that weakened safety standards for manufacturers of children’s products, weakened incentives for safe workplaces, and made it more difficult for victims of corporate wrongdoing to file class-action lawsuits, among other pro-business rulings.

Looking at President Bush’s history of reconciling the often incongruous twin GOP bases of social and business conservatives, one can observe a pattern of words and deeds. While the President frequently speaks the language of social conservatives and champions their causes in public statements, he actually delivers on the business agenda (consider the passage of the bankruptcy and class-action lawsuit bills this year). But by calling attention to the social and religious issues, Bush both satisfies his own base and draws the attention and energies of many progressive activists, creating a distracting bugaboo that makes it easier to do favors for big business.

In the case of the battle to replace O’Connor, the anti-abortion, pro-prayer, anti-gay right-wing groups may be doing the distracting for Bush, drawing progressives into a battle over social and religious issues. Such a limited battle, however, ignores the many crucial business issues at stake and makes it that much easier for big business to continue to push jurisprudence further and further away from anything resembling corporate accountability.

http://www.tompaine.com/articles/20050714/the_supreme_boardroom.php

Cavorting around copyright

Cavorting around copyright

Providence Journal
01:00 AM EDT on Tuesday, July 12, 2005

If history is any precedent, the recent U.S. Supreme Court decision clearing the way for the music industry to sue the pants off Grokster and StreamCast (and any other file-sharing service that promotes copyright infringement) will not really have much of a long-term effect on the illegal downloading of music.

For a while, the music industry will applaud the court's decision, which reasonably said that services that deliberately permit illegal behavior (and copyright infringement is, let's not forget, illegal) should be held accountable. Lawsuits will, of course, follow. And services that have been a little reckless in promoting their product as a way to illegally share copyrighted material (the mistake that Grokster and StreamCast made, in the court's eyes) will shut down or be shut down.

Yet just as after Napster was defused, dozens of clones took its place with new legal precautions, now, in the wake of MGM v. Grokster, it seems unlikely that the file-sharing parade will stop. Rather, new companies will simply be more careful about how they describe and market their services, so as not to run afoul of the new legal standard. Or they'll just move their headquarters to, say, Pacific islands where U.S. laws don't apply, and nobody can track them down anyway.

The strange thing is that for all the industry complaints that relentless and evil file sharing threatens to destroy the very companies that so selflessly gave us the joys of the Backstreet Boys and Shakira, the music industry is actually making out quite well these days. Last year, the recorded-music market grew 5.7 percent from the year before, to $38 billion, according to PricewaterhouseCoopers's recently released Global Entertainment and Media Outlook. The report also predicts that the global media industry (including entertainment) is expected to grow 7.3 percent annually for the next five years.

Why the projected growth? According to the report, the spread of technology: ever more online digital distribution of content. But such technology cuts two ways. It lets the music industry reach people around the world and makes content easy to buy; it also makes it easy to copy stuff illegally. According to the music industry's own estimates, one in every three compact disks sold around the world (about 1.2 billion) is now a pirated copy, which reportedly costs the music industry $4.6 billion a year.

Although we condemn such rampant copyright infringement, it also seems, in today's world, increasingly impossible to stop. Essentially, technology is overrunning copyright law as we know it.

Sure, entertainment companies will continue to sue to fight piracy, because copyright royalties and hence enforcement are important parts of their business model. But such a model is becoming obsolete.

We suspect that music and movies will always find a way to get made, simply because there are so many people who are passionate about making them. But how they make their money will have to be frequently revised, to meet the realities of modern technology -- and associated crime.

http://www.projo.com/opinion/editorials/content/projo_20050712_12edgr.ok.402b7da.html

Investor Class Warfare

http://www.tompaine.com/articles/20050707/investor_class_warfare.php

Investor Class Warfare

Lee Drutman

July 07, 2005

TomPaine.com

Lee Drutman is the author of The People’s Business: Controlling Corporations and Restoring Democracy.

After far too many months of watching President Bush ramble around the American heartland in his folksy “Strengthening Social Security” medicine show tour, actual bills are finally making the rounds in important committees, and the possibility of actual Social Security “reform” legislation lingers in the air of a hot and steamy Washington summer.

Yet despite the resounding failure to build popular support for plans of privatization, Bush and company continue to do everything they can politically to make sure private accounts happen. Such insistence, however, begs the question: Why do they want private accounts so badly? And does understanding the prize that Republicans are after provide the Democrats with a better political strategy than mere obstructionism?

I think the answer to the second question is a resounding yes.

But to understand why, we need to understand why privatization might be so important to Bush and company. Much of the thinking on this so far follows a simple and powerful follow-the-money approach.

Consider: Who were George W. Bush’s top contributors in 2004? 1) Morgan Stanley; 2) Merrill Lynch; 3) PriceWaterhouseCoopers; 4) UBS Americas; 5) Goldman Sachs; 6) MBNA Corp., 7) Credit Suisse First Boston; 8) Lehman Brothers; 9) Citigroup Inc.; 10) Bear Stearns. It's practically a clean sweep for Wall Street.

And who would make an estimated one trillion dollars in profits from charging management fees if private accounts went public? 1) Morgan Stanley; 2) Merrill Lynch, and so on down the list.

Yet, in today’s politics, when Republican power struggles and corporate greed have merged into a synergistic mutual beneficiary moloch (think “the K Street Project”), something more is likely behind the unyielding push for private accounts than merely pleasing Wall Street donors.

I refer to the November 22, 2004, edition of the conservative Weekly Standard magazine, in which editor Fred Barnes quotes Bush Campaign Manager Ken Mehlman as “insisting Bush's ‘ownership society’ agenda will lock in millions of voters by "changing the incentives of politics.’

Changing the incentives of politics? The short of it is this: Mehlman argues that if instead of turning to government for answers, individuals start turning to the private sector for answers, they will be more likely to support Republicans because Republicans support the private sector more.

Hence privatization.

If people rely on the stock market for their retirement instead of on government Social Security, they will be more likely to support Republicans, because Republicans are the party of big business and hence stock market growth. (Never mind that the stock market actually has historically done better with Democrats in the White House.)

Mehlman’s contention is supported by some recent polling numbers. Consider, for example, a recent Washington Post survey, which found that “at every income level, direct investors are more likely to identify themselves as Republicans than are non-investors.” For instance, among voters with income less than $50,000, 34 percent of direct investors classified themselves as Republicans, as compared to 23 percent of non-investors who classified themselves as Republicans.

Similarly, in a recent Wall Street Journal article, pollster John Zogby noted that the “response to a single question—‘Do you consider yourself to be a member of the investor class?’—is a far greater determinant of how [people] will vote and how they see their world than income, religion, race, marital status, or size of individual portfolio.” According to Zogby’s numbers, among voters in the $50-$75K range, self-identified investors favored Bush 64 percent to 36 percent, but non-investors favored Kerry 55 percent to 45 percent.

Additionally, in a recent National Review article, Republican strategist and ownership society cheerleader extraordinaire Richard Nadler reported that, according to his own study, “a 6-point Democrat advantage among workers in 401(k) plans for less than 5 years became an 8-point Republican advantage among workers who had been in such plans more than 10 years. Both free-market opinion and Republican partisanship increased statistically with time-in-market, portfolio size, and the workers' own self-identification as an investor.”

Following the logic of some GOP strategists, Republicans would benefit from transforming Americans into a adoring flock of self-identified investors who believe that the Republicans’ unabashed support for big business will bring them riches, too.

A brilliant strategy and one deserving of the impressive opposition that Democrats have so far mounted to privatization?

Perhaps.

But the problem with mere opposition is that while Social Security privatization remains a bad idea with little popular support, plenty of bad ideas with little popular support have become law, and there are plenty of ways that one can imagine this bad idea becoming law as well, even despite Democrats’ stalwart opposition. (Imagine, for a second, a closed conference committee door).

What Democrats can thwart, however, is the Republican attempt to realign politics through a growing investor class.

Instead of mere opposition to private accounts, Democrats should follow the lead of New York Attorney General Eliot Spitzer, who has shown that one can win the support of small investors by taking on the mutual funds and investment banks that prey on inexperience and ignorance.

Already, more than half of all households have money in the stock market—a number that keeps growing—and most of those folks are inexperienced small investors who depend on a healthy dose of government regulation to avoid getting ripped off by investment broker and mutual fund sharks. They are there for the winning over.

And considering that Republicans, for all their pro-business rhetoric, have shown a marked inability to take advantage of this opportunity by doing things like nominating free-market ideologue Christopher Cox to head the Securities and Exchange Commission (practically begging for another Enron-type disaster), Democrats have a golden opportunity to do well by doing good.

Certainly, Democrats should continue to oppose private accounts for what by now have become the obvious reasons in progressive circles. But they also need to be savvy about foreclosing any potential political benefits that Republicans could draw from privatization. Democrats can do this very easily: By reaching out to one of the fastest-growing demographics in American politics—the newly minted small investors—and proving that they are willing to take on the rampant greed that preys on them, often far too easily.

Rich pervert tax code for themselves

Lee Drutman: Rich pervert tax code for themselves

01:00 AM EDT on Tuesday, July 5, 2005

BERKELEY, Calif.

FOR A SENSE of the strange macroeconomic priorities in vogue in America these days, one need look no further than the unfolding congressional budget process. Though the final numbers are yet to be codified, the thrust is unmistakable.

In May, the House and Senate Republican conferees agreed to a budget resolution that cuts funding for education, veterans' health care, environmental protection, housing and other domestic programs by $212 billion over five years, according to an analysis by the watchdog Center for Budget and Policy Priorities.

Though one can frequently hear the deficit-based "money is tight" argument marshaled in favor of, say, cutting $600 million for Food Stamps, such rhetoric does not appear to extend to the $106 billion in tax cuts included in the resolution.

Those tax cuts, which are achieved through extending capital gains and dividend tax cuts, will disproportionately benefit the very wealthiest Americans.

How to explain such priorities? For at least part of the answer, here is one piece of required reading: David Cay Johnston's recent book, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich, and Cheat Everyone Else -- a lively and disturbing breakdown of the growing unfairness of our tax system and the wealthy loophole exploiters that make it so.

In Johnston's narrative, the current proposed round of tax cuts for the rich and welfare cuts to the poor is only the latest step in a longstanding campaign to shift more and more of the tax burden to those least able to afford it, a campaign that demands far more attention than it has received.

"The tax system is becoming a tool to turn the American dream of prosperity and reward for hard work into an impossible goal for tens of millions of Americans and into a nightmare for many others," writes Johnston, who, after 10 years as The New York Times's tax reporter, knows his stuff cold.

Part of the campaign, however, has actually not been that covert. There were the $1.35 billion Bush tax cuts, which overwhelmingly benefit the top 1 percent. Then there is the unceasing effort by Republican leaders to repeal the estate tax, which affects only the wealthiest 2 percent.

But the largely untold story, and the one that Johnston sheds important light on, is the endless variety of tax trickery that high-priced lawyers and accountants and bankers have cooked up for very richest among us -- things like reverse split-dollar family life insurance and manipulated charitable trusts and secretive offshore accounts that make tax liabilities vanish like a pina colada in the hot Bermuda sun.

Then there are big corporations, which now pay roughly half of the statutory rate of 35 percent through such clever techniques as setting up complex webs of subsidiaries around the world, mostly in tax havens, to move around assets and cut tax rates.

Sometimes, the company simply reincorporates in a tax haven for the biggest tax-savings bonanza of all. A recent MIT study found that corporate tax shelters cost the government $54 billion a year. And at the center of the storm are the tax-shelter promoters, the wily accountants, lawyers and bankers who scour the tax code for strategies to sell for a small fortune that only the very rich can afford to pay. "Ernst & Young has been known to charge people a fee of $1 million just to look at a tax shelter proposal," Johnston writes. "One Ernst & Young shelter cost $5 million to wipe out $20 million in tax obligations."

Nor are these professionals shy about marketing their "products." Add it all up, and the disturbing conclusion is that at a time when income disparities are growing more and more acute (levels of income inequality in America are at levels not seen since 1929), the progressive aspects of the tax code have effectively been excised: The top fifth of taxpayers now pay 19 percent of their incomes in taxes, while the bottom fifth pay 18 percent.

So what is to be done? Well, first of all, the Internal Revenue Service emerges from Johnston's book in need of a major makeover. Between the out-of-date technology, recent "reforms" that have tied the agency's hands, the hopelessly inadequate staffing levels, and the often not-so-subtle pressures that discourage enterprising agents from going after the "political donor class," the IRS comes across as a helpless chicken, pecking away at poor people who don't know how to properly fill out their earned income tax credit forms -- so that the agents can meet their quotas -- while the big-time tax cheats run free, gaming the system at will.

On the big scale, however, the leaders of our country, in their infinite wisdom, must realize that that the yawning gaps between rich and poor are hopelessly destructive to the long-term prosperity, and that the tax code must be refashioned to combat this problem, instead of exacerbating it.

Though we can't expect them to immediately change their cloistered perspective, getting them a copy of Perfectly Legal would be a good start.

Lee Drutman, a frequent contributor, is a Berkeley-based writer. He is the author of The People's Business: Controlling Corporations and Restoring Democracy (Berret-Koehler).

http://www.projo.com/opinion/contributors/content/projo_20050705_ctdrut.1ffe728.html