The CEO and Stocks

Today many of America’s, and this is a trend spreading into Europe, top CEOs are increasingly remunerated through stock-options. Share options have made Jack Welch, the head of General Electric, into a multi-millionaire…Having gone farthest in America, the habit of paying bosses in this way has been crossing the Atlantic, not only to Britain and France but also, more recently, to Germany, where conservative companies such as Daimler-Benz and Deutsche Bank are introducing share-option schemes for managers. (The Economist (5/4/96), p. 12)

This form of payment for top management raises some interesting questions, some of which were brought up recently in an article by The Financial Times. The article stated that the controversies over the chairman of AT&T’s$16 million package and the decision by Daimler-Benz to award its top executives share options highlight one of the big ethical questions in modern capitalism: should bosses profit from making their employees redundant? In both cases, vast redundancy programs are underway – 40,000 at AT&T and nearly 9,000 in Daimler-Benz’saerospace unit alone – and investors are cheering the prospect of cost reductions. At AT&T, executives already possess options, allowing them to benefit from any rises in the share price; at Daimler, they soon will. (The Financial Times (4/22/96), p. 24) In the US a remarkable 10 percent of the equity of America’s 200 biggest firms has been turned over to managers. (The Economist (5/4/96), p. 12) This paper will not take up the ethical aspect of this practice, but will rather look at what the effects of such practices may be on the average worker.

For many employees who keep their jobs, incentives for managers to improve shareholder returns are desirable. (The Financial Times (4/22/96), p. 24) This is certainly the case if the employee has stock in the company, or participates in a mutual fund or a pension fund that has stock in the company. It is important to point out that the percentage of the American population that owns stock (directly or through pensions or mutual funds) has almost quadrupled since 1952 from about 5 percent of the population to about 20 percent of the population. However, the vast majority of stock assets are still owned by the countries richest citizens. The richest .5 percent of Americans own 31 percent of all stock and the next richest 10 percent own 58 percent of all stock. (Harper’sMagazine (May 1996) p. 44)

In short, managers and workers who own stock in their companies benefit financially – not equally of course – when some of their fellow employees are made redundant, at least in the near term. In addition, the 401(k) Program alone in the United States is expected to have combined assets of $1.18 trillion by the year 2000. (R. Theodore Benna, p. 11) As managers of these funds continue to apply increasing pressures on companies to maximize the value of their stocks they will be assisted by willing accomplices within the companies’ boardrooms. It is worth noting that the most significant change in stock ownership in the last four decades has been the shift from individual to institutional ownership. Today individuals own about 55 percent of stock and pension-funds and mutual-funds own the rest. The result has been an increase in pressure from newly powerful pension-funds and mutual-funds for high and quick returns – often at the cost of jobs. (Harper’sMagazine (May 1996) p. 43)

Albert Dunlap, former-CEO of Scott Paper, points out that the responsibility of the CEO is to deliver shareholder value. Period. It’sthe shareholders who own the corporation. They take all the risks. And how does the CEO maximize value? He does that by focusing on profit. (Albert Dunlap, Harper’sMagazine (May 1996) p. 37) Companies are increasingly focusing on the bottom line which raises the question asked by Jim Hoagland in an April 25, 1996 editorial for The Washington Post. Hoagland wrote that people came to understand that workers lost their jobs when their company recorded huge losses. But how can we expect them to understand – and accept – that now they will lose their jobs while their company records huge profits? That their company makes those profits by downsizing them?’ asked a British Banker who is himself planning such an operation. (Hoagland, The Washington Post, p. A31)

Capitalism in the past 15 years has been creating dynamic changes in the lives of many of the world’scitizens. For some it has been a period of great opportunity, and for many others it seems to have been a period of economic failure. Thurow argues that we are entering a period of winner takes all capitalism. (Thurow, p. 21) One of the reasons for this is that many of the institutions that people trusted in the past to help them are in decline. The unionized portion of the US labor force has dropped more than a third – from 25 to 16 percent – since the 1970’s. (Ethan B. Kapstein, Foreign Affairs (May/June 1996) p. 22) In Germany, membership in the Trade Union Federation has dropped from close to 12 million members in 1991 to 9.4 million members in 1995. (The Economist (5/4/96) p. 19) In the United States and Europe, labor is losing its political voice, and the consequences of its demise – lower wages and benefits for unskilled workers, greater job insecurity, and less political interest in the economic losers – should not be dismissed. (Ethan B. Kapstein, Foreign Affairs (May/June 1996) p. 23)

Some economists argue that in terms of improving efficiency, and labor market flexibility, the decline of labor unions is a good thing because those who still need the protection of trade unions are in fact mostly people with inadequate education and skills, and thus constitute the majority of the unemployed. Hence, they are not protected, but kept out of the market by the salaries and other rules protecting those workers who ëpossess’ a job and keep the threshold high for others trying to enter the market. (Christian Lutz, Societies in Transition p. 115)

Government, an institution that people have turned to in the past for help is also in decline. A headline in the May 2, 1996 edition of The Financial Times proclaimed that Governments beat a slow retreat. One of Bob Dole’sfavorite campaign labels for President Clinton is that he is the rear-guard of big government and the welfare state. (Dan Balz, The Washington Post (5/17/96) p. A8) This an attack on a President who proposes to eliminate Aid to Families with Dependent Children, the main welfare program. (Judith Havemann, The Washington Post (5/19/96) p. A1) President Clinton has also been on watch in the White House as an estimated 185,000 full-time jobs have been cutî in the federal government. (Walt Harrington, The Washington Post Magazine (5/19/96) p. 15) The Economist summed up the current state of affairs nicely when it wrote countries around the world are seeking to reform welfare states and deregulate their economies in the face of international competition. In most, success, where it has come, has been bought only at the cost of considerable social disruption. (The Economist (5/4/96) p. 17) Governments are abandoning all social groups accept the elderly. States are basically telling their workers that they can no longer afford the postwar deal (of full employment and comprehensive social welfare), and must minimize their obligations. (Ethan B. Kapstein, Foreign Affairs (May/June 1996) p. 17)