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Fat and Mean

May 27th, 2003

Ken Parish posts on the latest executive pay scandals, with plenty of detail. I have a couple of thoughts arising from this.

The first is that it’s not long since we were all being told about the new lean and mean corporate model, with its slimmed-down management. As recently as 1996, when the late David Gordon wrote Fat and Mean, pointing out that the opposite was true, it was correctly viewed as a contrarian attack on the conventional wisdom.

The second relates to the rhetoric about risk and return that still dominates much public debate. I remember reading some years ago that, contrary to this rhetoric, the income risk faced by senior executives was about the same, in proportional terms, as that faced by ordinary workers. The comparison by now must be massively in favor of the bosses. Once you’ve got a CEO-type position, you effectively have a job for life, with or without duties. Even if you get booted out the next week, you’re still paid for the rest of your life and beyond. The fact that virtually every CEO employment contract contains provisions of this kind speaks volumes about attitudes to risk

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  1. Homer Paxton
    May 27th, 2003 at 22:13 | #1

    Surely this is an issue that there can be bipartisan support for accross the bloggoshere.

    A person who believes in the free market will be upset that people in high management positions are gaining all carrot and no stick and therefore making decisions which will not allocate resources correctly. Shareholders will invest in inappropriate companies.

    People from a social justice perspective will be cheesed off by the sheer greed of these people and the fact the are different rules for CEO’s that are sacked compared to the rest of us.

    At the same time we might just have a look at what the Fund managers’ reaction is also.

  2. May 27th, 2003 at 23:34 | #2

    It’s when bipartisan agreement and about three bucks gets you a cuppa that you know somethinmg’s very wrong. As I keep saying, dust your Veblen off – we’re back in the age of the Robber Barons, people … conspicuous consumption; the profitable interference with, and stuffing up of, production chains; an unassailable web of cross-directorships; and crony corporatism; the risks aren’t theirs, they’re ours; the costs aren’t theirs, they’re ours; they ensure personal ‘certainty’ by dodging market forces wherever they can, ‘the market’ is where the rest of us have to live; and they create bugger-all, and yet the destructive gales all blow our way.

    Okay, that last bit was Schumpeter.

    And maybe that second-last one was Galbraith (and Coase, I submit).

    And mebbe the bit before that was Smith.

    Anyway, we’re stuffed. To me this is just symptomatic of a world of impotent polities and crisis-bound economies, and no bugger in the blogosphere is disabusing me of this feeling. Anyone here up to the task?

  3. May 28th, 2003 at 02:46 | #3

    This is a problem that should be corrected by shareholders, not the government.

  4. May 28th, 2003 at 09:06 | #4

    Yobbo,

    The point of my post that JQ linked (and no-one else seems to have read because it was a tad long) was that leaving it to shareholders is totally ineffective in the form of corporate capitalism Australia now has. Most corporations are effectively controlled by institutional shareholders, especially super funds, through a combination of substantial shareholding an interlocking directorships. The institutional shareholders ensure the maintenance of rule by the corporate oligarchy irrespective of what ordinary shareholders might want or try to do. There is little or nothing ordinary shareholders can do about this. The market has failed, and in fact ceased to operate in any meaningful sense. Only legislative intervention can achieve anything useful. Unlike Rob Schaap, I don’t necessarily extend this analysis in its strong form much beyond executive remuneration, although I certainly think he has a point.

  5. Dave Ricardo
    May 28th, 2003 at 10:20 | #5

    Ken is right about this. The institutional vote is controlled by funds managers who are themselves the beneficiaries of the culture of excessive remuneration, in their own organisations. While it would be in the interests of their unit holders for the funds managers to do something about the executive remuneration in the companies in which they invest, it is not in the personal interests of the funds managers, so they don’t.

    One possible way out of this log jam might be if trustees of independent (not controlled by the usual institutions) superannuation funds took the lead on this. But they don’t control enough shareholder votes yet, and maybe never will.

  6. Scott Wickstein
    May 29th, 2003 at 02:25 | #6

    I read it Ken and thought about blogging on it but decided against since I’ve binged out of the financial markets since 2000 and haven’t really been up to date.

    I think that the blame for the present situation can be spread even wider- investors certainly have to share the bulk of the blame. Stephen Mayne’s experiences with AMP point to one half of the equation. I wonder how long it is before someone sues an institutional investor for voting in a dud director.

    I also think that a lot of the publicly listed companies in Australia simply shouldn’t be on the stock exchange. But there’s fat chance that the ASX will tighten it’s listing requirements.

    Executive renumeration is a tough area to form a realistic policy in. You see boards appointing the ‘right’ people for the job – usually has been a CEO from somewhere else, and the point of this is that the market will hammer a stock if a Board thinks outside the square. Or promotes from within an organisation.

    Some CEO’s, by the way, certainly do earn their corn in relation to the increase in stockholder’s funds. I don’t see Commbank shareholders demanding David Murray’s head, for example.

  7. May 30th, 2003 at 13:15 | #7

    i’ve solved the problem

    use ricin or similar in a wrist attachment as part of a director’s package

    http://www.dolebludger.blogspot.com/2003_05_01_dolebludger_archive.html#94966345

  8. May 30th, 2003 at 13:19 | #8

    ps
    i agree with Rob, time for some instituional economic corrective measures

    all human movements, even in a market, tend to turn into institutions or one sort or another, these places, groups and loops tend to be colonised by predictable types and types of behaviour (that Boom Boom room is a good example)

    of course, culture is the last and first resort influence on these types of things

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