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Fat cats

I am all in favour of the recent decision by shareholders of European drugs giant GlaxoSmithKline to vote down a proposed ‘golden parachute’ payout to its chief executive in the event that he ever got the boot.

The payment would have been $36 million, and while I yield to no-body in my admiration for the capitalist system, it seems perfectly fair if the owners of the firm – the shareholders – felt such a proposal was going too far. A case of property owners using their property as they say fit. Of course, by ‘too far’ we are entering the field of subjective judgement. It seems a bit odd that in an age where few bat an eyelid at the sums earned by Formula One racing drivers or footballers, so many get riled at such payouts to company bosses.

In any event, we are going to see more examples of big groups of shareholders like pension funds getting upset about this sort of pay regime. One thing slightly bugs me in that some of these pension funds are increasingly being seen by anti-globalistas and similar-minded folk as ways of inflicting their views on the world. The buzzword out there is ‘shareholder activism’. Let’s be clear here. It is our retirement money at stake. By all means let’s not vote in big pay rises for hopeless bosses, but tomorrow’s pensioners need the wealth generated by good firms of today – and often that means hiring the best people.

And that sort of thing comes at a price.

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26 comments to Fat cats

  • Irate left-wingers who focus on corporate paypackets could be asked what kind of measures of success and failure they would be willing to meet in order to be sacked or make lots of money.

    As in “…for the chance to earn as much money as a CEO, what verifiable results would you offer to which group of paying customers by what date, with voted resignation being the price of failure?”

  • The reason the GlaxoSmithKline was idiotic and deserved to be voted down was that it would have rewarded failure by senior management.

    I think it is ENTIRELY a matter for the shareholders but I would have voted to sack every member of the board which even suggested such a pay deal.

  • Andrew Duffin

    I rather suspect the payments were in a signed executed contract which still stands, so the vote means nothing at all.

  • zack mollusc

    I am fascinated by the way ‘Top People’ are paid a fortune to oversee an enterprise which is otherwise made up of lowest-bidder minumum wage activity.

    ie a company which produces widgets will have them made by child labour in some third world country to maximise profits while paying its directors millions.
    What do the directors do that is so amazing that only a few have this great skill? How are new ones trained? Whatever will become of us all when they die?

  • Alan

    The actions of the shareholders were an example of democracy in action – and a good thing too in my opinion. By all means award success but why award failure? However, don’t forget that the main reason why pension funds are sliding down the pan at the moment is because of the Chancellor introducing measures which in effect tax the profits made by pension funds.

    zack mollusc said:

    “I am fascinated by the way ‘Top People’ are paid a fortune to oversee an enterprise which is otherwise made up of lowest-bidder minumum wage activity.”

    I’m also facinated by the way “top” politicians are paid large sums of money for overseeing an enterprise that would work just as well without their constant meddling. Its quite scandalous when they prattle on about the need for wage restraint amongst the rest of us, then award themselves large, above inflation pay rises on the grounds that they only seek parity with “equivalent” positions in industry. Those politicians who go on to retire can also look forward to gold plated, guaranteed, inflation-proof pensions. Still, I suppose that if we want to attract only the best people in politics, we ought to hike their pay much higher than they are at the moment and give them even greater benefits and perks.

    Whatever will become of us all when they die?

    Quite…

  • Alan: it is not really ‘democracy in action’ and nor should it be… the shareholders are not the population at large, they are the company’s owners, and the weight of their individual votes appropriately depends on the size of their shareholdings and commensurate risk at stake, thus I think talk of ‘democracy’ is misplaced (and speaking for myself the word has all sorts of negative connotations).

  • Ted Schuerzinger

    I disagree with Jonathan’s original comment that ‘few’ bat an eyelid at the salaries earned by F1 drivers or other professional athletes. Populists here in the US engage in athlete-bashing all the time over their high earnings.

    Note that I keep putting the word earn in bold. It’s an accurate word. The populists who decry these high earnings are the sorts of people who would use an argument like “The people who create the wealth are the ones who out to receive the benefits” when they refer to the pay disparity between assembly-line workers and the heads of corporations. (Even though it can be argued that the person creating the wealth is the one investing capital in setting up the assembly-line, and not the person doing the actual assembly.) When it comes to sports, it’s clearly the athletes who create the wealth. Here in the States, there are only about 2000 people good enough to play in the NFL — and some positions are much more demanding than others; the skills it takes to be a good quarterback are much more than what it takes to be a place kicker. And accordingly, quarterbacks (even backups who wait for the starter to get injured and may only see the field one or two games a year) get paid vastly more than place kickers. And because there are tens of millions of football fans, each of them contributing a modest sum (in the form either of tickets purchased, team merchandise, or slightly higher prices for products advertised during football games) winds up in large sums going to each individual football player. After all, the football players are the ones creating the wealth!

    Yet try giving this argument to your average athlete-bashing populist.

  • S. Weasel

    When I began my life as a corporate battery chicken, the guy at the top made around 400 times what the guy at the bottom made. It is now over 4,000 times. (Source: errr…I read it someplace). The excuse is always that you have to fork over that much to attract the best people.

    Ha! Considering some of the bone-headed things the “best people” have done to some fine companies in the last decade or so, perhaps we’d be better served by the second best people.

    I’m a capitalist through and through, and I object to this on the grounds that it is not good capitalism. The CEOs we’re talking about here are not the bold, hard working, risk-taking pioneers who built grand multinational companies out of spit and chewing gum, whose vision might arguably be worth princely sums. They’re bidness school grads with pocketsful of buzzwords and bullshit. They don’t build companies, they loot long-term company assets for short-term gain.

    As you say, it’s a matter for the shareholders. So, thank goodness the shareholders of some corporations seem to be paying attention at last. And if building a new plant or hiring another hundred worker-bees seems a better bargain for the same money than hiring one self-important business diva to sit in the corner office…

  • Alan

    Perry,

    point taken – it isn’t really democracy.

    All I was trying to say was that a collective decision by the owners of the company on what happens to their “property” is fair and is surely better than them not having a say at all.

    Alan

  • I think it is ENTIRELY a matter for the shareholders but I would have voted to sack every member of the board which even suggested such a pay deal.

    And you would have consequently seen your dividends reduced as the company began to fail. There are many good people on the board and you would have been cutting off your nose to spite your face.

  • Weasel: I’m a capitalist through and through, and I object to this on the grounds that it is not good capitalism.

    Amen to that, Bro!

    JohnJo: That is not what I meant… if a particular member of the board did not suggest it, I have no problem with them being on the board, but any board member who voted for such a lousy deal should not be on a board representing my interests as a shareholder.

  • Did the board vote at all I wonder? If they did then we can assume that more than 50% voted for the deal. So that’s over 50% of the board gone. I don’t know and am simply guessing here because I am not up on how this particular board make decisions.

    It just seems to me that major surgery of a successful company is not in the interests of the shareholder.

  • I think there is a deeper issue here and that is the whole principle of ‘Limited Liability’ which, in my view, ought to be abolished.

    There is a whole raft of libertarian literature about the follies of the ‘corporate veil’ which has led to a situation whereby the decision-makers in large concerns have no real stake in the business. Rather they are ‘ships that pass in the night’ sailing in and sailing out again with the primary motive of feathering their own personal nest but indifferent to the fortunes of the actual business under their charge.

    Doing away with the Limited Liability principle would also put a stop to this ‘shareholder activism’ nonsense that Johnathan rightly refers to as the latest manifestation of red/green nihilism. The reason they can buy a £1 share and then set about wrecking a profitable company is because is costs them nothing except their initial £1 to do so. A very cheap price to pay for the benefit of being able to wrap themselves in cloaks of righteousness.

    However, a share that entails unlimited liability for losses is an almighty disincentive for anyone who wants to upend the balance sheet and an equally almight incentive for those whose dewey-eyes are fixed firmly on the ‘bottom line’.

  • Liberty Belle

    Alan – I think if politicians want pay rises that will net them “parity with equivalent positions in industry”, first they should have to prove that they would have reached those equivalent positions in industry. Is there a single MP today who’s not either a lawyer or a career politician? Who are these parasites to be demanding parity with the wealth creators? I’d say 90% of them, including Tony Blair and all his minions, would be in lower level jobs or working for local councils if they hadn’t managed to get into Parliament. Tessa Jowell in the Cabinet! What a joke! Stephen Byers. What a joke! Mo Mowlam, what a joke! Clare Short. What a joke. Jack Straw. Oh, help me up off the floor from laughing. And this is the creme de la creme – the Cabinet! The cast of “Carry on Governing”. Oddly enough, I can see John Prescott as a successful businessman – although some may disagree.

  • anglosphere2003@hotmail.com

    David,

    Surely limited liability is just a useful legal shortcut? Anyone dealing with a company knows the company has limited liability because it has the suffix PLC or Ltd (or inc. in the US, etc). They can choose not to deal with this limited company, either as a customer or a supplier, if they are not willing to accept the fact that the shareholders of the company are not personally responsible for the liabilities of the company.

    As you know, if you deal with a limited company and it goes bust, you can only get back money up to the value of the company’s assets (probably only a proportion, if there are competing claims). However you knew this when you dealt with the company.

    What is the disadvantage of having this useful legal shortcut of allowing companies to register themselves as having limited liability compared to the more wearisome alternative of the company having to write a “limited liability” clause into every contract it makes with a customer or supplier?

  • It’s also true that in one sense I as an individual have limited liability too. I can declare bankruptcy and my creditors will not get all the money that I owe them. People who lend me money know that, and can make a decision based on their assessment of my creditworthiness. The same happens with a limited liability company.

    (Please note that I do not presently have any creditors – this is all hypothetical).

    The trouble with some corporate pay is that the shareholders do not generally set CEO compensation, but a board does, and this board consists of other people in whose general interest it is to bid up CEO and director salaries. I favour more accountability to shareholders for the simple reason that the company (and money paid to the CEO) is ultimately their property.

  • Good point there, Liberty Belle. Lawyers infest corners where the rest of us find it hard to clearly measure if we’ve been short-changed or not. I doubt if many lawyers change career to become engineers, for example. Much easier to see if engineers are value for money or not – why would a lawyer want that kind of exposure to measurement?

    Funnily enough, like Liberty Belle, I can also see Prescott as a successful businessman in another life. He seems to have some shreds of integrity – could that be it? He’s not a total shape-shifter?

  • Alan

    Liberty Belle, Mark,

    I’m not sure that I see John Prescott as a successful businessman. Wasn’t he a steward in the Merchant Navy before becoming a politician? Oddly enough, I think he could have been a successful sportsman if he’d continued the boxing he did in the Navy.

    This is an off topic question (and apologies for sticking it in) – perhaps the Samizdata team could consider writing about it if it hasn’t been done before: How do you attract the best, the brightest and the most successful people into politics (assuming you think that politicians are a necessary evil)? Or will we always get the worst/wrong kind of people standing for election? How do you measure success in a politician?

    Alan

  • If memory serves, it was stated in one of the financial columns that the shareholder vote was advisory in nature under the corporate by-laws, which means the B.O.D. may ignore it and award the money, anyway.

    So much for the shareholder vote meaning anything useful.

  • Alan: How to attract the best and brightest into politics is extremely simple and this has been done many times and in many places… you just close off the alternatives offered by non-political advancement and make absolutely everything political. The best and brightest want to get ahead, therefore the best and brightest get into politics. QED.

    Politics by its nature attracts a high proportion of predators who actually like using the proxy violence of the law to compel others to do their will. I prefer dealing with predators who are not the best and brightest.

  • Ironically enough, some of the very problems that are discussed above are eliminated by a “Golden Parachute.” In order to better align a Director’s interests with the company, this device is used to allow for a takeover by others with a better idea of how to make the company profitable without a huge fight from the parachuted-Director. Since that Director is assured of a soft landing, unless he is sure that he can do a better job than those looking to oust him, he will allow the company to go to a higher-valued use. Interestingly enough, the GP can also work as a deterent to potential takeover bids that are not serious or valuable enough. In the case of GSK, unless the takeover bidders thought that the target was worth its control premium plus the GPs (there’s always more than one), no attempt wil be made. Therefore, it is only those entrepreneurs that have the best vision for the company that will make offers, and the GPs will incentivise the old Directors to step aside and allow fresh blood to invigorate the company.

    David:

    I think there is a deeper issue here and that is the whole principle of ‘Limited Liability’ which, in my view, ought to be abolished.

    Without limited liability very few people would invest in companies. LL means that only that company’s assets are at risk for anything it does, as opposed to its assets *plus* the assets of each and every owner (i.e. every poor bloke who has a pension). Furthermore, by granting a company LL, an equity market is allowed to flourish since it is highly unlikely that each and every owner will be interested in how the company is run. Let those who know how do it; I just want higher earnings. If I don’t like how the company does business, I can trade my shares o someone who does and invest elsewhere. Incidently, the “shareholder activism” is usually countered by the application of the “business judgment rule” which basically means that second-guessing directors is left to a majority of the shareholders and not to the courts or minority shareholders. Those who own only a small interest in a company are often prevented from interfering with the firm’s operations absent backing from large stake-holders.

    Absent LL, there would be very few companies that I would invest in — certainly not any that took any kind of real risks (e.g. GSK, any food producers) or was often exposed to liability for its routine actions (e.g. car makers, chemical producers). And those few, very safe firms where I would be willing to invest would have to be watched like a hawk because everything I own would be at risk. To make matters worse, I couldn’t expect very much of a return since only minimal risk-taking would be allowed. This in turn would lead to fewer firms, fewer products, less choice, yada yada, yada … you see where I’m going.

    This isn’t meant at all to take away from your points about the “corporate veil” and “shareholder activism.” However, while both are bothersome and tend to drive up costs, they are both rather well handled by the legal process and the common law (believe or not). Most importantly, they are minor nuisances compared to the freedom of access to wealth-building that LL partially provides.

  • One more comment I should make is that I really have no opinion as to whether the GSK shareholders made a good or bad decision. In fact, I agree entirely with John Pearce’s opinion that this was an entirely fair decision for the shareholders to make. However, when you consider that GSK is probably worth 1000x the price tag of the GP, it starts to to look like small potatoes. in any case, whether it was a good or bad decision will be borne out by furture events.

  • T. Hartin

    D. Citizen makes most of my points on the advantages of limited liability. I don’t think it is possible to run a functional capitalist economy without limited liability companies to invest in.

    If all of my assets are exposed to liability because I invested a single dollar in a company, then you can be sure that I will not invest in any companies that I either do not control or do not spend a great deal of (largely wasted) time monitoring.

    I think that as a practical matter capitalism rests on a distinction between ownership (investment) and control – it is difficult to imagine a functioning capital market that does not divorce investment from control to some degree, and that consequently does not limit the liability of the investor.

    Limited liability is just the flip side of the coin from limited control, you see. Shareholders in a corporation, unlike the owners of an unincorporated business, have very little ability to directly control the day to day operations of the company. Because they cannot control these activities, the reasoning goes, they should not be held liable for these activities. Liablity without responsibility/control is a very bad thing, I think we would all agree.

  • Well said D. Citizen,

    I agree that LL is a necessity for a mature capitalist economy.

    In light of other comments, I think shareholder activism is a *great* idea. Take for example the Unions. Instead of spending Union dues on lobbying for laws that constrain *everyone’s* freedom, they could instead use that money (in the case of public corporations, at least) to have bought into the company. Over time, the larger unions would probably have accumulated enough shares to swing a seat on the board, or so. The old Marxist class-warfare and the Union management-vs-labor, is ridiculous under such circumstances.

    Also, shareholders are people like you, me, and everyone else. If, for example, they want greener products and are willing to take the risk of their investment in attempt to achieve that end, then more power to them. I much prefer the share holders willingly making a company’s products greener than some government mandate that will stifle the market for years to come.

  • D.Citizen, T.Hartin, Nate

    Many thanks for your comments and views. All very good input and all duly noted.

    I am going to try to dig out some of the old libertarian literature on this subject and do a separate post on the pros/cons of LL.

  • Shareholder activism sounds nice until you reaslise that a good number of activists are not capitalists seeking to rectify some problems in the system, but revolutionaries seeking to smash it. Every anti-capitalist and his dog nowadays buys shares in his object of hatred (Shell, Nike, whatever) and seeks by means of that ownership to destroy it. So let’s start by distinguishing between creative shareholder activism and its destructive second cousin. Then we can talk about whether its a good thing or not.