Recently, it seems like every time you turn on the news, you hear about another corporation that is laying off thousands of employees, shutting down factories, sending manufacturing overseas or outsourcing jobs to India. Often we are told it is because of the economy, the high cost of US labor and corporate taxes. While it is true that the economy has been in recession and is now in a period of very slow growth, labor in many third world countries is cheaper than the US and corporate taxes here in the United States are the second highest amongst developed nations, I think that one of the biggest factors is a lack of corporate leadership or business ethics.
I am sure that you are all aware of some of the high profile cases of corporate fraud, greed and mismanagement from the past few years. All of us have heard of companies like Enron, Tyco, WorldComm and others where dishonest executives destroyed the companies under their management with illegal and unethical business practices. More recently, we have only to look at Lehman Brothers, Merrill Lynch, Countrywide, Fannie Mae and Freddie Mac to know that corporate malfeasance and risk-taking has been on the upswing. These stories are legend and often used as case studies in business schools across the country. Today I would like to focus on some of the more insidious business practices that I feel are doing tremendous damage to our country and our economy.
Many years ago, people went to work for a corporation and often spent the rest of their working career with that same company. Employees and employers had a responsibility to one another. If I worked for you, I had a responsibility to show up on time, perform the requirements of my job to the best of my ability and deliver value for the wage I was paid. The company had a responsibility to provide me with a safe environment, pay me fair market value for the work I produced and run the company in a manner that would provide profitable growth for the shareholders, stable employment to its workers and a good product and service to its customers.
Over the past few decades, things have changed dramatically. In 1965, the CEO’s of major US corporations earned approximately 25 times what the average worker made. By 1978, the ratio grew to 35 times. By 1989, CEO’s earned approximately 71 times as much. In the late 1980’s to early 1990’s, Congress grew concerned that while CEO pay was growing at astronomical rates, oftentimes the companies they represented were posting huge losses and hundreds of thousands of employees were being laid off and shoved onto the public dole. In 1993, Congress moved to limit the deductibility of executive income to one million dollars. A company could pay more cash compensation but they could not deduct it as a business expense. This should have brought CEO pay more in line with what the average worker was earning. Yet by 2005, CEO pay was on average 262 times higher than the rank and file worker.
Unfortunately, the Law of Unintended Consequences reared its ugly head and corporate compensation committees came up with an alternative way to incent their executives using stock options and restricted stock grants. This seemed like a logical approach as the CEO’s pay would be tied to the performance of the company and its stock. While that sounds both good and fair, we all learned very quickly that no one is in a better position to manipulate the value of a company’s stock than its executives. Since the early 90’s fraud, manipulation and misrepresentation of company earnings have been steadily on the rise. In November of 2008, the Wall Street Journal published an article outlining how CEO’s and top executives of major corporations liquidated their stock between 2003 and 2007 before the stock market collapse.
Richard Fuld of the now bankrupt Lehman Brothers, cashed in $184.6 million. Countrywide’s CEO, Angelo Mozillo sold over $400 million of his stock during his tenure with the company and cashed out $129 million in the 12 months leading up to August 2007 alone. Ken Lewis of Bank of America reportedly sold off $81 million during this time and the CEO’s of Fannie Mae and Freddie Mac pocketed $23 million and $33 million respectively for their last two years of service, even though they were chiefly responsible for the downfall and subsequent government takeover of the two companies. As these CEO’s were liquidating their stock and exercising their options, who purchased the stock they were selling? You and me. The mutual funds in our 401k plans and IRAs were buying up this stock at exorbitant prices right before the bust.
How could the very people who destroyed the businesses they were hired to serve have profited so much from their failure? What about the shareholders who lost trillions in value from bankruptcies, declining share prices, bond defaults and more? What about the employees of these companies who were just doing their jobs and suddenly found their lives turned upside down because they were out of a job during one of the worst recessions in history? What about the customers of these companies who were left out in the cold?
During boom years, the ridiculous compensation of many executives serves to drain corporate profits and hurt shareholder performance. During lean times, these same executives simply engage in massive layoffs to bring “costs” under control and help profitability. Tens of thousands of workers suffer because they experience a drastic reduction in income and the taxpayer is left holding the bill for unemployment and government assistance.
Isn’t it logical to assume that companies will experience both good and bad times? Shouldn’t they feel some responsibility to their employees? Shouldn’t they make plans to retain these employees by building a cushion during the good years? Sadly, these same CEO’s and executives receive huge bonuses for helping boost company performance by cutting costs and laying off so many employees. Is this really the best we can do?
© 2011, Angelica Wolf
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