To great fanfare Monday,
the chief executives who make up the Business Roundtable declared that
companies should pursue a variety of social goals rather than focus
solely on shareholders. The CEOs said they should invest in employees,
foster diversity and protect the environment. As Jamie Dimon, the CEO of
JPMorgan Chase and head of the Business Roundtable, put it,
“If companies and CEOs do not get involved in public policy issues,
making progress on all these problems may be more difficult.”
Since the Roundtable’s members include many of the country’s largest
companies, such as Apple, Boeing, Walmart and Amazon (whose chief
executive, Jeff Bezos, owns The Washington Post), its joint statement implied
a real change — a big deal in a realm where the shareholder has long
been king. But this presupposes that maximizing shareholder value is
what corporations have been doing all along. They haven’t. Returns to
shareholders have actually been unusually low in the past two decades.
What has been maximized? Executive compensation.
Both the left and right generally accept the public rhetoric about shareholder primacy, but it does not reflect reality. The average real return
to shareholders since December 1997 has been 4.8 percent a year. This
compares with a longer-term average real return of more than 7 percent
annually. (I use 1997 as a starting point, instead of taking the more
natural 20-year average, to avoid distortions created by the 1990s stock
bubble. The average real return over the past 20 years has been just
These relatively low returns are especially striking because
corporations have benefited from substantial tax cuts over this period.
The first set was a series of relatively minor provisions put in place
under President George W. Bush. The second set, under President Trump,
included a reduction in the corporate tax rate, to 21 percent from 35
It is hard to reconcile more than two decades of low stock returns
with a commitment to maximizing shareholder value. The data points to a
more obvious goal of CEOs: maximizing their own paydays.
A recent analysis by
Larry Mishel and Julia Wolfe at the Economic Policy Institute found
that CEO compensation has risen 940 percent over the past four decades,
after adjusting for inflation. The analysis put the average pay for CEOs
at the country’s 350 largest companies at $14 million a year, or more
than $17 million if we count the realized value of stock options.
It is easy to see how CEO compensation could have become divorced
from returns to shareholders. As Steven Clifford points out in his book “The CEO Pay Machine,”
the salary of top executives is most immediately determined by
corporate boards. Board members typically owe their own high-paying
positions to the CEO and other top management.
Clifford estimates that a board member works about 150 hours a year
on average. With these directors of large corporations often receiving
pay of several hundred thousand dollars, their pay rate can come to well
over $1,000 an hour.
It is almost impossible for shareholders to dislodge members of
corporate boards. Over 99 percent of directors nominated by the board
win reelection. The only way board members really risk losing their
positions is by antagonizing other members.
It seems unlikely, then, that questions like “Can we get a CEO who is
just as good for half as much money?” come up too often in the
corporate boardroom. While the pay of other workers is subject to market
discipline, this does not seem to be the case with CEOs.
Excessive CEO pay matters not only because a relatively small number
of people get exorbitant paychecks. If a CEO is paid $14 million a year,
most likely the next layer of executives is getting close to $10
million. Even the third tier can earn well over $1 million a year. High
pay in the corporate sector also affects salary scales elsewhere. It is
now common for university presidents and CEOs of major nonprofit
organizations to get well over $1 million a year. Government officials
view it as a sacrifice to work for, say, the $211,000 annual salary
received by members of the president’s Cabinet.
Simple arithmetic tells us that more money for those at the top means less money for everyone else — including shareholders.
To be fair, it is good to see corporate CEOs commit themselves to
respecting their workers, their communities and the environment — and it
will be interesting to see whether and how they follow through. Here’s
one way to do it: In the 1960s and ’70s, the ratio of CEO pay to the pay
of ordinary workers was 20 or 30 to 1. If CEOs committed to restoring
this pay ratio — lowering their pay to $1.5 million or $2 million —
they’d go a long way toward achieving the goals they boldly declared
This column first appeared in the Washington Post.
1. US Security from Michael_Novakhov (88 sites)