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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Money managers themselves confirm to surveytakers that their colleagues are too obsessed with quarter-to-quarter newsIts surprising how few pension funds have led the rebellion. Most prominent is Calpers, with a handful of other public pension funds at their side. Useem (1996, p. 56) noted that these funds controlled by elected officials and held in the name of public sector workers find it easy to adopt an antimanagement rhetoric, especially when directed against big business. Their agenda, though, looks much less radical than the rhetoric. The strictly governance aspects of this agenda typically include: bringing more outsiders on to the board, in the name of independence; shrinking large boards (15 or more) down to around a dozen, on the theory that large boards are more scattered, and therefore more easily dominated by management; encouraging more scrutinty of management strategy by outside directors; removing obstacles to takeovers in corporate charters; and tying executive and director pay to stock performance, rather than paying flat (and fat) salaries (Salmon 1993; Useem 1996, Chapter 7). More broadly, these moves have translated into the famed downsizing and investment cutbacks of the first half of the 1990s; the point of the governance agenda, after all, is to increase shareholder wealth by increasing shareholder control. Public justifications for these downsizings have almost always pointed to technological change and global competition, which takes human interest and agency out of the picture, but in fact the proximate cause has more often been pressure for higher stock prices coming from Wall Street portfolio managers. Institutional investors have made their presence felt most famously through annual hit lists, like Calpers, and another drawn up by the Council of Institutional Investors, a consortium of 100 major pension funds with some $800 billion in assets. Such public humiliations, which have led to boardroom shakeups at household-name firms, have their effects not only on the named targets, but also on the managers of other firms, who get the message and take appropriate action to avoid being on next years list. As Calpers general counsel, Richard Koppes, said, You focus on a few visible ones and make everyone else nervous (quoted in Berenbeim 1994, p. 29). But aside from these visible struggles, pension fund managers have also worked behind the scenes, pressing their wish lists on often recalcitrant managements, and in some cases, meeting with firms outside directors, pushing the case for managerial revolution (Lublin 1995b; Useem 1996, p. 108). According to a Conference Board survey, executives from 86% of large U.S. firms were contacted by their institutional shareholders; almost half reported an increase in the number of shareholder calls, with few reporting a decrease (Berenbeim 1994). Why have the public pension funds, and only a handful of them at that, been prominent in the shareholder rebellion, to the exclusion of other institutional investors? There are several reasons. Private pension funds are inhibited by conflicts of interest, actual or potential; GMs pension fund would have a hard time taking a visible position on a management shakeup at Chrysler. More broadly, since corporate pension funds are ultimately run by CEOs, the chieftains are not eager to stoke challenges to their authority. Mutual funds have also shied away from governance issues; Fidelity, its said by someone in the know, tried it and withdrew because of bad press, but the company didnt return phone calls asking for comment. Firms like mutual funds with highly visible public images dont want to get caught up in public controversies. But its highly likely that many of the nonparticipating institutions are happy to have the activist funds in the lead, doing their work for them; they get the benefit of higher share prices without having to take the trouble, or risk their public image by pushing a controversial agenda. shareholders who needs them? Just because Wall Streets short-termism is a clich doesnt mean it isnt true. In surveys, CEOs and corporate investor relations managers repeatedly complain of pressure from money managers and Wall Street analysts to produce quick profit growth. This is no special pleading coming from a formerly pampered class; money managers themselves confirm to surveytakers that their colleagues are too obsessed with quarter-to-quarter news, and take too little heed of long-term prospects. It can hardly be otherwise, since most big investment managers are graded on their quarterly performance. (Useem 1996). Still, stroking these portfolio jockeys takes a lot of managerial time. CEOs of big U.S. corporations hold six meetings a month with money managers and stock analysts, and chief financial officers (CFOs) hold over twice as many; from that, its been estimated that CFOs spend 20% of their work time courting Wall Street (Baker et al. 1994). Surely they have something better to do with their time than spending it with people who earn big fees for underperforming the averages. That set holds CEOs to some strange standards indeed. Confirming Keyness theorizing of 60 years ago, expectations often matter more than actual results. Perversely, one study cited by Useem (1996, p. 88) shows that company shortfalls in meeting analyst forecasts are better predictors of [top] executive dismissal than are shortfalls in the actual earnings. Put differently, you are more likely to lose your job if you shock investor sensibilities than if you dock company earnings. And these are the folks who want an even bigger piece of the action. As Charles Wohlstetter (1993), former chair of Contel, put it, In sum, we have a group of people with increasing control of the Fortune 500 who have no proven skills in management, no experience at selecting directors, no believable judgment in how much should be spent for research or marketing in fact, no experience except that which they have accumulated controlling other peoples money. Pension funds are the least regulated of the major institutional investors, which is one reason theyve been active in the shareholder rebellion, but this makes them accountable on none but purely financial measures. So rather than solving the agency problem, activist shareholding simply adds another layer of potential irresponsibility. And what do they really have to contribute? The best periods of U.S. economic growth have occurred when managers ran corporations and shareholders kept their mouths shut. Admittedly theres a chicken-egg problem here; its no accident that Berle and Means book came out during the Depression, that governance issues receded during the Golden Age, and that they returned as economic performance deteriorated in the 1970s. But the point is that theres no evidence that shareholder intervention promotes better performance over the long term better performance, that is, for anyone but shareholders.23 Apologists love to finesse this distinction, treating higher share prices as synonymous with a higher social return. But one could argue that by reducing the funds available for real investment, increasing the return to shareholders will depress growth and employment over the long term. Its likely that investment projects or R&D that shareholders might condemn as uneconomic would nonetheless leave society as a whole better off. When I asked Useem what purpose stockholders serve, he answered, wrongly, that theyre an important source of capital. Ive devoted a good bit of this book to showing that the signals emitted by the stock market are either irrelevant or harmful to real economic activity, and that the stock market itself counts for little or nothing as a source of finance. Shareholders should be vestigial; they have no useful role. Instead, they have grown increasingly assertive over the last 15 or 20 years, disguising themselves behind a rhetoric of democracy, independence, and accountability. Shareholders love to present themselves as the ultimate risk-bearers. But their liabilities are limited by definition to what they paid for the shares, they can always sell their shares in a troubled firm, and if they have diversified portfolios, they can handle an occasional wipeout with hardly a stumble. Employees, and often customers and suppliers, are rarely so wellinsulated. Add to this Keyness argument that the notion of liquidity cannot apply to a community as a whole, and you have a very damaging critique of shareholder-centered governance: whats divine for rentiers is bad news for everyone else. Apologists for the rentier agenda also argue that them are us: the portfolio managers demonized as greedy Wall Streeters are really managing all of societys savings for the long-term interest of all.24 The figures on concentration of stock ownership presented in Chapter 2 make that argument hard to sustain, but apologists also point to the pension benefits that well all collect someday if were lucky enough to make it to 65 or 67. This too is devious. Pension assets, while less concentrated than other forms of financial holdings, are still concentrated; under 40% of the workforce is covered by a pension plan (U.S. Bureau of the Census 1995, p. 383) and the richest 10% control 62% of pension assets (Wolff 1996). It seems odd that workers should be asked to trade a few extra percentage points return on their pension fund, on which they may draw some decades in the future, for 30 or 40 years of falling wages and rising employment insecurity. The point of shareholder activism is to increase the profit share of national income, and to claim a larger portion of that profit share for rentiers. Any gains to people of modest means are accidental. Maybe the present wave of shareholder assertiveness will wane; the temptation to sell a stock rather than take the trouble of lobbying management may eventually triumph over the apparently meager gains to activism. It may be that even with the institutionalization of ownership, shareholding still remains too dispersed to sustain the kind of relationship investing advocated by Calpers, the Twentieth Century Fund (1992), or Robert Monks (1995). Professional rentiers and their bankers will no doubt find a new fad designed to unlock shareholder value, and devise a fresh set of arguments for why their enrichment is synonymous with the common good. Aside from Margaret Blair though she is far more measured than I no prominent student of corporate governance has drawn the obvious conclusion from all this research: if outside shareholders serve no useful purpose, then there is no better argument for turning firms over to their workers.25 Of course, the shareholders dont see this solution as obvious, but thats another story. governing governments This chapter and this book have mainly been about the private sector, but it would be incomplete to finish a chapter on governance without looking at the relations between Wall Street and government, not only in the U.S., but on a world scale. One advantage that Wall Street has in public economic debate, aside from its immense wealth and power, is that its one of the few institutions that look at the economy as a whole. American economic policymaking, like the other kinds, is largely the result of a clash of interest groups, with every trade association pleading its own special case. Wall Streeters presume to care about how all the pieces come together into a macroeconomy. The broadest policy techniques fiscal and monetary policy are central Wall Street concerns. For some reason, intellectuals like the editors of the New York Review of Books and the Atlantic have decided that investment bankers like Felix Rohatyn and Peter Peterson have thoughts worth reading. Not surprisingly, both utter a message of austerity the first with a liberal, and the second with a conservative, spin hidden behind a rhetoric of economic necessity. These banker-philosophers, creatures of the most overpaid branch of business enterprise, are miraculously presented as disinterested policy analysts. |
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