Occupy Toronto: Fundamental Truth About Public Company Executives

Part I

Occupy Wall Street started as a protest against corporate influence on democracy, absence of legal punishment for the contemporary financial crisis, and a growing disparity of wealth. Although some of its slogans sound as a variation of the ones used by communists in 20th century, no doubt that the current financial and economic crisis, spread from America throughout the whole world, was caused by corporate America. The disparity of income was just a by-product of the existing business practice, inadequate legal system, and many other aspects of economy, the subject of which we will discuss in this article.

The cause of many social ills, so evident in the latest crisis, is the remuneration system of corporate executives of public companies, large and small. A brief examination of it will reveal many interesting aspects of so-called ‘talent compensation’ of CEO’s and explain its cause and effect.

The exorbitant pay to corporate executives has been the topic of numerous discussions in the media. In the eyes of the American middle class the sky is no longer its limit: more than $100 million a year is not a headline anymore. Even at that, the whooping figures do not include all benefits, as they are deftly hidden in the jungle of corporate accounting. According to AFL-CIO analysis of 299 companies, overall CEOs received in 2010 a combined total of $3.4 billion in pay. This is while average income drops steadily and the executive pay is on the steady climb.

Considering the current crisis, the cause of which is a blatant abuse of business practice and poor management, the conclusion is simple: collectively, the top management of corporate America has no talent whatsoever, and their compensation has nothing to do with their ability to run the largest economy of the world. Collectively, they broughtAmericaon the verge of collapse, therefore they deserve no compensation at all. How come then that the self-proclaimed ‘talents’, with so many evidence of their inability to manage and achieve results, are at the top of money making machines and get such a high compensation for their poor performance? And what should be the fair compensation of the top executives, successful or not?

If we discard the radical left ideas of using force to re-distribute wealth, no plausible system has been suggested by economists so far. There is no workable method to calculate compensation, neither we have an effective legal system to punish crooks, or moral system to expel those who circumvent criminal code to their advantage. But there is one group of people who claim that they know the solution: the corporate management itself. Here is their explanation.

Management of a corporation is a demanding job, which requires an exceptional talent. To attract this talent, the company must have an adequate compensation system in place. The increase of executive pay is “a mere by-product of supply and demand for executive talent.” 

So far so good, and sounds reasonable. The contemporary financial and economic crisis though, second only to the Great Depression of 1929, is a spectacular evidence of this ‘talent’ capability. Billions of people suffer. What is wrong then with their talents? What is wrong with the system, which permits the assent of these ‘talents’ to the top of social ladder and cause so much harm to the economy and social life? What is the moral stature of this collective ‘talent’? 

To understand this, let us consider two extremes. On the rightmost end of the scale I will place entrepreneurs and executives who changed American economy for the better, and affected lives of billions of people around the globe. Representatives of this lot are Bill Gates, co-founder of Microsoft, and Steve Jobs, co-founder of Apple, to mention the most famous. I believe that the majority of readers would agree that they deserve a very high compensation. How high is a separate issue, but if the rest of corporate America were this kind of contributors, there would be no “Occupy Wall Street’ movements, and the executive compensation would be largely the matter of academic discussions among the gurus of social science.

Now, let us examine the other type of executives, located on the leftmost end of the scale. The good example of it is Nortel Telecom, a Canadian company, which at the end of 1990’s accounted for one third of total capitalization of the Toronto Stock Exchange. The company was headed up by John Roth, a typical corporate ‘talent.’ He went on a spree of buying high tech companies which, in his opinion, promised technological miracles. In 2000 the company value reached $368 billion. Its shares were in portfolios of largest pension funds, mutual funds, and in accounts of numerous small shareholders, mesmerised by the spectacular growth of the company value on international stock exchanges. John Roth, however, was far ahead of the investor’s crowd. In 2000 alone he cashed in his stock options for $135 million. After that Nortel Telecom steep decline was as meteoric as its previous rise. As the ‘talent’ of John Roth was helpless in stopping the shares downfall, he retired, taking all benefits of Golden Parachute and other conditions, specified in the agreement. But there were other ‘talents’, which assumed the helm of the sinking company. The compensation of the company management did not decline; on the contrary, many millions of dollars were distributed among them on the company way to bankruptcy and finally to total liquidation. To hide the truth, billions of dollars were booked improperly to boost executives compensation, which accounted for hundreds of million dollars. The result of this management ‘excellence’ and ‘exceptional talent’ was disastrous for tens of thousand of workers losing jobs, millions of people loosing their pension funds and investments. The company ceased to exist. What about the management? Nothing affected their opulent life.

Was Nortel Telecom management just an exception? Was the company just a black sheep among the snow white, high morality herd? The current crisis has ample answers to this question.

As soon as the American government, in its attempt to save big corporations from total crush, gave money to major financial institutions and Wall Street biggies, they first thing the top management undertook was to distribute ‘compensation’ (what a word!) among themselves. How vicious should be the greed, how low morality these people should have, how arrogant should they be to steal public money in full view of the public! And all this is to compensate themselves for the greatest scam and mismanagement in the history of corporate America. Unfortunately, there is no law to punish them and, apparently, no ‘talent’ to replace them.

Not all corporate America is like that, of course. As was mentioned above, there are brilliant managers and entrepreneurs who contribute a lot to progress of America and the whole world. But in average, the moral stature and ‘talent’, if you pardon my use of this world here, is pretty low. The interesting question in this regard is: Why this happened? What is the selection process that opens the door to people with no scruples and unremarkable management abilities to climb the top of the corporate ladder? Why the door is shut for truly talented people with high moral principals?

 

To be continued….   Part II

 

Alex Markman

The author of:

Contra-ODESSA (available on shelves of Chapters/Indigo in Canada)

Messenger of Death

Payback for Revenge

 

 

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