In 2016, Sacred Heart University purchased G.E.’s
headquarters in Fairfield, Connecticut for $31.5 million. Gone were the Persian
rugs and lavish artwork. The property acquired included the “Guest House,” the
company’s 28-room hotel “to serve visiting executives and others, with no
expense spared on the parquet floors, wood-burning fireplaces and a Steinway
piano.”[1]
Jack Welsh oversaw the ornate construction, leading to the obvious question of
just what his sense of fiduciary duty to the company’s stockholders was. An
artificial distinction between managers—only some being styled “executives”—was
doubtless behind the luxuriant excess only for those certain employees “in the club.” From the standpoints of a board
and its stockholders, “executives,” managers, and other employees are all employees. Why then should some of
them be associated with luxury while they are at work? Historically, the
aristocratic luxuriated precisely because those people didn’t have to work, and
more importantly, they viewed work (and even their own money) as not worthy of
much attention—there being finer things
in life. “Executive” employees are not aristocratic, for they labor even when
they could live off their accumulated wealth and pursue loftier aims, such as
aiding humanity, furthering knowledge, or engaging in the arts with an eye
toward advancing civilization. Bill Gates got this memo; Warren Buffett did
not.
The presence of extremely rich people in the executive ranks
of large corporations interferes, I submit, with the accountability that
corporate governance is designed to deliver for stockholders. Lavish business expenses run counter to such
governance and the very notion of a corporation as the stockholders’ combined
wealth. In the era of American
industrialization, the huge profits in the industrial sector gave cover to managers
such as Jack Welsh, who felt free to exploit the obvious conflict of interest
in spending lavishly for the
upper-echelon managers themselves, as if the company were their own country
club rather than a business. Doubtless managers themselves assumed that paid country-club
memberships were necessary to get and
even retain (well qualified?) fellow “executives.” The underlying conflict of
interest was somehow invisible to sycophantic boards and even large
stockholders who looked the other way. In the succeeding high-tech era, the
same obliviousness has surely existed in that sector in spite of the rise of
activist stockholders.
To be sure, indications can be found that suggest more
activist pressure. Even as stockholder activists’ assets were increasing from
1997 to 2015, the number of publically traded U.S. companies decreased from
7,507 to 3,766.[2] Meanwhile,
the activists were getting more, well, active, and they were finding it easier
to win board seats as fewer companies staggered their elections over three-year
cycles. More than 300 U.S. companies were targeted in 2015, up from about 100
in 2010.[3]
Boards were better positioned, at least formally, to hold C.E.O.s accountable
as the percentage of joint C.E.O.-Chair positions decreased. “In 2001, more
than half of new C.E.O.s also assumed the position of chairman when they took
over. By 2016, only 10 percent occupied both roles.”[4]
Yet the actual impact from activist stockholders may have only
been in decreasing the average tenure of the C.E.O’s. Boards were “still
willing to dole out huge golden parachutes to C.E.O.’s, even if they fail.”[5]
Furthermore, even though G.E.’s swanky executive suites went from 44,000 square
feet in Fairfield to 7,800 square feet in Boston, C.E.O.s of high-tech
companies were under less activist scrutiny in spending from soaring profits
and stock prices.[6] A
study looking at shareholder proposals from 2003 through 2015 concludes that “managers
often seek to avoid the implementation of legitimate shareholder interests.”[7]
In 2017, the U.S. House of Representatives passed the Financial Choice Act, a deregulatory
bill that would require a shareholder to own at least 1% of a company’s shares
for three years to get a proposal on a proxy ballot. At the time, a stockholder
needed to own only $2,000 worth of stock for at least a year. Clearly, the
power of activist stockholders was quite far away from Congress, whereas that
of corporate managements was very close by.
Even the increased power of activists to pressure the firing of a
C.E.O. of an underperforming blue chip company may actually be a
manifestation of frustration over stagnant revenue and profits in the sagging
industrial sector; the real question, still unanswered in 2017, is whether
activist stockholders would ever go after the lavish spending of “executives” of
profitable companies. Even those managements, such as of Amazon, Apple, Google,
and Facebook were obliged even in their hay-day by the legal doctrine of fiduciary
duty to not be profligate, and to authorize spending for legitimate business reasons because cost management is in the stockowners’
financial interest. This interest, rather than those of “executives,” is
legally hegemonic, rather than to be dismissed or even rebuffed. Luxury, in
other words, does not go with the work inside a corporation, but, rather, with
the ownership of wealth, even if some
of the employees are themselves extremely rich. Their independence and
association of themselves with luxury does not fit with the corporate model,
especially as concerned the ability of corporate governance to exert
accountability in the interests of stockholders. As for the apparent strengthening
of corporate governance in the industrial sector, the alleged improvement may
actually have been a function of a major sectoral shift within the American
economy. It is only natural that the old guard would be frustrated at the
shift, so what looks like better accountability may only be infighting. To
gauge real accountability, we would need to look at the newly hegemonic sector:
Are the “executives” in it taking liberties at their stockholders’ expense?
[2] Ibid.
[3]
Ibid.
[4]
Ibid.
[5]
Ibid.
[6]
Ibid.
[7]
Gretchen Morgenson, “Meet
the Legislation Designed to Stifle Shareholders,” The New York Times, June 16, 2017.
