Follow The Money
”Some thoughts on the contemporary version of capitalism.”
Unlike my many friends who are writers, artists and engaged in non-profit activities, I have toiled in the vineyards of capitalism for roughly 50 years. This experience has led me to think of capitalism in the way that Winston Churchill described democracy: “The worst system—except all the others.”
The ideal system, to me, is therefore a carefully and intelligently regulated capitalism. This is precisely what most “conservatives” oppose, as they want companies freed of any marketplace limitations on their ability to maximize profits. That key word is “maximize.” For tax and PR reasons, the vast bulk of the compensation of C-suite executives these days comes in the form of “incentive” pay—stock options and bonuses tied to “performance.” This performance is often carefully designed to be ridiculously easy to achieved.
This has resulted in the average total compensation of the CEO of an S&P 500 company today earning 384 times(!) that of their median employee. Way back in the late 1960s, I was an aerospace analyst at a respected Wall Street firm. I remember to this day that the annual report of one of the leading such companies—McDonnell-Douglas—posted in its annual report the total compensation of its CEO and its comparison to—not their median employee —but their lowest-paid employee (amusingly identified as a “floor sweeper.”) My rough recall is that company founder and CEO was paid 14X that lowly floorsweeper.
Reliable data as to just how this has escalated over the past four or five decades is a bit elusive. And defenders of this system (mostly its beneficiaries and those paid to defend the system) will argue that the current compensation figures are the product of assumptions about the future performance of their stock grants. These form the vast preponderance of the total compensation of today’s executives.
There is of course the possibility that subsequent declines in the stock price could diminish these projections. However, given the performance of the stock market over the past fifteen years (roughly a quadruple) these projections far more frequently underestimate the value of stock-based compensation. This makes the typical CEO (who may hold that position for no more than five years) incentivized to drive short-run profits, and thus the stock price, as opposed to investing in activities with a greater long-term promise but with potentially negative effects on current profitability.
The inherent flaw I find in the system is the elevation of the profit motive above all other considerations. Those corporate executives and their Wall Street cheerleaders who talk of “maximizing shareholder values” as the near-total focus of their efforts, are taking—for self-interested reasons, a seriously narrow view.
There was a striking moment for me when the dangers—to society at large—of just such a narrow view was driven home to me back in the early 1990s, when AIDS was a raging epidemic. I had a very nice young man working for me as a summer intern. One day his father, a fairly senior executive at Pfizer, came to the office to pick up his son.
Making well-intentioned small talk, I told this gentleman “I assume Pfizer is hard at work trying to find a cure for AIDS.” He replied, “Well, actually a treatment.” Of course a treatment, unlike a cure, held the promise of decades of profits, unlike the possibly major but one-time benefit of a cure.
And this is how, I suspect, we got to the wildly expensive AIDS “cocktail.” I have no idea if an actual cure was feasible in a similar timeframe as their “treatment.” But I am reasonably certain that no subsequent effort was made to find a cure at any of the for-profit drug companies, i.e., nearly all such companies. Rather they also sought a competitive treatment that might outsell—and out earn— Pfizer’s.
Perhaps I am naive to think it might ever have been otherwise. But I sincerely believe a genuine search for a cure could have been undertaken while also seeking a quite handsome profit from such an effort.
I have been fortunate in the long-ago past to work for CEOs who understood that employees, suppliers and the larger community are also important constituents of a public—or even a private—corporation. I was able to argue, often successfully, for such societally beneficial policies, that the long-term interests of the company—and thus its shareholders—are enhanced by taking a broader view of a corporation’s responsibilities.
Hoping such an attitude might be found in the upper ranks of major corporate managements is, I sadly suspect, a fool’s errand. Fortunately there has been a major increase in the number of richly- endowed foundations that do seek the public good. And the Federal government can make an enormous contribution to such efforts, either directly or by incentivizing private industry to create the means to achieve socially desirable goals. Numerous provisions in several of the Biden administration’s major pieces of legislation seek precisely this with regard to climate control.
That the GOP uniformly and vehemently opposes all such efforts is why I believe that the Democratic Party, whatever its flaws may be, must be supported—at least until the GOP abjures its current devotion to its Neanderthal positions on almost every significant issue. And certainly as long as Donald Trump has even the remotest chance of being elected.
