Evil Geniuses: The Unmaking of America: A Recent History (23 page)

The most obvious way to make corporate executives obsess more over their stock price was to start paying them in shares of company stock instead of cash. Until the late 1960s only about one in five senior executives at big U.S. corporations were being paid partly, and fairly minimally, in stock options. In the 1970s a new standard accounting rule allowed corporate financial statements to pretend that stock-option pay didn’t really count as a corporate expense—free money!—which naturally encouraged the practice. By the 1980s a third of senior executives’ pay came from stock and stock options. The IRS code was tweaked in 1993 to encourage it some more—from then on, any
cash
salary over $1 million was no longer tax-deductible at all for companies, but
stock options
remained fully deductible. So by the end of the 1990s, fewer than one in five senior executives
weren’t
getting stock options, and stock constituted half their compensation. Recently options and other stock awards amounted to two-thirds of senior executive pay, and for the highest-paid ones even more.

Making executive pay more stock-based at least had a plausible rationale, like putting a shock collar on a dog to make it behave but mainly rewarding it with extra delicious treats when it’s a
good
boy,
good
girl. But what’s so revealing about this change during and after the 1980s was the sudden growth in America of the
amounts
of that executive pay. For forty years, from the 1940s through the ’70s, the compensation of the top three executives of the largest companies had increased modestly, less than 1 percent a year, from the equivalent of $1.4 million on average to $1.8 million. Then it suddenly went crazy, particularly during the 1990s, so that by the early 2000s, those executives were receiving an average of $13 million a year. In the 2010s the average compensation of the five hundred highest-paid executives of public companies was $30 million. Why did CEOs and other top executives suddenly start getting paid ten and twenty times as much as they’d been paid before, and lots more than their peers in the rest of the rich world? I think the answer is threefold.

First and most simply, greed and shamelessness and shameless greed had been normalized. In American capitalism’s upper precincts, a kind of self-justifying orgiastic hysteria took hold, particularly in finance. It’s a spectacular illustration of the tacit across-the-board decision then that economic boats would no longer rise together, that it’d be
fine
to increase inequality to staggering new levels.

Just as CEOs’ compensation rose steadily but modestly for a half-century, the premiums they got compared to their employees were also more or less steady, reflecting the all-boats-rise norms of the American social contract. From the 1930s through the ’80s, the top three executives at the fifty largest U.S. corporations were paid between thirty and sixty times as much as their average employee.

But then in just a dozen years, that ratio quadrupled, so that by 2003 those three top bosses on average were earning 219 times as much as their average employee. The ratio between the pay of the average worker and that of the CEO climbed even higher and remains close to three hundred. Some U.S. CEOs—at Starbucks and Disney, for instance—are paid one thousand times more than their median employee.

Paul Volcker, the former chair of the Federal Reserve and of a Wall Street investment bank, said not long before he died recently that “a kind of contagion [was] at work,” the profligacy symptomatic of a mass hysteria emanating from Wall Street.

Do the CEOs of today’s top banks (or other financial institutions) really contribute five to ten times as much (in price-adjusted terms) to the success of their institution, or the economy, as their predecessors did forty or so years ago? I have my doubts. At least, it doesn’t show up in the economic growth rate, certainly not in the pay of the average worker, or, more specifically, in an absence of financial crises.

The second factor driving the madness was perverse but more quasi-rational: if the goal of shareholder supremacy was for hired managers to resemble owners psychologically, didn’t making executives rich enough to
live
like Scrooge McDucks have a certain sick logic? Furthermore, in the Fortune 500 boardrooms where pay packages are approved, who was going to argue that smart, hardworking people like themselves didn’t finally
deserve
to be paid these vast sums? Besides, they could say and sincerely believe starting in the 1980s that “deserve” is totally subjective, that pay is determined and ratified by the
market,
and that market judgments are final…even though, as some of them admit privately, with a shrug and a smile, the top-executive job market isn’t really a free market but more of a clubby, crony-capitalist cartel practically immune to true market forces.

Third and finally, the extra billions in compensation funneled by Wall Street to managements of all the major corporations starting three decades ago amount to a de facto gargantuan bribe to
obey Wall Street,
thus extending and consolidating Wall Street’s power over the entire economy.

That last point is not a conspiracy theory. I’m not suggesting that the 1990s pay increases of 500 percent or 1,000 percent were designed with that in mind, as part of a grand master plan by the financial sector for world domination. But it did work out like that, one more powerful new tether making America more beholden to Wall Street, financialized. Nor was private equity invented by the financial sector in order to give themselves more direct, hands-on control over more and more of the economy, but that was what happened. Until the 1980s, when private equity firms arose, Wall Street bankers were just bankers, middlemen providing capital to companies but not actually presuming to run the companies, let alone remake or dismantle or loot them. Now there are more than two thousand private equity firms in America owning and running businesses worth around $2 trillion.

But finance came to dominate the rest of the corporate economy most profoundly by changing the job of the top executives at America’s several thousand public companies. The number one responsibility became not producing better products or satisfying customers or planning five years ahead, but making the stock price get higher
today
and stay high.

My closest personal encounter with this crazed new corporate reality came in 1993. At the time my wife was an executive at the cable channel Nickelodeon, then in its extremely profitable heyday, and she’d just closed an important $30 million home video deal for the company with Sony. Late on the day the deal became public, Sumner Redstone, chairman of Nickelodeon’s $11 billion parent company Viacom, phoned her for the first time—not to offer congratulations but to berate and scream at her, irrationally, because the announcement of her deal hadn’t made the Viacom stock price move up. Just then he was particularly desperate for a higher stock price in order to acquire the Paramount movie studio more easily with stock. But she says that despite high earnings, that obsession with getting Viacom’s share price higher definitely made her and her Nickelodeon colleagues reduce quality and innovation.

That’s just one company run by one old guy. But evidence for this new dominance of business by Wall Street since the 1980s is vast and inarguable. For instance, in a survey in the 2000s of four hundred financial officers of public companies, as many as 78 percent of them actually admitted they would cancel projects and forgo investment that they knew would have important long-term economic benefits for their companies rather than risk disappointing Wall Street’s every-ninety-days earnings expectations. Another giant irony: precisely that kind of perverse, enterprise-damaging management behavior was what the professor-godfathers of shareholder supremacy in 1976 had warned that purely salaried managers were doing. According to “Theory of the Firm,” when an executive’s pay isn’t a function of the stock price, “his incentive to devote significant effort to creative activities such as searching out new profitable ventures falls. He may in fact avoid such ventures simply because it requires too much trouble or effort” to understand new technologies and use them to innovate. Forty years later, the research provides no consensus that paying executives in stock solves the problems of executive inattention or laziness.

Indeed, now that the overriding goal of the managers of every public company was to get the stock price up, the focus of corporate “innovation” became doing
that,
financially innovating by any means necessary. I remember when I first read in the 1980s about companies buying up masses of their own shares on the stock market as a strategy for jacking up the price—by having fewer shares in circulation, their earnings per share magically rose—it struck me as…not a con, maybe, but not exactly kosher. As with almost all the arcane changes going on in the political economy at the time, however, my response was to forget about it and move on. But I’ve now learned that my natural civilian suspicion of the practice had been encoded in federal securities law since the New Deal: buying back shares of your own stock was tantamount to illegal market manipulation, insider trading in the spirit if not the letter of the law, and it had been essentially outlawed.

But then in 1982, without any real debate and without almost anybody outside finance noticing, the SEC did away with that ban.

At first managements were hesitant to
go for it,
continuing to spend as they always had, trying to use their profits to pay dividends to shareholders and grow their companies rather than concentrating on hacking the stock market. So in 1984 a pair of big-time Wall Street executives wrote a
New York Times
article exhorting companies to take advantage of this fantastic new zone of financial lawlessness. Reagan’s giveaways to big business, tax rate cuts of 40 percent, and “tax credits and other benefits for corporations,” they wrote, had provided companies “unprecedented” amounts of cash, “one of the biggest cash buildups in corporate history.” In this “stunning and strange” new world, conventional capitalist logic had been overthrown. To use company money in the old-fashioned slow-payoff ways, to “reinvest” it in “new capacity,” to build for future growth in the actual business, was now a chump’s game. Since the bull market for stocks that had started in 1982 had ended and prices were now dropping, these two Wall Street geniuses asked and answered a question: “Who will support stock prices? It could and should be the companies themselves.” They also pushed the new American truism that perception
is
reality, that as a display of corporate self-esteem buying your own stock is fabulous PR.

The year that manifesto was published companies bought back only a few billion dollars’ worth of their stock, but as the decade ended five years later, the annual average was tens of billions. That’s when Jack Welch (Jack Welch!) announced that GE (GE!) was going to buy back the equivalent of $21 billion worth of its own stock because that was so much easier than “going out and taking a wild swing” at developing new technologies or new businesses. It was the biggest single buyback yet. Welch was acting even more like a Wall Street guy, and Wall Street redoubled its love for him. Unquestionably a new party had started.

The largest U.S. companies went from spending 4 percent of their annual profits buying back stock in the early 1980s to 30 percent in the late 1980s, then in the ’90s around half. During just the five years leading up to the crash of 2008, the number of buybacks by the biggest companies quadrupled. In 2007, the four hundred biggest companies spent 89 percent of their profits to buy shares of their own stocks, and most corporate earnings are still spent that way. During the last decade, U.S. airlines, for instance, spent 96 percent of their available cash buying back stock to jack up their share prices—shares of which the executives of those airlines personally sold for $1.6 billion during that same period. Buybacks effectively became obligatory in corporate America, done by 85 or 90 percent of big public companies. The cost lately has been around $1 trillion a year, three times what businesses spend on research and development.

Even in a short-term financial sense for investors, it might be a waste. One study published in 2011 for chief financial officers concluded that stock buybacks “may not yield as much value as investing in a company’s business.” Company executives tend to buy back their shares when the price is excitingly high, and for three-quarters of the companies, the return on investment was subpar. During the period of the study, the stock market was down 19 percent, but the share prices for the 29 companies (out of 461) that
didn’t
do buybacks went
up
on average by 40 percent.

How much do companies use buybacks to fool shareholders and the markets about the actual health and prospects of their companies? How much do executives, each being paid with stock and options worth millions and sometimes hundreds of millions, use buybacks simply to enrich themselves? The new SEC rule in 1982 didn’t define what might constitute unacceptable deception or fraud when it came to buybacks, so in the thirty-eight years since, no company has been prosecuted for abusing the practice. In 2018 an SEC commissioner who happens to be an NYU law professor specializing in this area did a study of this problem, and he makes a compelling case for systematic abuse. Right after a buyback becomes public, the average executive sells five times as many of his or her shares as usual. “When executives unload significant amounts of stock upon announcing a buyback, they often benefit from short-term price pops at the expense of long-term investors.” That is, he found, three months after a buyback is announced, “firms with insider cashouts,” as they’re called, “
underperform
the other firms…by more than 8 percent.”

This bizarre new normal is a vivid display and powerful underpinning of the de facto enslavement of the economy to Wall Street and to shareholder supremacy dogma. And speaking of dogma, if the stock market at large isn’t correctly valuing a company, thus requiring its CEO to step in and correct that mistake by spending billions on stock purchases, doesn’t that cast doubt on our absolute faith in the efficient free market? In this way, massive stock buybacks are like the capitalist version of Christians who shake and scream to prove that the holy spirit is
real
and inhabiting
them.
But if you sincerely think the market is undervaluing your stock because investors just don’t
get
your amazing company, then why not buy all of your shares back and go private?