The $400 Million Dollar Man

The Financial Times reports tonight that if Merrill wants Larry Fink, the head of Black Rock, to become CEO, the price is probably $400 million. That's the estimated cost of buying out Fink's stake in the company, an necessary step, since would otherwise have an incentive to make decisions that favor Black Rock (Merrill now owns a 49% interest).

The precedents for this move are not favorable at all. In 2000, Chase paid $500 million to buy Beacon Group, an energy industry merchant bank headed by former Goldman M&A chief Geoff Boisi. That was the price of getting Geoff to join Chase as vice chairman to beef up its merger and acquisitions effort.

The sale of Beacon was almost certainly Boisi's most successful deal. The people I know in the energy industry reported at the time that Beacon had done relatively few deals (and they weren't seen as particularly astute, which was not surprising given that Boisi didn't know the industry and only a couple of his lieutenants did ). The firm was also heavily staffed relative to its apparent level of activity. The price clearly had more to do with Chase's keen desire to secure Boisi's services, not the value of Beacon.

Although I cannot prove it, I am highly confident that Boisi did not generate anywhere enough in fees to recoup the handsome premium paid for his firm. Boisi had been one of the top M&A pros in the swinging 1980s, but his Rolodex had to have eroded after a decade at a boutique with a narrow industry focus. Indeed, Googling his name provides no insight into his time at Chase, which was brief (he was gone by 2003).

Not a good harbinger for Fink, needless to say.

The Ignored Information Content of Stan O'Neal's Call To Wachovia

The New York Times got a hold of a hum-dinger: that Merrill Lynch's CEO Stanley O'Neal had called G. Kennedy Thompson, the CEO of America's fourth largest bank, Wachovia, last week to feel out a possible merger. Thompson's reaction was cool, and his stated reason was that the Charlotte, NC bank was still digesting earlier acquisitions.

Merrill's board was reported to be furious at the move, despite the fact that initiating this sort of call is not a hanging offense in the executive suite (although having it run on the first page of the New York Times puts it in another category). O'Neal is not expected to last the weekend as Merrill's chief.

The reaction in the press and in the markets was knee jerk. Merrill's stock was up 8.5% by the end of the day and most analyses focused on what a merger would have done for O'Neal's pay package (a sale of a 30% or more stake would trigger payments estimated at $200 million or more) , and what he might get upon his ouster (the New York Times and Bloomberg disagree by a pretty big margin).

But no one seems to be reacting to the information content of O'Neal's move. Things look so bad for Merrill that calling, of all institutions, Wachovia, a domestic bank that has about zero in common with Merrill, and suggesting a merger, seemed reasonable. That is a move of sheer desperation, and everyone assumes it was desperation for O"Neal to save his severance package.

What if everyone has this wrong? What if O"Neal thought this was a reasonable move to save Merrill? This scenario says that, having finally gotten his arms around the dimensions of the problem, O'Neal thinks Merrill should make the best deal it can before things deteriorate further.

If that's what the phone call was really about, the people who ran Merrill's stock up today have got this badly wrong.

Let's consider a few facts. Most CEOs like being CEOs. Once you fall off that perch in disgrace, it's rare indeed to make a comeback (how many can you name besides Steve Jobs and Robert Nardelli?). And even with the lavish paydays, the ones I've come across in the year or two after having lost out by being fired or having their companies acquired look very diminished, like shells of their formers selves. The current conventional wisdom, that O"Neal called Thompson to pull his personal rip cord, flies in the face of how corporate leaders operate.

Plus the board was already out for his head. If O"Neal really wanted to get fired, all he'd have to do is have a couple of lousy analyst presentations, or get snippy with the board. At this juncture, it wouldn't have taken much for them to terminate him, which also would have triggered cash and prizes.

Consider this discussion from the New York Times:

According to people with knowledge of the deliberations, Mr. O’Neal pitched the idea of a merger with Wachovia as one option that the firm was considering. Other possibilities raised included a direct equity infusion by an investor and a sale of Merrill’s 20 percent stake in Bloomberg, a holding that some analysts have valued as high as $4 billion.

According to these people, the view of the board was that Mr. O’Neal was pushing the Wachovia deal. Indeed, compared with the other proposals, the Wachovia option does come across as a more proactive proposal, notwithstanding the fact that Wachovia’s chief executive expressed reservations.

Mr. O’Neal would be entitled to a payout worth more than $274 million if he left after a deal, according to a pay analysis by James F. Reda & Associates, a compensation consulting firm, using yesterday’s closing price. The other options, a capital infusion and selling the Bloomberg stake, would convey to the market a notion that Merrill had concerns about whether it had enough capital available after the write-downs, these people said. Such vulnerability, perceived or real, could hurt a large investment bank like Merrill that relies on its capital and reputation to cut big deals or engage in sophisticated trading strategies.

The message here is plain and simple. The easy options to shore up Merrill's capital base could make matters worse by raising worries about the soundness of the firm. But any time a merger looks like a better solution than a capital infusion (and recall, sale of a 30% stake would also have triggered a big O'Neal payday), that says a firm is on the ropes.

The drama about Stan O"Neal is a sideshow to a much bigger and more difficult problem: what will it take for Merrill to right itself?

Two Thirds of CEOs Say They Are Overpaid

Apologies for having two Financial Times items in succession, but the FT all too frequently has the goods.

In a new item that so far had not been picked up by the Wall Street Journal, the Financial Times reports that a survey by the National Association of Directors found that two thirds of CEOs said CEOs were overpaid, and 80% of participating corporate directors agreed.

That of course begs the question; if there is collective agreement that CEOs are paid too much, particularly among the group that approves their pay packages, why does outsized compensation persist?

I can think of at least two reasons. One is that there is a well documented propensity for people to assume others are more biased than they are and will hew to those biases. For example, it turns out that members of selection committees for fraternities in the 1960s would turn down black candidates, not because they had any personal objection to them, but they assumed the others did. But it often turned out that a majority of members of not only the committee, but the club itself, felt the same way, yet too many were loath to bring up what they assumed to be a hugely divisive issue.

Second is that the survey was well designed. It did not ask "Are you overpaid?" That most certainly would have elicited a negative response. Depersonalizing the question yielded a more honest answer. Yet CEOs understand that their pay is set in relationship to the compensation of other CEOs. To get this negative a response when they know full well how the game works is quite an indictment.

From the Financial Times:

Most US corporate leaders believe chief executives are overpaid and do not provide value for money for their companies, according to a study that will embolden critics of excessive compensation.

The findings – to be published today by the National Association of Corporate Directors – are likely to strengthen calls by investors and politicians, including George W. Bush, US president, for restraint on executive pay at a time of growing income inequality in the US....

Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance.

Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”.

Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.

“There is an overall realisation that executive compensation is an area that boards and management are struggling with,” said Peter Gleason, chief operating officer of the NACD.

The issue is particularly sensitive because the gap between rich and poor in America has reached its widest point in more than 60 years.

Figures released last week showed the share of national income claimed by the wealthiest 1 per cent of Americans had reached 21.2 per cent – a postwar record – partly because of booming company profits.

Mr Bush last week told The Wall Street Journal that he thought some executive compensation was excessive and that some boards needed to improve their oversight of this.

Nearly 60 per cent of the directors polled by the NACD said the reason for excessive pay packages was the absence of objective ways to measure an executive’s performance. Nearly half criticised the use of options and equity awards that reward executives when the company’s share price goes up, rather than when its operations improve.

Investors have become more vocal in attacking what they often call “pay for failure” – large severance packages awarded to ousted chief executives.

Scrutiny of Pay Gap Between CEO and Direct Reports

The Financial Times reports today that institutional investors and the SEC are taking interest in the difficult-to-justify pay disparities between the CEO and his immediate subordinates at some public companies. And isolated data points, like Sallie Mae, suggest that the ones with the biggest gulf (in its case, ten times) aren't delivering commensurate performance.

A few corporate leaders recognize that a large gap is demotivating. GE's Jeff Immelt remarked:

The key relationship is the one between the CEO and the top 25 managers in the company, because that is the key team. Should the CEO make five times, three times or twice what this group makes? That is debatable, but 20 times is lunacy,

However, the facts on the ground indicate that Immelt's views aren't widely shared. A lot of CEOs appear to be suffering from what might politely be called acquired situational narcissism, or less politely, a belief in near-royal entitlement. From the Financial Times:

US companies are facing fresh pressure from regulators and shareholders to rein in excessive executive pay as research shows chief executives have been paid up to 10 times more than their top lieutenants.

The average total compensation for a S&P 500 chief executive was about twice as much as the second most highly paid executive last year, according to a study conducted for the Financial Times by the research group, Salary.com.

However, at SLM, the student loan group known as Sallie Mae, the pay of Thomas Fitzpatrick, chief executive, who resigned in May, was more than 10 times that of June McCormack, his executive vice-president.

At more than 30 other companies, the gap ranged from four times to seven times.

The Securities and Exchange Commission is believed to have asked a number of companies to explain the reason for large pay gaps between top executives, as part of a review of corporate pay.

In August, the regulator sent letters to more than 300 companies urging them to be more transparent in their disclosure of executive compensation practices. Several companies received specific questions about the executive pay gap, according to people who have seen the letters.

The Council of Institutional Investors, whose members have more than $3,000bn under management, has also voiced concern at large disparities in pay between executives.

Investors argue a huge pay differential may be a waste of shareholder funds; indicates the board is not an adequate counterbalance to the chief executive’s powers, and could drive away talented young executives.

“[The gap] is a red flag for investors. It is a classic sign that the board may be beholden to the chief executive,” said Christopher Ailman, chief investment officer of the California State Teachers’ Retirement System (Calstrs), the US pension fund.

Genzyme, where Henri Termeer, chief executive, earned more than seven times more than Peter Wirth, chief legal officer, said: “Our compensation structure for executive management is set so that there is a flat tier below Henri. Because there’s not a hierarchical approach here, [there is] a bigger gap between number one and number two.”

Other high-profile companies with above-average executive pay differential include the utility TXU, and the food group Heinz.

A related FT story sees the pay gap as a sign of corporate malaise:

After years spent focusing on the value of the princely pay packages commanded by corporate leaders, shareholders, and to a certain extent regulators, have begun looking at boardroom inequality.

Their argument is that a large differential between those at the top of the ladder and those just below – chief financial officers, division heads, or even superstar sales executives – is a symptom of deeper malaise.

Christopher Ailman, who manages more than $170bn for the California State Teachers’ Retirement System, believes that a yawning gap points to weak corporate controls. “Paying chief executives an excessive amount relative to their number twos is a warning signal that the chief executive may have the compensation committee sewn up and that the board is not doing a good job of the succession plan,” he says.

Others warn that funnelling a large part of the executive compensation pool to the boss can damage shareholders by demoralising senior management and future chief executive candidates.

“A large differential can actually harm performance because it is demotivating for the senior managers,” argues Ann Yerger, executive director of the Council of Institutional Investors,.

Two weeks ago, the Council wrote to the Securities and Exchange Commission, urging the regulator to ensure that “companies... adequately disclose each [executive’s] compensation and explain the reasons for the differences in the amounts awarded to each”.

Mark Van Clieaf, managing director of compensation consultancy MVC Associates International, says directors should police pay equity more strictly: “Large shareholders are asking about it, regulators are asking about it, so directors should take a look at the issue.”

Yet few dare quantify what an “excessive” differential actually is.

It will be revealing to see how much coverage this story gets in the US.

Narcissistic CEOs Produce More Volatile Performance

This Penn State study, reported at PhysOrg.com, ascertained that narcissistic CEOs gravitate towards bold moves, like big acquisitions or marked changes in strategy, which leads to more variable (although no worse on average) performance.

The interesting thing about this finding is the disconnect between Wall Street pressures and boardroom hiring practices. At least according to the raft of leadership books on the market, and the propensity for boards to hire CEOs that look like they came from central casting, bold leadership is perennially in fashion, and CEOs like Jeff Immeldt of General Electric (who refuses to pay himself too much out of concern that it would demotivate his top team) are the exception that proves the rule. But swashbuckling leadership is a close cousin to narcissism, which per the study, produces the sort of uncertain outcomes that Wall Street hates.

A question unexamined by this study is whether narcissistic CEOs have a greater propensity for criminal behavior when they can't get their way by legitimate means (one of the hallmarks of narcissism is lack of empathy, and the tendency to see others as objects to be used). While I am no therapist, Conrad Black, Jeff Skilling, Dennis Kozlowski, and Richard Scrushy seem classic examples of the type.

From PhysOrg.com:

Companies led by more narcissistic chief executives tend to make more frequent strategy changes, undertake larger and more frequent acquisitions, and have more extreme and irregular fluctuations in performance, according to new research from Penn State's Smeal College of Business.
Arijit Chatterjee, graduate lecturer, and Donald Hambrick, Smeal chaired professor of management, gauged the level of narcissism exhibited by 111 CEOs of computer software and hardware companies and compared it to the subsequent strategies and performance of their companies.

"Highly narcissistic CEOs -- defined as those who have very inflated self-views, and who are preoccupied with having those self-views continuously reinforced -- can be expected to engage in behaviors and make decisions that have major consequences not only for the individuals who interact directly with them, but also for broader sets of stakeholders," the researchers wrote.

They used five indicators to measure CEO narcissism: the prominence of the CEO's photograph in the company's annual report, the frequency of the CEO's name appearing in company news releases, the use of first person singular pronouns (I, me, mine, my and myself) by the CEO in interviews, and the CEO's cash and non-cash pay compared to the company's second-highest executive.

Using these measurements, Chatterjee and Hambrick developed an index, ranking the CEOs according to their levels of narcissism.

They then compared the CEOs' narcissism levels to their companies' strategic dynamism, acquisitions, and performance extremeness and fluctuation. Their results show that CEO narcissism is related to all four measures.

The data show that narcissistic CEOs tend to lead companies through more changes in strategic resource allocation and their companies experience higher highs and lower lows in organizational performance.

"While less narcissistic CEOs may be inclined to pursue incrementalist strategies that entail refining and elaborating on the status quo, more narcissistic CEOs gravitate to bold and highly visible choices," they wrote. "Thus, narcissism may be thought of as an ingredient that stimulates distinctive, extreme managerial actions."

Their research indicates no relation between executive narcissism and how well a company performs. "Although narcissists tend to generate more extreme and irregular performance than non-narcissists, they do not generate systematically a better or worse performance," they found.

"It's All About Me: Narcissistic CEOs and Their Effects on Company Strategy and Performance" is forthcoming in Administrative Science Quarterly.

Source: Penn State

Towers Perrins Stonewalling Congress on CEO Pay Inquiry

In Saturday's New York Times, Gretchen Morgenson reported that House Committee on Oversight and Reform had issued a subpoena to Towers Perrin, an executive compensation consulting firm, because it had failed to comply with an information request regarding potential conflicts of interest in its pay consulting business.

Now because this was a news story, rather than her weekly column, Morgenson had to hold her tongue, so I will fulminate on her behalf.

Anyone with an operating brain cell knows that the comp consultants have had a central role in burgeoning CEO pay. It's really simple. You create certain fictions about CEO compensation, like they have to be paid "competitively." This is an odd notion, given that corporations aren't baseball teams, swapping staff at regular intervals. The market for CEO comp should be pretty inefficient, given that CEOs don't trade often and aren't fungible (Steve Jobs may be brilliant, but how many companies could he run? You wouldn't put him at the helm of Ford or Chevron or Pfizer, to name just a few). And you have some examples of CEOs taking well below what they could extract. For instance, Jeff Immeldt of GE paid himself only $3.2 million last year because he believes a large pay gap between him and the rest of his executive team is demotivating.

But by making pay more transparent, the comp consultants have created the illusion of liquidity in the CEO market. If we pay our CEO too little, someone might bid him away! Yikes!

Now here is the inspired bit. By virtue of creating the fear of having an underpaid CEO, many boards set targets for where their CEO should be paid in their comparable universe (that universe is created by the Delphic comp consultant). Many board have set as a target that their CEO should be paid in the upper half of the comparable universe (many set a specific target, say 50th, 60th, 75th percentile). These targets are irrespective of performance. Performance incentives go on top of that!

Now, since no board wants to believe that it has a substandard CEO (in Lake Woebegone, all children are above average), most boards set a formal or informal target of having their CEO paid in the top half. This of course is a statistical impossibility, so companies raise their CEO's pay to keep him in the top group, which raises the averages, which forces companies whose CEOs whose pay has slipped on a relative basis to raise pay, forcing the average up again. It's like a greyhound race. No one is ever gonna catch that rabbit.

Now why would Towers Perrin need to be bludgeoned to cooperate while other comp consultants have responded to the House document request? My bet is their records have someone commenting knowingly on how this scam works. If you can maintain the pretense that you are an honest professional and the bad outcomes are an unfortunate side effect of you innocently trying to do your job, you pass go. But if you demonstrate awareness that there is a scam afoot, and knowingly perpetuate it, you go to jail, or at least get called bad names in public.

From the New York Times:

Towers Perrin, one of the nation’s largest executive pay consulting firms, was subpoenaed yesterday by a House committee after it failed to comply with a request for information about potential conflicts in its compensation consulting business.

Representative Henry A. Waxman, the California Democrat who is chairman of the Committee on Oversight and Government Reform, is examining the potential for conflicts of interest among pay advisers who provide other lucrative services to their corporate clients.

In May, he asked the largest firms in the industry for details on their client relationships and the revenues those ties have generated in the last five years.

The firms that received the requests included Hewitt Associates; Watson Wyatt Worldwide; Mercer Consulting, a unit of Marsh & McLennan; and Towers Perrin. The consultants were given a deadline of May 29. As of yesterday, Towers had not provided the requested material.

In a letter sent yesterday to Mark V. Mactas, chief executive of Towers, Mr. Waxman wrote, “Although other firms have made significant efforts to provide complete responses to the committee’s inquiry, Towers Perrin has provided virtually none of the responsive information.

“I regret that we reached this impasse,” Mr. Waxman continued, “and that the committee had to resort to compulsory process to obtain information on whether Towers Perrin’s advice to corporate boards on executive compensation is tainted by conflicts of interest.”

A spokesman for Towers, Joseph P. Conway, confirmed yesterday that the firm had received the subpoena.

“It has always been Towers Perrin’s intent,” Mr. Conway said, “to cooperate with the committee consistent with our commitment to our clients to maintain the confidentiality of their information.

“Towers Perrin is reviewing the subpoena and is in the process of alerting its clients,” Mr. Conway said. “Towers Perrin will respond to the subpoena consistent with our legal obligations.”.....

As consulting firms have grown more powerful in the pay arena recently, the potential for conflicts has risen. Consultants typically earn far more from actuarial and benefits outsourcing businesses than they do giving pay advice; as a result, critic say, companies hiring the same firm to do both may not be receiving unbiased advice on executive compensation.

The Securities and Exchange Commission does not require corporations to disclose whether the pay consultants they employ also receive revenues from contracts in their other operations.

Congressional investigators are not the only ones interested in receiving more details about possible conflicts among consultants. Investors have begun asking the companies whose shares they own for more disclosure about these ties.

For example, shareholders of Verizon Communications voted at the annual meeting last month on a proposal that would have required it to disclose professional relationships with its current or previous compensation consultants that might taint their independence. The proposal gained support from 47 percent of the shares voted.

When he requested information last month, Mr. Waxman said that “almost everyone agrees the extravagant increases in executive compensation make no sense. The question I’m looking at is whether potential conflicts of interest among compensation consultants and their corporate clients might play a role in some of the irrational compensation decisions.”

You can see from the discussion above that this isn't hard to understand. Do you think a comp consultant is going to justify a lucrative client relationship by recommending an less than generous pay package for the CEO?

And this problem is easy to fix if anyone had the guts. Require CEO and other top executive pay consultants to be engaged by the board of directors (right now, they are typically hired by the HR department, which is even more untenable, in terms of achieving objective outcomes) and bar firms that do top level comp consulting from providing other services to the same company. That would almost certainly lead to the comp consulting arms being spun off from most of these firms. And with the players now smaller and independent, a market might actually develop for more honest advice (it happened in the post-Enron era in M&A, where boutiques suddenly had the ear of the board because they were considered to be objective by virtue of not peddling fundraising services).

Even CEOs Who Make Bad Deals Come Out Ahead

While it's no news to anyone in M&A land that CEOs have considerable incentives to do deals, it's nice to see that the wider world is taking notice.

The dirty secret is that, at least the way the comp consultants cut the numbers, CEOs of bigger companies get paid more. So when a CEO winds up acquiring another company, his compliant board will usually approve a bigger pay package, even though, ahem, the CEO clearly has a conflict of interest in recommending the deal.

Mark Thoma points to a study by Jarrad Harford and Kai Li that finds that CEOs do better financially even when deals the recommend turn out badly.

The paper focuses on the compensation mechanisms, but I suspect, in some cases, a second force may also be at work. A deal can extend a CEOs tenure. Think of Carly Fiorina at HP. She clearly did not have a fix-the-company plan, ex acquisition (recall her failed pass at PriceWaterhouseCoopers before the acquisition of Compaq). Regardless of what you think of her leadership at HP, acquiring Compaq clearly bought her more time. A board will generally give a CEO eighteen months to two years to integrate a large deal. I doubt she would have lasted seven years at HP without a transaction.

From Harford and Li:

Following an acquisition of another company, chief executive officers' compensation levels usually increase, even when the purchase turns out to be unprofitable, according to researchers at the University of Washington and University of British Columbia. That's because while a bad merger can decrease the value of a company's stock and options, CEOs typically acquire new stock options once the deal goes through, thus making up for any financial losses suffered as a result of the buy.

"There are major personal financial gains to be made by CEOs after any merger or acquisition so even if it ends up being a financial loss, shareholders suffer but CEOs nearly always come out ahead financially," says Jarrad Harford, an associate professor of finance and business economics at the UW Business School and co-author of the study. "The net effect is that a CEO's wealth actually increases even if he makes a poor acquisition decision. The experience is quite different for the shareholders."

However, he adds, companies whose boards of directors are more independent from management and generally exercise stricter corporate governance are more likely to penalize executives for unprofitable merger deals.

For their study, the researchers examined 370 mergers of publicly traded U.S. companies between 1993 and 2000. They compared the wealth of the CEOs of the purchasing companies a year before and a year after the acquisitions. Their wealth was determined by calculating their salaries, stock and option grants, and the value of their portfolio of existing stock and options.

They divided the purchasing companies into two groups: those whose stock increased after the merger, and those whose stock suffered. The stock value of the underperforming companies lagged the broader market by roughly 52 percent. Yet because of new stock and option grants, three-quarters of the time those CEOs became wealthier despite the downturn.

“While CEOs are still better off making good acquisition decisions, there is little penalty to making bad ones, so this sets up a strong incentive to acquire, even when the chance of failure is high. The sheer magnitude of new stock and options grants given when the firm’s size increases more than offset the effect of the acquisition on the CEO’s pre-merger portfolio.”

The authors note that one way to evaluate the independence of a board is the proportion of board members who preceded the CEO, and therefore were not nominated to the board by the CEO.

"Investors who are concerned about evaluating a CEO's potential payoffs from undertaking future acquisitions should consider examining the strength of the board," said Harford.

The Breakdown of the Post War Social Contract

An article in the New York Review of Books, "The Specter Haunting Your Office," discusses three books, one by Louis Uchitelle, The Disposable American, meaning the disposable employee; one by Greg LeRoy, on the way corporations play states and muncipalities to extract economic concessions; and one by John Bogle, on "managers' capitalism" and how it is a corruption of what capitalism is meant to represent.

Towards the close of the essay, author James Lardner connects the threads:

From their different vantage points, Uchitelle, LeRoy, and Bogle are writing about the breakdown of what some have called the postwar social contract, and about the rise of a new "money power" more daunting, in some ways, than that of the late 1800s and early 1900s. To gain their political ends, the robber barons and monopolists of the Gilded Age were content with corrupting officials and buying elections. Their modern counterparts have taken things a big step further, erecting a loose network of think tanks, corporate spokespeople, and friendly press commentators to shape the way Americans think about the economy. Much as corporate marketing directs our aspirations disproportionately toward commercial goods and services, the new communications apparatus wants us to believe that our economic wellbeing depends almost entirely on the so-called free market—a euphemism for letting the private sector set its own rules. The success of this great effort can be measured in the remarkable fact that, despite the corporate scandals and the social damage that these authors explore; despite three decades of deregulation and privatization and tax-and-benefit-slashing with, as the clearest single result, the relentless rise of economic inequality to levels so extreme that since 2001 "the economy" has racked up five straight years of impressive growth without producing any measurable income gains for most Americans—even now, discussions of solutions or alternatives can be stopped almost dead in their tracks by mention of the word government.

The entire article is sobering, well argued, and very much worth reading:

The Disposable American: Layoffs and Their Consequences
by Louis Uchitelle

Vintage, 287 pp., $14.95 (paper)
The Great American Jobs Scam
by Greg LeRoy

Berrett-Koehler, 290 pp., $24.95
The Battle for the Soul of Capitalism
by John C. Bogle

Yale University Press,260 pp., $16.00 (paper)
1.

Donald Davis was not concerned about imports in the late 1960s, when he started out as CEO of the Stanley Works, the country's leading manufacturer of hand tools. By the early 1980s, the challenge of competing against inexpensive tools made in Taiwan, Korea, and China had swept most of Davis's other concerns aside. His first response was a plan to streamline management, reducing the company's white-collar ranks through attrition. An old-school CEO who had been with Stanley most of his adult life, Davis considered layoffs a last resort. But by the time he stepped down as CEO in 1987, hundreds of factory workers had lost their jobs on his orders.

His successor, Richard Ayers, had the advantage of knowing what he was in for. An industrial engineer by training, Ayers mapped out a long-term strategy that called for layoffs, plant closings, and outsourcing: sledgehammer and crowbar production was moved to Mexico; socket wrench production to Taiwan. But the company also invested in making its domestic operations more efficient, and Ayers took special care to preserve jobs and facilities in New Britain, Connecticut, where Stanley had been a major employer for more than a century. By the mid-1990s, revenues had stabilized, profits were up, and Ayers could reasonably tell himself that his "evolutionary" approach had worked.

Wall Street, however, was not impressed. Securities analysts, comparing the jobs eliminated by Ayers with the layoff numbers at other old-line companies—Scott Paper (11,000), Sears (50,000), General Motors (94,000)— suggested that Stanley's key problem might be leadership rather than imports. At age fifty-five, according to Louis Uchitelle's The Disposable American, Ayers concluded that he did "not have the stomach" for any more job-cutting.

When Ayers retired, Stanley's directors turned to an outsider. The new CEO, John Trani, approached the import question with a clear mind. In his seven years as CEO, he shifted virtually all tool production to East Asia and Mexico, closed forty-three of Stanley's remaining eighty-three plants, cut the payroll from 19,000 to 13,500, and reduced its presence in New Britain to, in Uchitelle's words, "a collection of mostly empty factory buildings and reproachful former workers."

Through the story of the three Stanley CEOs, Uchitelle traces a mental journey taken by a great many top managers over the past few decades, and it would be hard to find a better distillation of the new mindset than his brief account of an interview with Trani in November 2004 (just a few days before he, too, retired, with an $8 million bonus and a $1.3 million-a-year pension). "Layoffs and plant closings," Trani says, "are not such a rare event anymore that one generally makes a big deal out of them." Scarcely mentioning the laid-off workers, he acknowledges no hesitation, no regret—in fact, no alternatives. The story, as he tells it, comes down to the difference between successful leaders, who "look at reality as it exists," and unsuccessful ones, who make the mistake of "hoping for it to change."

Trani came to Stanley from General Electric. In his attitude toward layoffs he resembled his former boss, Jack Welch, who had pushed more than a hundred thousand workers off the GE payroll. Welch's combative style has gone out of fashion lately; in fact, Uchitelle had something to do with that. A longtime reporter for The New York Times, he was largely responsible for "The Downsizing of America," an attention-getting series of Times articles on the mass layoffs of the early and mid-1990s. Those articles helped inspire a backlash. Few CEOs, questioned now about layoffs, would permit themselves to boast, as Trani did, of "taking out" workers—as in, "We took out 23 percent of the people" at Best Access, one of the companies Stanley acquired. In his actions if not his affect, however, Trani speaks for a school of management that remains ascendant. He drove Stanley down the path of a great and continuing migration—away from the postwar view of the corporation, whose success rested on a secure workforce and a strong local economy, toward what Greg LeRoy, in The Great American Jobs Scam, calls the "rootless corporation," which defines success by financial measures alone, making it possible to "save" a company by destroying much of what it was.

"The Downsizing of America" came out in March 1996—not the best moment, in hindsight, for a 40,000-word lament on the theme of growing economic insecurity. Inflation and unemployment were falling. The stock market was rising. In Silicon Valley, Washington, D.C., and other centers of optimism, influential commentators were turning out books and articles intended to explain why, unlike previous good times, these could be expected to last virtually forever. Even many of Uchitelle's journalistic peers thought the Times had been too intent on telling an old, downbeat story to notice the new story of America's astonishing resurgence. In The Disposable American, Uchitelle makes it plain that he is writing about a long-term change—one that neither began nor ended in the 1990s, and one that transcends even the wrenching adjustment of an economy moving from manufacturing toward information and service. "The permanent separation of people from their jobs, abruptly and against their wishes," he asserts, has become "standard management practice."

It's a fair statement. Over the past quarter-century, the victims (and potential victims) of layoffs have come to include managers, professionals, and workers in such growth industries as banking and telecommunications. Hardly any company is too successful nowadays to consider a large-scale cutback in jobs. Early last year, Intel was showering cash on its shareholders in the form of dividends and share buybacks after reporting record 2005 profits of $12.1 billion (partly thanks to a custom-made tax break known as the American Jobs Creation Act). None of that kept CEO Paul Otellini from announcing, several months ago, plans to eliminate 10,500 jobs—10 percent of Intel's total—in order to become a "more agile and efficient" company.

The modern layoff is frequently a hidden layoff, entered in the personnel records as a buyout, an early retirement, or the severing of relations with someone deemed a contractor rather than an employee. Procter and Gamble has unloaded some 20,000 employees since 1993, Uchitelle says, while scarcely registering a blip on the Bureau of Labor Statistics' count of involuntarily displaced workers. With all their omissions, however, even the official data suggest a sharp decline in job security. In 1978, a middle-aged American male could expect to remain with the same employer for eleven years, according to BLS figures. Now it's 7.5 years. Over that same period, the average duration of unemployment has lengthened from thirteen to almost twenty weeks. The long-term economic damage that people suffer has grown, too. If you factor in the impact of foregone pay raises in the old job and lower wages in the new one, according to the Princeton University economist Henry S. Farber, the typical laid-off college graduate now suffers a 30 percent loss of income, up from 10 percent in the early 1980s.

Uchitelle sees Jack Welch as a pivotal figure. Before he came along, a CEO was expected to manage the existing enterprise. Welch enlarged the job description: lifting a page from the corporate raider's playbook, he promised to manage the shareholders' capital as well, by maintaining a steady lookout for more profitable places to put it. There is a case to be made for his approach. It may be better for a company—better even for its workers, and for the economy—to have layoffs spread over time rather than deferred until a moment of crisis. What today's managers like to call a "flexible workforce" has arguably helped American corporations seize opportunities they would have missed if the US had the kind of employment protection that exists in, say, France. Uchitelle is not dogmatic on these points. He simply wants it acknowledged that we are going through something more than a few bumps on the road to "a new equilibrium at the high end of innovation and production." Permanent disequilibrium, he argues, would be a more accurate picture of where we're headed.

Uchitelle's harsh view of the new workplace order sets him at odds not only with corporate leaders but with economic advisers to the last four presidents. Layoffs, he reminds us, were a hot issue in the 1992 presidential campaign. Although Ross Perot's "great sucking sound" is better remembered, Bill Clinton also came down hard on companies that closed factories where Americans made "a decent standard of living" while opening "sweatshops to pay starvation wages in another country." Candidate Clinton wanted corporations to spend at least 1.5 percent of their earnings on "continued education and training." (Companies that made such a commitment were less likely to let employees go, research showed.)

But once he became President Clinton—and as the budget deficit moved to the center of his thinking—continued education and training got a new name and spin. Now the Clintonites began to speak of "lifetime learning," which was more exhortation than policy and directed mainly at employees, not employers. Americans who had lost their jobs or who sensed their skills becoming outmoded were told that they could take charge of their careers, go back to school, and emerge retooled and "reempowered."

While the policy experts may have believed some of this, it bore little relation to the experience of laid-off workers around the country, according to Uchitelle. There were many retraining programs, but scarcely any actual retraining, he says, largely because few appropriate jobs were waiting to be filled even in the surging economy of the late 1990s. The first order of business in many retraining programs was to defuse anger and lower expectations—a process known in the trade, he reports, as "housebreaking." In The Disposable American, Uchitelle describes an Indianapolis program created largely for United Airlines mechanics who lost their jobs when the company bailed out of an advanced maintenance shop for narrow-body jets. The mechanics show up looking for tips about companies that might be hiring or new careers beckoning. What they receive, mostly, is airy wisdom about attitude, interpersonal relations, and the inner self; at least one classful gets free copies of the global best seller Who Moved My Cheese?, which warns those in economic distress not to be led into indignation or dismay by the overly complex human brain. Far better, the book suggests, to adopt the existential pragmatism of mice: No cheese in that corner? Check out this corner.

Uchitelle is a fine reporter. In The Disposable American, he follows several of United's mechanics as they head out into the world of the downsized. After twenty-five years in the airline industry, Ben Nunnally, a specialist in delicate wingskin repairs, becomes a window-washer. Erin Breen goes back to college, gets an engineering degree, and winds up as a janitor in the Indianapolis public schools. Tim Dewey, who has been through one layoff already, resolves to go into business for himself rather than run the risk of a third. With his wife and children, he moves to the Florida panhandle to run a water taxi service, impulsively charging the $54,000 purchase price on three credit cards. He spends five months "hawking boat rides to passing tourists," as Uchitelle puts it, before the business goes bust and the family goes bankrupt. A few hard knocks later, he grabs a chance to return to his old line of work for $17 an hour (half his United pay) as an employee of one of the non-union subcontractors he and his former coworkers had scorned.

As well-paid blue-collar workers, union members, and, for the most part, males without college degrees, United's mechanics were out on a limb. But Uchitelle finds much the same pattern of downward mobility among women, white-collar workers, professionals, and executives. The "vast majority of laid-off workers never get back to where they were," he writes. Moreover, he finds, being laid off is a "fundamental in-the-bones blow to ego and self-worth." People are "cut loose from their moorings and rarely achieve in their next jobs a new and satisfactory sense of themselves."

"The Downsizing of America" was criticized for treating the postwar era as the natural order of the US economy. The relatively secure employment of the 1950s, 1960s, and 1970s was historically exceptional, Uchitelle acknowledges, and it was secure mainly for Americans fortunate enough to land full-time jobs with major corporations or professional firms. Nevertheless, he regards the ideal as one to cherish and build on. To Uchitelle, the labor practices that others now celebrate as bold and unprecedented look a lot like those of the nineteenth-century robber barons. We should hold today's corporate leaders to a higher standard, he argues, because they know better —or, at any rate, because more is now known about what stable employment means to mental and physical health.

Resentment and self-castigation are recurring themes in The Disposable American. Persuaded to accept a buyout package after twenty-five years at Procter and Gamble, Elizabeth Nash seems unable to find any source of self-confidence other than the scraps of contract work that her former employer throws her way. "It vindicates that I have value," she says. Some people, of course, have more of what it takes to hop from job to job and stay afloat emotionally as well as financially. Among the United mechanics, Uchitelle cites Craig Imperio, who after moving to Georgia and taking a job with Pratt & Whitney, the engine maker, networks around the clock, plays golf with his superiors, and earns a promotion to quality engineer. (Even then, his $50,000-a-year salary remains about $20,000 short of what he made in Indianapolis as a mechanic.) Imperio's brand of resilience could become more widespread as time passes and freelancing becomes an increasingly common way of life. But in the here and now, Uchitelle reasonably insists, lifetime learning is a delusion—and a cruel one, providing cover for layoff-prone companies and setting unrealistically high expectations for layoff victims, who then blame themselves when their experiences fall short.

Layoffs can be unavoidable, Uchitelle acknowledges. His quarrel is with corporate leaders who do not seek to avoid them—and with those, in the corporate world and elsewhere, who count the cost purely in material terms. In conversations with layoff victims, Uchitelle emphasizes the systemic nature of the problem. People tend to "agree perfunctorily," he writes, before going "right back to describing their own devaluing experiences, and why it was somehow their fault or their particular bad luck." Even when thousands of jobs are eliminated at once, few can depersonalize the experience.

Uchitelle resists the temptation to spell out an anti-layoff program. His caution arises partly out of a temperamental inclination to let his reporting speak for itself, and partly out of a bleak assessment of the political world's readiness to entertain the measures he would be tempted to propose. His policy recommendations really boil down to one: when we think about layoffs, we should consider the full range of consequences, and, above all, the emotional and psychological ones, which are, he says, "deep, consistent, and ignored in the political debate."

Ignored and, as he shows, compounded—and not just by callous rhetoric. United could abandon its Indianapolis center with impunity, turning its back on a spectacularly efficient facility, because it would not have to continue making mortgage and maintenance payments of $37.5 million a year. That responsibility passed to the taxpayers of Indiana and Indianapolis under the terms of a 1991 agreement in which United had received the land and $320 million in cash—more than half the facility's total cost. The city and state had done this in the name of "economic development," a seedy business that is briefly discussed in The Disposable American and thoroughly dissected in Greg LeRoy's The Great American Jobs Scam.
2.

The economic development story goes back to the 1930s when a group of southern governors set out to capture some of the manufacturing business of the North by offering cheap capital on top of the traditional lure of cheap labor. In more recent decades, the practice has gone national, and the private sector has taken firm control. To work their will with job-hungry public officials, corporations now routinely deploy teams of lobbyists, site consultants, and other hirelings. The formula rarely fails: drop word of a planned expansion or relocation; create the illusion of a wide-ranging search; overstate the company's own investment and the number of jobs involved; hire fancy experts to talk about the economic ripple effects; walk off with huge subsidies and tax concessions.

Among the southeastern states, North Carolina once had a reputation for refusing to play the economic development game; its relatively prosperous economy was founded on infrastructure, education, and public investment. Nevertheless, the state was easy prey for Dell Computer when, in 1994, the company dangled the prospect of a factory in the Piedmont Triad area. So anxious was the administration of Governor Mike Easley to land the prize that state officials became stooges in Dell's efforts to pit one North Carolina community against another. The company eventually wangled $37 million in tax incentives out of Winston-Salem and Forsythe County, on top of a $267 million subsidy from the state; the total far exceeded the cost of the plant property, and construction combined. After the deal was made, leaked documents revealed a negotiating process that resembled an organized-crime shakedown. "[I'm] not wowed here," Dell's chief emissary complained at one point, adding that a twenty-year income-tax exemption was "my line in the sand." A few weeks later, he was threatening to pull out "unless I can get that income tax resolved."

Was Dell really prepared to go elsewhere? Most companies, LeRoy shows, enter the process with their minds made up. Site selection experts, when they are not off helping companies stage their elaborate "searches," acknowledge that business fundamentals, such as access to key customers and suppliers, generally carry more weight than subsidies do. But while the game may have little to do with where companies decide to locate, it has everything to do with the taxes they pay. LeRoy puts the national cost of these deals at $50 billion a year; they go a long way, he says, toward explaining a sharp decline in corporate taxes as a share of state revenues— from 9.7 percent in 1980 to about 5 percent today. The falloff in some states has been even more precipitous. Corporations paid a third of all taxes in Arkansas as recently as the 1970s; by 2002, the figure was 2 percent.

Beyond the injury to city, county, and state treasuries—and the services they fund—the economic development process "demeans" and "degrades" public officials, LeRoy writes. He means not only the officials who participate, but also those who are cut out of the process—such as the school board members who get "no say in property tax abatements that will corrode their budget" or the revenue director whose "sober advice is upstaged by the frothy projections of an economist rented by the Chamber of Commerce." The rules are designed to bestow the biggest rewards on the companies least likely to show any true attachment to workers or communities. New businesses are subsidized at the expense of existing ones. Big-box retailers gain while independent merchants lose. Commercial and social life is pulled away from Main Streets and downtowns toward malls and strips. Local and state leaders have been known to grovel before telemarketing firms, gambling casinos, and the operators of private prisons.

LeRoy is an activist. His organization, Good Jobs First, has worked with unions, environmentalists, and citizen watchdog groups to resist the giveaways. But realism often compels them to aim for modest goals, such as job-quality guarantees with "clawback" provisions calling for the recovery of taxpayer funds if a company fails to deliver. LeRoy foresees a long campaign of organizing and consciousness-raising before it is even worth talking about more sweeping reforms.

That is about how Uchitelle sizes things up, too, and it is a conclusion shared by John C. Bogle, author of The Battle for the Soul of Capitalism. Bogle has been an investor and innovator in financial management for close to fifty years. He was railing against the chicanery and high fees of the mutual fund industry before Eliot Spitzer had been to law school. Vanguard Management, which Bogle founded in 1972, became the biggest company in the field by keeping commissions low and transactions infrequent—and advertising it. Bogle went on to invent the index fund; while innumerable others claimed the ability to beat the market, he merely offered to approximate the market year after year. That proved to be a better deal for most clients, as he had theorized.

After a heart transplant ten years ago, Bogle retired to a life of full-time hell-raising. The Battle for the Soul of Capitalism is his response to the recent corporate scandals—Enron, MCI WorldCom, and Tyco among them. Not being a prosecutor, though, Bogle fails to see much difference between the acts that sent Jeffrey Skilling, Bernard Ebbers, and Dennis Kozlowski to prison and a host of more common and accepted forms of executive self-enrichment—for example by playing around with employee pension funds in order to inflate company profits and bonuses. At Verizon, Bogle notes, bonuses for the year 2001 were based on profits of $389 million, which rested, in turn, on a supposed $1.8 billion in pension-fund gains. By the time the company reported those numbers, however, the stock market bubble had burst, making it clear that Verizon's pension funds had actually lost money that year; as it turned out, they had lost a staggering $3.1 billion, obliterating all the claimed profit and then some. Verizon, moreover, was only one of 1,570 companies—"an enormous part of the giant barrel of corporate capitalism"—required to restate corporate earnings for one or more of the years 2000–2004; and "I have not heard of a single instance," Bogle adds, "in which...bonuses have been recalculated and the overpayments returned to the stockholders."

Since the publication of Bogle's book, executives and directors of more than 250 companies have come under suspicion of profiting from fraudulently timed stock option grants. The whistle was blown by Erik Lie, a professor of finance at the University of Iowa. Through statistical analysis, he established a pattern that could not be explained by chance, thus giving new meaning to the term "probable cause." His 2005 paper "On the Timing of CEO Stock Option Awards," prompted investigations by The Wall Street Journal and eventually the Justice Department and the Securities and Exchange Commission; their objective, however, was to prove what Bogle might consider a minor point, for, in his mind, stock options were a scam to begin with. In the overheated market of the late 1990s, he shows, options—backdated or not—brought windfall gains to virtually all executives, including some who were leading their companies to ruin while concealing the evidence from (among others) the eventual purchasers of their stock.

Viewing these evils through a shareholder-rights lens, Bogle attributes them to a triumph of "managers' capitalism" over "owners' capitalism." But while he offers plenty of evidence to justify his low opinion of "our imperial chief executives" with "their jet planes...their pension plans, their club dues, their Park Avenue apartments," his argument ranges well beyond the territory suggested by the manager/ owner framework. In almost all their recent misdeeds, he demonstrates, self-serving executives have been abetted by self-serving directors, securities analysts, auditors, lenders, investment bankers, and others. And while shareholders have suffered in case after case, many could be said to have brought their losses on themselves by being just as fixated on market trends—and just as oblivious to business realities—as anyone else in the equation. To Bogle's dismay, few of today's shareholders have much appetite for the rights he asserts on their behalf (over the election and removal of corporate directors, for example); most seem content with the only right that today's executives would willingly grant them —the so-called "right of exit," which gets exercised nowadays with promiscuous frequency, in Bogle's judgment. Twenty years ago, the annual rate of share turnover was about 25 percent; by 2004, he says, it was 150 percent. That kind of manic buying and selling, Bogle convincingly argues, generates wildly irrational levels of market volatility and endless opportunities for insiders to play the market for short-term gain.

Institutional investors now control approximately two thirds of all publicly traded stock in the US. Bogle has for years been trying to mobilize these giants into a new community of owners, capable of restraining corporate avarice and opportunism. Except for a few unions and public pension funds, he has found few takers. Not a single "mutual fund firm, pension manager, bank, or insurance company," he writes, "has ever sponsored a proxy resolution that was opposed by the board of directors."

"Managers' capitalism," then, is Bogle's shorthand for a system of rules, practices, and standards of behavior designed to bring quick and sure rewards to a few at long-term cost to many. Executives are not the only suspects here, and shareholders are not the only victims.[*] Often, Bogle observes, workers and shareholders get defrauded together. That is obviously true when managers cook the books; it can also be true when they cook up dramatic "restructuring" plans entailing mass layoffs. As Uchitelle points out, these plans often generate smaller-than-anticipated savings and bigger-than-anticipated costs—in morale and trust, especially. The point of many recent layoffs has been to free up capital for the repayment of debt incurred in mergers and acquisitions; those deals have a notably bad track record of their own. To understand why so many mergers continue to occur—$3.79 trillion worth in 2006—Bogle suggests that we consider the consequences for the executives who arrange them: not just the bonuses and the increased pay and power, but the ability to "take huge writeoffs—largely ignored by market participants —and create 'cookie jar' reserves"—paper assets created through mergers —"available at the beck and call of management to inflate future earnings on demand."

From their different vantage points, Uchitelle, LeRoy, and Bogle are writing about the breakdown of what some have called the postwar social contract, and about the rise of a new "money power" more daunting, in some ways, than that of the late 1800s and early 1900s. To gain their political ends, the robber barons and monopolists of the Gilded Age were content with corrupting officials and buying elections. Their modern counterparts have taken things a big step further, erecting a loose network of think tanks, corporate spokespeople, and friendly press commentators to shape the way Americans think about the economy. Much as corporate marketing directs our aspirations disproportionately toward commercial goods and services, the new communications apparatus wants us to believe that our economic wellbeing depends almost entirely on the so-called free market—a euphemism for letting the private sector set its own rules. The success of this great effort can be measured in the remarkable fact that, despite the corporate scandals and the social damage that these authors explore; despite three decades of deregulation and privatization and tax-and-benefit-slashing with, as the clearest single result, the relentless rise of economic inequality to levels so extreme that since 2001 "the economy" has racked up five straight years of impressive growth without producing any measurable income gains for most Americans—even now, discussions of solutions or alternatives can be stopped almost dead in their tracks by mention of the word government.

The rules, procedures, and understandings of the postwar social contract were designed for a world in which practical forces kept businesses anchored in geographical place, reinforcing the sense of obligation that many corporate leaders felt toward workers and communities. That being said, those arrangements were spectacularly successful in creating a broad, accessible, and secure middle class, and in bringing unprecedented transparency and fairness to the hazardous relations between individuals (whether customers, workers, neighbors, or shareholders) and corporations.

In addition to being good for the society at large, the postwar social contract turned out to be very good for American business. (No matter what they may say about the role of government, today's corporate chieftains and financiers—the scalawags and the rest—owe their fortunes in no small part to the legacy of trust in the financial markets created by the securities regulations of the New Deal era and onward.) Economically and in other ways, then, the future will depend on our ability to find more durable means toward the same ends; and while none of these books lays out a blueprint, taken together, they suggest a few operating principles.

The economic policy of the United States has in recent memory been directed almost entirely toward the goal of growth, and treated, accordingly, as the preserve of experts and corporate and financial insiders. Policy initiated outside this preserve has been limited, for the most part, to a set of narrowly defined issues (such as health care, retirement security, pollution, etc.) considered fit for democratic deliberation. This compartmentalized approach, we now know, is guaranteed to be an exercise in damage control, requiring obsessive vigilance and leaving a trail of frustration. Instead of trying to prod or seduce companies into doing what they cannot justify from a profit standpoint, we should be trying to bring everyday corporate thinking into rough alignment with the goals of society as a whole.

That will mean, as Bogle says, finding efficient ways to check the speculative excesses of today's financial markets and cut down on the tremendous amount of energy and human as well as economic resources that go into the pursuit of what he calls "aggressive financial targets" at the expense of "character, integrity, enthusiasm, conviction, and passion." It will also mean (in exchange for the privileges and rewards of incorporation and access to regulated financial markets) coming up with mechanisms to recognize the stakeholder status of longtime employees and local communities, and— as we are just beginning to do on environmental issues—bringing some of the intangible concerns of work life and community and social wealth onto the corporate balance sheet.

Devising workable policies in service of these aims; forging new approaches into a coherent and convincing program; looking for strategic ways to loosen the hold that the free-market mythology still has on us—that is the great challenge of this fluid moment in our national story. It is a project filled with difficulties, and, as yet, not so obvious potential. The injuries examined by these books are felt, to one degree or another, by most Americans. A countermovement might eventually be as broad as the harm, reaching across some of the lines that have defined American politics, unconstructively, since the 1970s; such a movement could, in time, draw support from inside as well as outside the business world, since, as Bogle so plainly shows, many corporate decisions reflexively attributed by supporters and critics alike to a "bottom-line mentality" in fact serve what he calls "the wrong bottom line"—one that not only shortchanges investors but tramples on many of the impulses that people naturally bring to the work of creating and building businesses.

Most Americans are troubled by the culture of dealmaking and financial engineering and insider self-enrichment that Bogle deplores; by the callous treatment of workers and work life that Uchitelle describes; by the erosion of communities and community institutions that LeRoy examines. Not very far below the political surface, most of us feel some version of the same vexed ambivalence toward corporate America—dazzled by the conveniences and comforts it delivers, yet resentful of the tradeoffs that it continually demands; few Americans would be anything but grateful if our corporations and financial institutions could develop some respect for our non-material and non-individualistic selves. It is hard to imagine such a fundamental transformation of these giant institutions. It is even harder to imagine a better world in which they remain essentially what they are.

Former Goldman Co-Chief Calls Wall Street Pay Shocking

John Whitehead, former co-chairman of Goldman, who with John Weinberg, presided over the firm when it went from being a commercial paper dealer and institutional equity broker to a top investment bank, decried Wall Street compensation levels in a Bloomberg interview:

"I'm appalled at the salaries," the retired co-chairman of the securities industry's most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are "shocking," Whitehead said. "They're the leaders in this outrageous increase."

Whitehead went even further, recommending the unthinkable, that Goldman cut pay:

Whitehead, who left the firm in 1984 and now chairs its charitable foundation, said Goldman should be courageous enough to curb bonuses, even if the effort to return a sense of restraint to Wall Street costs it some valued employees. No securities firm can match the pay available in a good year at the top hedge funds.

"I would take the chance of losing a lot of them and let them see what happens when the hedge fund bubble, as I see it, ends," Whitehead, 85, said....

Goldman during its rise to preeminence had a very different compensation formula. The joke at the firm was that partners lived poor and died rich. That wasn't precisely true, but new partners actually had lower cash earnings than senior vice presidents (their interest on the debt borrowed to buy their partnership interest left them with modest pay packages in their early years as partner, a brilliant formula to keep them working hard). Consider that Bob Rubin, who was co-chairman of the firm after the Whitehead/Weinberg era, had an estimated net worth when he left the firm of $100 mill on. Not shabby, but the point is that Blankfein in one year earned half of what Rubin made in this career at Goldman.

Whitehead is correct. Wall Street pay is unseemly and unjustifiable. But he errs in seeing this as a Wall Street phenomenon. Whitehead comes from another age, when investment bankers saw themselves as serving corporations, were concerned about looking too flashy (Gucci loafers were not acceptable footwear at Goldman), and there was a strong sense of noblesse oblige. Today, Wall Street sees itself in the driver's seat, telling public companies like Costco that they should pay workers less and charge more for their products so they can deliver higher margins. Traders, who unlike investment bankers can measure their personal bottom line, are ascendant, and they have a notoriously myopic perspective. People I know at Goldman compare the current management group unfavorably to that of earlier eras.

But Wall Street's behavior is part of a much larger change in cultural attitudes. In the 1980s, RJR's private jets were seen as a sign of corporate excess; it's now routine for corporate executives to use private planes. Lee Iacocca took a $1 salary while turning around Chrysler. Now, CEOs of distressed companies demand if anything higher than average compensation, allegedly for the difficulty and risk of the assignment. Anyone who has loyalty to the larger enterprise or society is a chump; the accepted, even celebrated posture is get as much as you can, as fast as you can, regardless of the collateral damage. A study by MIT economists Frank Levy and Peter Temin confirms that institutional behavior and social attitudes have played a significant role in the increase in income inequality.

Sadly, Whitehead's railings are likely to be seen as a sign that he is out of touch, rather than an indicator that social bonds are unraveling.

Krugman: Disconnected? No, But Not on the Mark

Paul Krugman's Monday op-ed piece, "Another Economic Disconnect," attracted the normal amount of attention in the blogsphere (which is to say quite a bit) with less enthusiasm than usual. And I must say I understand why. This piece was a little flat, and managed to miss some key issues.

Disclosure: I am a fan of Krugman's, and am also sympathetic to his problem of needing to be clever twice a week, in a tightly constrained number of words, and appeal to a mass audience without garnering the ridicule of Serious Economists.

Part of the reason for the lack of enthusiasm was that Krugman is a bit late to his topic, which is that high corporate profits have not been accompanied by increased pay to workers. To be a bit more econo-geeky about it, this recovery has been starkly different from past ones in the share of GDP growth going to profits versus labor. In every previous recovery, the preponderance of GDP growth (on average, over 60%) has gone to wages (a combination of wage increases and increased hiring). The lowest proportion heretofore was 55%. Our current recovery? 29%. This is a huge disparity, one that merits comment.

This isn't news; our colleague Susan Webber discussed it at some length in "The Incredible Shrinking Corporation," in the November/December 2005 issue of the Conference Board's magazine. And as this trend has continued, it has gotten more widespread notice.

So why has the pattern changed so dramatically with this recovery? Krugman isn't really sure, he ruminates, and the lack of confidence in his ideas no doubt contributed to the lukewarm reader response. He comes up with two theories, lack of confidence and stock buy-backs:

Nonresidential investment — that is, investment other than housing construction — has grown very slowly by historical standards. As a share of G.D.P., nonresidential investment remains far below its levels of the late 1990s, and it has been declining for the last two quarters.

Why aren’t corporations investing, and what does the lack of business investment mean for the economy?

It’s possible that sluggish business investment reflects lack of confidence in the economic outlook — a lack of confidence that’s understandable given the bursting of the housing bubble, which has already caused G.D.P. growth to slow to a crawl.

But as Floyd Norris recently reported in The Times, there is a more disturbing possibility. Instead of investing in physical capital, many companies are using profits to buy back their own stock. And cynics suggest that the purpose of these buybacks is to produce a temporary rise in stock prices that increases the value of executives’ stock options, even if it’s against the long-term interests of investors.

It’s not a far-fetched idea. Researchers at the Federal Reserve have found evidence that company decisions about stock buybacks are strongly influenced by “agency conflicts,” a genteel term for self-dealing by corporate insiders.....

[L]ow investment may be one reason productivity growth has slowed dramatically over the last three years — another development that hasn’t received as much attention as it should.

In any case, next time someone tells you that any action that might reduce corporate profits a bit — like actually enforcing health and safety regulations or making it easier for workers to organize — will reduce business investment, bear in mind that today’s record profits aren’t being invested. Instead, they’re being used to enrich executives and a few lucky stock owners.

While Krugman's general conclusions aren't wrong, the mechanisms are a lot more complex. In this modern world, if you are going to accuse Corporate America of bad behavior, you need to characterize it in such a way that they can see themselves (or at least their peers at the country club) in the mirror. Otherwise you are just preaching to the converted.

I see corporate chieftans as much victims as perps. The people really pulling the strings are Wall Street, specifically analysts, investment bankers, and the financial press (I used to be one of them, so I speak with some knowledge). That's why accusing CEOs of greed isn't a sufficient explanation. Yes, there are some who are pigs at the trough. But most won't (can't?) see themselves in that light, in part because they are surrounded by enablers (particularly compensation consultants) who have an incentive to push pay to even higher levels (but that's another long discussion).

The main driver of this behavior isn't so much greed as extreme short-termism and insecurity. Once upon a time, most companies had 5 and 10 year planning horizons. Now they are fixated on the quarter. And if your focus is very short term, the only activity that produces certain results is cutting costs. That will provide an quick uptick in profits. Anything else takes time and involves risk. I have heard stories from all fronts of companies cutting investments essential to growth, like marketing and advertising, to "make the numbers." One telecom would not spend to advertise a second line service, its most profitable activity, even though the campaign had an 11 month payback. That wasn't good enough. Simiarly, major companies will routinely impose firm-wide hiring freezes. That makes no sense, since some areas will clearly have high growth potential and would recoup the investment in increased staff.

So how does this cost fixation relate to wage stagnation? Easy. Costs key off of headcount. So the first line of defense is to contain or better yet reduce headcount. And the shrinking employment at large corporations gives them considerable bargaining power over those who remain. Although white collar wages haven't suffered like manufacturing pay, everyone I know who is at a large company is doing at least 1 1/2 jobs. So their pay has effectively been cut too.

Why do companies care so much about profits? It's because Wall Street likes predictable and increasing profits, a nice orderly artificial progression of numbers (the pressure to produce pretty figures helped create the accounting scandals of 2001-2002, plus non-criminal forms of earnings smoothing).

And why does Wall Street hold the whip hand? My view is the driver isn't greed per se but a more poisonous combination of fear and greed. The markets and the financial press are punitive if a company falls short of its targets, and if it happens more than a couple of times, a CEO is on his way out. So CEOs are sensitized to stock price declines. It's not about losing their stock options but about losing their jobs and being criticized in the press (and remember, CEOs get a great payday when they are pushed out). And because the risk of getting fired is real (even if the consequences aren't all that bad), they and their minions use it to rationalize their pay. So ego may be as powerful, if not a more powerful, factor in this calculus.

One might imagine CEOs and top executives as being in a cult, or some other form of alternative reality, where things that look indefensible to mere mortals are accepted, even common, in that realm. That doesn't justify their behavior, but it may help explain it.