So, 182 chief executives of the largest US corporations have signed a pledge to “lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders”.
When I read this, I didn’t know whether to laugh or cry. I don’t know what is worse: that the CEOs believe what they signed or that they don’t. If they don’t believe it, then it might be taken as just PR puffery.
Perhaps they hope to forestall public policy intervention which might force them to improve in particular their performance on environmental damage. Not that there’s much danger there for them under the current US administration.
… the ratio of CEO compensation to shop floor wages increased … from about 30:1 to about 300:1. This shocking trend is the most important economic event of the past 40 years: more important than the global financial crisis, because it basically caused the GFC.
Or could it be a more insidious attempt to divert our attention? That list of five key ‘stakeholders’ is cunningly missing a sixth group: the CEOs themselves. Yet no collection of people – certainly not consumers, workers and communities, and not even shareholders – has done so well feeding at the corporate trough than the men (only 10 percent of the signatories are women) who run these gigantic enterprises.
The more-than-doubling of the share of total income taken by the top one percent of earners – from 10 percent in 1979 to 23 percent in 2006 – over a period when real wages of US workers barely moved, was vigorously led by the CEOs and their accompanying phalanxes of senior executives.
The result was that the ratio of CEO compensation to shop floor wages increased by an order of magnitude, from about 30:1 to about 300:1.
This shocking trend is the most important economic event of the past 40 years: more important than the global financial crisis, because it basically caused the GFC.
The intricate ‘high-powered incentive’ schemes top management used to supercharge their salaries booted out ‘boring banking’ and directly led to the proliferation of dodgy packaged financial assets that inflated the housing and asset price bubble.
And then Wall Street financial firms didn’t have the balance sheets to cope with the bursting of the bubble, because as much as half of their profits had been sucked out and into the salaries and bonuses of top management.
It wasn’t so bad in New Zealand, because we had retained ‘boring banking’ and our corporations are relatively tiny. But the top one percent income share has doubled here as well, with CEO and top management pay increases far outstripping the remuneration of wage and salary workers.
All this makes a mockery of the media take (including from Newsroom) on the CEOs’ manifesto, which is that it represents a rejection of the conservative economist Milton Friedman’s famous 1962 injunction that it is ‘fundamentally subversive’ of the market economy for corporate officials to accept any ‘social responsibility’ other than to make as much money for their shareholders as possible.
… neither Friedman nor Galbraith gave the faintest inkling of what would actually happen: that the shareholders would in fact be exploited by the management, in a neat reversal of Marx’s prediction of capital exploiting workers.
In fact, CEOs have been rejecting Friedman’s injunction since the early 1980s – ruthlessly pillaging for themselves the profits of their nominal owners, the shareholders.
Even in the 1960s, Friedman’s view was challenged, notably by his great rival from the left in the public intellectual stakes – the Harvard economist John Kenneth Galbraith.
In The New Industrial State (1967), JK Galbraith argued that the big business corporations did generate huge flows of profits, and that these were vulnerable to capture by the people running the companies – the ‘technostructure’.
But he posited that the technocrats would indeed use this power to pursue growth, technical excellence, and perhaps social goals such as paying good wages and being good corporate citizens.
What is, however, striking from today’s perspective, is that neither Friedman nor Galbraith gave the faintest inkling of what would actually happen: that the shareholders would in fact be exploited by the management, in a neat reversal of Marx’s prediction of capital exploiting workers.
There is literally not a whisper of such an event in Friedman’s Capitalism and Freedom. In his case, this could be explained as unwillingness – as a staunch exponent of the Chicago School of laissez-faire economics – to admit even to the possibility of the great oligopoly corporations producing streams of surplus cash, because such is even more fundamentally subversive of the maintained doctrine of the efficiency and efficacy of the free market.
In Galbraith’s case, however, no such excuse is possible (if being an ideologue is an excuse).
Galbraith recognised the potential for the technostructure to divert the company’s profits into their own pockets. But he insisted it wouldn’t happen.
“Sound management is expected to exercise restraint,” he said. And “the level of salaries of managers even in leading corporations is not exceptionally high.”
He argued that a “remarkably effective code” bans behaviour that would lead to a “chaos of competitive avarice”. Indeed!
The fact that such statements were arguably valid for the America of the 1950s and 60s makes it the more disturbing that they so demonstrably no longer hold true. So if indeed there is a soupçon of sincerity in the 182 top CEOs’ pledge – and, being a simple, trusting soul I’d like to think that there is – we must still hold our breaths for the follow-up pledges to ruthlessly cut executive remuneration.
Who knows, we might even see a call for greater government regulation to assist the corporations to work together on their new environmental and social goals?
Tim Hazledine is a professor of economics in The University of Auckland Business School.
See also Newsroom’s story: Business Roundtable has a Damascus moment