If You Invest, You Need To Know How Much Corporate Management Earns, but It is Nearly Impossible. So, What Can We Do? At The Least, Let Us Get Knowledge and Get Angry. Then, Perhaps, We Can Figure Out How To Take Action If you are an investor in individual stocks or mutual funds that hold stocks, than you have something you need to start to think about. How can you protect your interest, small as it may be compared to all the shares outstanding, when it comes to the issue of executive pay? My short answer is you cannot. However, as an investor, you probably should know that there are a number of important issues going on that involve your investments and how management treats those investments. So this article is designed to give investors (both direct shareholders and mutual fund investors) some important information about how top management of many large publicly traded companies are both overly compensated as well as defrauding investors. Right now, you have a chance to have something down about it in the form of shareholder derivative suits permitted by Section 10(b) of the Securities Exchange Act of 1934. You can also complain to your state attorney general if you are an investor who believes that companies in which you invest are doing something wrong. However, if the federal government takes the action they are now contemplating, those rights may be forever lost and then you really will not be able to hold companies in which you have invested responsible to you. The Story: Last week was a good week for investors with the Dow surpassing 12,000. But, it was also a good week for investors on another front: corporate accountability. The New York State Attorney General, Elliot Spitzer, won his case (for now) against Richard Grasso, the CEO of the NYSE, a publicly traded company. The Court decided that Grasso breached his fiduciary duty by failing to fully disclose his pension and other aspects of his compensation to the Board of Directors of NYSE. What this will mean to the future of outrageous compensation packages remains unclear, especially in light of the increasing allegations of stock-options backdating to increase executive compensation. While Grasso was found liable by a Court, another Court sentenced Jeff Skilling, Enron's CEO to 24 years in prison for his role in the Enron fraud. Meanwhile, William McGuire was forced out of United Health and the Wall Street Journal and Merrill Lynch are both investigating options' backdating to see how such acts might affect shareholders. So, as of now, while it may take a while and cost a lot of us a lot of money, there are some people out there overseeing fraud and excess by some corporate executives. Why Should We Care? If someone walked into your house and stole something, you would call the police. If you invest in stocks and the executives and/or Board of Directors engage in theft, we should be equally outraged. It is, after all, our hard-earned money they are stealing. Not only our money that we earned, but money that we expect to be there when we need it. Of course, investments are not guaranteed, especially stock investments. But, excessive corporate pay or forms of corporate/accounting fraud that cause us to underestimate our risk of investing is not the same as just making a bad investment. For the stock market as a whole, but for ourselves in particular, tolerating corporate irresponsibility and fraud is unacceptable. Essentially, when we buy stock, we buy "ownership" in the company. Just like I would not "loan" money to my cousin who is not trustworthy, I would not buy stock in a company that is run by untrustworthy people. If executive pay issues rich all over the market, I will have trouble trusting any of the people running the corporations with my money. Theoretically, that means that all of us investors would have to remove our money from the stock market -- which seems extreme. Thus, as investors, we need to be assured that we are not letting people steal from us. Why is some executive compensation the equivalent of theft? Grasso's 100 million dollar pension is a hundred million dollars more that can be divvied up amongst shareholders or used to build up the company. Every executive who has one of these exorbitant packages is taking money from shareholders. While everyone deserves compensation for their work, and, I am sure that the CEO of a huge corporation works hard, executive pay is truly out of control. (100,000,000 dollars is equal to almost $275,000.00 per day or $11,500.00 per hour assuming a 24 hour work day -- their earnings in one hour are more than some people make for a year (believe it or not, minimum wage for 40 hours per week comes to approximately $15,000 per year, so, I am not really exaggerating). But why should an attorney general of a state go after outrageous corporate pay? Is that an issue for state or federal government to solve or should Boards of Directors and stockholders take care of their own corporate pay issues. I presume that some might argue that the shareholders are not forced to own shares in a particular company; thus, if they do not like executive pay at a company, they need not own shares of that company. However, it is not that simple for a shareholder to determine what amount of executive pay a group of individuals gets especially when compensation formulas are as complicated as they often are. Others could argue that the high earnings are well-earned, and they might be. However, such excessive pay definitely cuts into the bottom line of corporate profits. Some of the people who earn this exorbitant pay are the same people who suggest downsizing companies to save money by firing the regular hourly workers. (Based on my calculations, you would have to fire hundreds of average employees to recoup the amount that some of these CEOs make). Many of these same people argue against increasing the minimum wage to a livable standard. What kills me is that the argument that some poor working class person should not get an increase of $40.00 a week is a huge issue for the government, but the government might shrug off a compensation package for one person of millions of times that amount. It just feels like bizarro world to me. The bottom line is that corporate oversight is the only way the individual has to protect him or herself. If the government does not get involved, nobody will: an article in the New York Times several weeks ago showed that institutional investors, mutual fund managers, who have the biggest voice in shareholder voting, tend to side with management on the issue of executive compensation. Thus, those people with the biggest voice at shareholder meetings, the mutual fund managers, actually go along with the management's requests for high compensation. They do not do because such compensation is in the best interest of the shareholders. So why do they vote for such high compensation packages? Because those mutual fund companies are also making money by administering corporate 401(k) plans: if they vote against management on corporate pay, they may lose the account. Truly, all these people are in bed with one another. They have no choice but to share the covers. If the mutual fund managers are not voting against excessive pay, how can individual shareholders really do anything about it? Recently, it became clear that many companies have begun backdating option benefits to give management even bigger pay. Once that is sorted out, companies may have to restate earnings; thus, shareholders cannot even know what the pay of an executive actually is at the time of buying the shares and, perhaps even worse, individual shareholders who base their decisions on earnings as stated, cannot know the true earnings of the corporate shares which they buy. For that matter, neither can the big institutional investors who we entrust to buy the proper shares. We have no choice but to trust them because that is the way most of our retirement funds are being held: in mutual funds of some type. It is a real conundrum: we want to make money. The stock market has been the best way to do so over the past 70 or so years. The laws are supposed to protect us: after all, the CEO's and Boards of Directors have a fiduciary duty to their shareholders which means that their decisions have to be in the best interest of the shareholders. Thus, if they have to accept lower compensation to do what is right by their shareholders, they should do so. Otherwise, they should face sanctions either by shareholder suits or by the government. Both types of cases have recently shown that corporate executives and boards better look more closely at management compensation packages. I have been thinking about this a lot lately because I have been paying a lot more attention to my family's finances, I am writing this web site, and, therefore, I listen to and read a lot more about business than I used to. In fact, my husband and I have been investigating our own holdings for the purpose of figuring out the best way to invest for our retirement, and, as I will discuss in a future article, got some disturbing news: my husband's plan manager is offering mutual funds with sales loads and all kinds of fees and expenses and the firm hired to administer the plan is making a lot of money off the backs of all of us who are investing our nickels and dimes for retirement. If that firm is going to make a lot of money, it ought to be offering good choices, and, while researching, we found out it offers all the kinds of choices the personal finance advisors advise against. It is all hugely frustrating to work so hard to make less than some of these people make in a day only to find that people that are supposed to act in your own interest do not do so. How do you get ahead in a system that is not designed for the average individual. What is Secretary Paulson thinking? I have been thinking a lot about these issues and then today, I learned even more disturbing news. If I am correct, as a small investor, relatively speaking, my best hope is that if someone does something wrong, I can turn to a shareholder suit (with lots of other shareholder's) or can contact my state Attorney General who can investigate and, if something nefarious has occurred, take action. Today, I learned, however, that Treasury Secretary Henry Paulson, Jr. is attempting to do away with all that. In the New York Times Business Section, Ben Stein is taking corporate America to task for trying to get the government to prevent shareholder and attorney general suits. Or, perhaps, he is taking the government to task for allowing corporate shills to convince American politicians that they ought to rewrite laws to prevent such suits from going forward. This seems so wrong to me: in the midst of feeling badly used by someone whose job it was to help us make good investment decisions, I read about the absolute lack of limits in corporate greed, and I am angry. I am angry that I have no power beyond my vote to take care of my own money. I am angry that the government feels a huge need to take a huge chunk out of my family's paychecks, and, as we earn more money, the hard, old-fashioned way, by working harder and harder, the government cannot be bothered to understand that we are still middle class and "forgets" to fix things like alternative minimum taxes for average people, or pay increases for working class people, but, can spend time and energy fixing the securities' laws to make it easier for corporate America to commit fraud and take excessive pay. I know that all of that money buys corporate America a ton of access that I cannot afford to pay for-- I am a social studies teacher, after all, and I teach about lobbying and political campaign finance. So, I actually know more than most about how such money controls the political agenda, yet, I also teach about the early days of the Republic, and, naively, I sometimes believe that the government is supposed to be about protecting me and the people like me -- the backbone of American society. So, while I do not mean this article or web site to be expressly political -- most people reading this site are interested in learning how to better their own financial positions, not about politics -- I find I need to take a stand to educate the (admittedly small) numbers of people who read this site. So, according to Ben Stein, in Has Corporate America No Shame? Or Memory? (New York Times, Sunday, October 29th, 2006, Sec. 3, p. 3), Henry Paulson, our Treasury Secretary and former "top dog" at Goldman Sachs, has created a "Committee on Capital Markets Regulation" to study "whether securities regulation and litigation that ...protect shareholders are harming American 'competitiveness.'" It seems that the purpose of the committee, which includes distinguished academics as well as heads of financial firms, manufacturers, and accounting firms is to ensure that regulatory laws like 10b are not hurting American corporations' competitiveness. Stein points out that this committee exists at a time of "major corporate frauds: backdating of stock options, which is really just insider trading in a big, big way; undisclosed executive pay and "gross ups" for paying taxes; stupendous looting in the form of "going private" transactions where management buys assets from stockholders at below-market prices and becomes rich in the process; and many others. And there are straight-out accounting frauds in which major players actually go to the Graybar Hotel along with people who did their thieving with guns instead of computers." The "laws" existing today are getting in the way of all of this wealth generation; therefore, the committee is working to convince the lawmakers that these laws need to be changed. So, the attorney general who I applauded in the beginning of this article only last week, would be shut down (actually, he'll probably be the next governor of New York, but the other ones out there who are attempting to help the people in their states) will be shut down. As Stein notes, what a waste of management talents: what if they actually went to work thinking about how to best serve the shareholders instead of spending their energy in such a self-serving enterprise. What if they actually had to remain accountable to the shareholders? He analogizes the committee's ideas to an argument that hospitals would be more competitive "if [they] didn't have to take care not to kill [their] patients when [they] operate on them." It really is bizarro world! What absurdity. And shame on those professors who are actually helping this committee gain credibility. I've worked with academics. Many of them are good, smart people. But they are like corporate executives sometimes: they are out of touch with the real lives of real people. They are out of touch with the lives of the people who buy their products and their stock and keep them in business. HOW DARE THEY speak for us! If you do not like to think about these issues, that is fine. However, it's your dollar: it is your tax dollars that pay Secretary Paulson's salary and presumably the work of this committee. If you are in mutual funds or stocks, it is your dollars that OWN the company. If the management need not be accountable to you to be competitive, than who prevents the management from doing what is best for itself even if not in the best interests of the owners. It makes me think: I work for a school. I am accountable to the students, the taxpayers in the community, the parents, my boss, the principle, a superintendent, and so on and on and on. If I make a mistake, I have to live up to it. If I steal money from my students or the taxpayers, I will be fired. Simple. My husband works for people who own his nursing home. He runs the place; however, if he does not listen to them, they can fire him. He does not get to choose his own pay, they choose it. Like other managers, he has a say in recommending pay; however, his bosses pay attention to his pay package which is straightforward and easy to understand. If it were not, they would not pay him. Honestly, I don't want to pay corporate executives who do not tell me exactly what they earn and why they deserve to earn so much. It's absurd to do otherwise. It would be absurd for the owners of my husband's nursing home to say take whatever you feel like. In fact, we'll hire a company to figure out a creative way to pay you so you can pay less in taxes and make it look like you do not earn as much as you earn. Regardless of how much money these executives help the companies make, they surely have to be fundamentally accountable! Those are the laws the government should worry about: I own these companies that I have invested in. If they are not worried about satisfying me, and there is no way for me to know that because of how they do business, and they are so important to the economy, the government should make sure that they act properly; the government should not help them to rip us off. Somehow, we need to remind these major corporations of who pays their salaries. Honestly, if every shareholder moved their money into cash, the stock value would go down, and, then, they'd have to sweet talk us. But, there is no way for all the investors to wield that power because of our diversity -- we are everyone, not the big guys. In an era where there are fewer pensions and less money funding social security, the government better make sure that shareholder retirement accounts are safe. If they do not, the taxpayers will have to take care of us in old age.
And if you invest your money, keep an eye on the news about all of your investments. Remember, you are the only one who can protect you.