Part two of a new CSRwire series based on the book Citizens Disunited shows that “drone corporations” are eroding shareholder value along with social equity.
By Bob Monks
Part of the Citizens Disunited series.
Corporate sustainability and responsibility is hot news these days. People are looking for ways to have impact through their investments and there’s even a growing movement among students for responsible investment through university endowments.
Who Owns America’s Big Companies?
But who are we calling on when we demand sustainability and responsibility in corporations?
Corporations, of course, are merely legal constructs and are neither good nor bad on their own. People own them and run them, but who is accountable? Management? Owners? The board?
Before we can demand any change in corporate behavior we have to have accountability. Someone has to be in charge, someone has to take responsibility and we have to know who that is.
It used to be an owner was an owner. You knew who they were and that person was in charge. Who knows who owns most of America’s big companies these days? Probably, we all own infinitesimal amounts through funds but ownership at that level is virtually unknowable.
Trustee owners – people who manage pension funds, endowments, 401(k) plans, IRAs, and university investments manage ownership for millions of people and they are the effective owners. They are the stewards and yet they have abdicated power they have to impact corporate behavior. So the owners of big corporations are not involved and no one is holding corporations accountable.
Four Attributes of Drone Corporations
In research for my recent book, Citizens DisUnited: Passive Investors, Drone CEOs and the Corporate Capture of the American Dream, we looked at indexed companies -- those whose ownership is so widely distributed that no single shareholder holds a principal position, which is defined by the SEC as 10 percent or more. These are what I call “unowned” or “drone” corporations.
The research showed unowned companies to be run by powerful managers or CEOs with little or no accountability to ownership. Lack of accountability is a clear indication that a corporation has no effective owners and it’s characterized by four clear attributes:
1. An excess of compensation plans and overindulgent CEO pay.
Compensation is an expression of concentrated power — of enterprise power concentrated in the chief executive officer.
According to the Economic Policy Institute, CEO pay has risen 725 percent since 1978 or more than 127 times faster than worker pay during that same time. To put it another way, in 1980 average CEO compensation was 42 times of the average worker. By 2011, it was 380 times larger than the salary of the average worker [Jack Bogle, The Battle for the Soul of Capitalism (2005) and Executive PayWatch, AFL-CIO, accessed December 1, 2012].
Where there is clear and effective accountability in a corporation, the CEO has a salary and a bonus. When you start to see five and six compensation plans – based on different schemes and contingencies and meriting additional bonuses even for failures – you know that owners are absent in that company and CEOs are dictating their own payment schemes.
2. Frequent payment of penalties and fines for misconduct or negligence.
When a company pays frequent fines and penalties, it’s a clear indication that they consider those payments to be just another cost of doing business. The penalties are no longer about changing behavior, they’re a licensing fee.
Unowned or indexed companies were more than twice as likely to pay regulatory fines and settlements than so-called owned companies, based on our research. And, they account for almost 85 percent of the total amount paid over the past 20 years, totaling more than $80 billion in all.
3. The corporation is spending huge sums in Washington.
The financial power of American corporations now controls every stage of politics — legislative, executive, and ultimately judicial. With its January 2010 decision in the Citizens United case, the Supreme Court removed all legal restraints on the extent of corporate financial involvement in politics, a grotesque decision that can have only one effect: maximizing corporate – not national — value. Outside spending on the 2012 election hit $1.176 billion, a four-fold growth since 2008.
The result is that CEOs have the power to direct political payments, lobby legislators and organize PAC programs to achieve objectives entirely in their own self-interest. Political spending (campaign money, lobbying, gifts to congressional charities, etc.) isn’t approved by – or even disclosed to – the shareholders.
And yet the Washington Post reported that shareholder proposals regarding disclosure have more than doubled since 2010 – since Citizens United.
4. The company is likely to underperform for the stockholders.
What is perhaps worse news for shareholders is that “unowned” companies are less valuable, overall. Even hiring the best executives (read most highly paid) adds little or no value. In 2011, total shareholder return for non-drone or “owned” corporations was 6.59 percent vs. 4.93 percent for drones.
In the end, if sustainability and corporate responsibility doesn’t motivate us, shareholder value should. After all, if you don’t care about the money then why are you investing?
It’s difficult to see our connection to these companies if we own through a retirement plan but the trustees of our plans manage millions of dollars worth of shares and their actions (or inactions) count. It’s the “count” in accountability. And if necessary, we must push them to be active owners on our behalf. That’s our job as beneficial owners – to call on the trustee owners to do their job.
Owners Need To Get Involved
Look, I am a capitalist.
But, I am a capitalist who believes that the benefits of the system come with responsibilities. It only works if owners are involved. As of yet, we have found no greater system to generate wealth for society but we cannot just reap the benefits without making sure that the companies we own behave in accordance with our own rules of society.
Wealth is more than just money. A safe, clean and good society is a source of wealth, too. It’s up to us to make sure that corporations are generating the kind of wealth we want.
Part I: A Simple Solution to Runaway Corporate Power