Friday, February 27, 2009

It's Always Been Our Money

Like any good financial crisis, the current economic downturn has given populists a number of examples of corporate greed at which they can direct their fury. Outraged citizens have used barrels of ink (or, perhaps, megabytes of data) to condemn incidents of corporate excess like John Thain's $1.22 million office renovation, AIG's $440K trip to a resort, and Citi's now-canceled purchase of a $50 million corporate jet. Given all these firms have received government bailouts, it come as no surprise people were upset about those spending sprees. My bigger question, though, is why people care about it now that it's their tax dollars, yet for years allowed executives to spend the money the people invested in them in much the same way.

With the vilification of many large corporations as evil entities, it's often easy to forget that a company is just a legal structure that exist to allow pools of investors to share ownership in an enterprise. And although some might have you think otherwise, the largest shareholders of the biggest companies aren't some devious old men hellbent on using their control to destroy the environment and exploit workers, but rather large institutions like mutual and pension funds that invest for regular folk like you and me. When a company moves jobs overseas to cut cost, we're the ones that, in theory, benefit from the better earnings. On the other hand, when companies spend their money to pay traders millions in bonuses, send employees on lavish trips, or to buy those luxury suites at sporting events, we've always been the ones that have essentially paid--even if it seems like they're just charging it to some faceless corporation. It's shareholders that foot the bill for your salesman friend with the huge expense account.

Although some of it is likely related to the fact people didn't care as long as their stock portfolios went up year-after-year, I suspect a big  reason people never really got as upset until now is that they simply didn't know how absurdly these financial institutions rewarded some of their employees, whether through huge salaries and bonuses* or perks like black car service to and from work. The public, after all, has gotten angry in the past over things like Dennis Kozlowski's $6,000 gold shower curtains and Robert Nardelli's $210 million golden parachute. Unfortunately, these sorts of details rarely become public, because despite being publicly-owned corporations these companies reveal very few details about their actual operations. When they do report to shareholders about their compensation agreements, it's often clouded in obscure language and technical details that only an expert can parse. And there's certainly no line on any income statement a shareholder would ever see that details how much money was spent to sponsor another golf tournament and entertain employees and clients with performances by Sheryl Crow and Chicago

*As a sidenote, if the business media couldn't get the public upset about something straight-forward like the skewed compensation schemes that rewarded traders with millions for short-term gains without any punishment for long-term losses, how could we expect them to warn the public about the danger lurking behind the complex structured finance and derivate products?

Although people have recognized for years that employees' interests must be aligned with shareholders', no one has created a good system for doing it. As taxpayers are now learning, corporate boards and new compensation schemes have clearly failed us once again. Even if shareholders didn't know they were endorsing it, at some point they elected directors who allowed these contracts and severance packages to get signed. Maybe people didn't care about it enough to do anything about it when it was their savings, but now that it's their taxes, hopefully they will.

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