Age Shock: How Finance is Failing Us by Robin Blackburn

Author:Robin Blackburn [Blackburn, Robin]
Language: eng
Format: azw3
Tags: Age Shock: How Finance Is Failing Us
ISBN: 9781844678341
Publisher: Verso Books
Published: 2012-01-02T05:00:00+00:00

Passive Investors and CEO Enrichment

The 1980s and 1990s witnessed the eclipse of corporate man and the rise of the superstar CEO, who trampled on employees, pensioners and, eventually, shareholders too. Leading financial economists such as Michael Jensen and Kevin Murphy argued that a device was needed to reinforce the priority of shareholder value and to align executive interests with those of the owners. They recommended that CEOs and directors should have a much larger equity stake in the companies they ran.16 While it would be good if directors could buy at least some of this stock with their own money this was not always practical and the stock option achieved nearly the same result. The public should not be squeamish about rewarding executives, they argued, so long as they had an equity stake: ‘By aiming their protests at compensation levels, uninvited but influential guests at the management bargaining table (the business press, labor unions, political figures) intimidate board members and constrain the types of contracts that are written between managers and shareholders.’17 The fear that boards would shrink from properly rewarding CEOs was to prove laughably misplaced, with Jensen’s own expert recommendations playing a modest role in loosening all restraint.

In a presidential address to the American Finance Association in 1993 Jensen argued that capitalism was undergoing a new revolution as far-reaching in its consequences as the industrial revolution of the nineteenth century. In his view, CEOs and boards of directors should no longer think it their task to come up with bold plans for investment or product improvement. They should be just as willing to consider downsizing, returning value to the shareholders by means of buy-backs, and preparing their company for ‘exit’. Jensen even had a kind word for those unfairly demonized figures, the corporate raiders, who were simply promoting a more rational allocation of capital.18 In fact Jensen was lending his own gloss to a financial revolution that was already well underway. Executives were already learning to love share options as a powerful supplement to salary, and began to see possibilities in combining them with share buy-backs and the pursuit of shareholder value.

Stock options gave an option to buy at the prices current when issued, giving senior executives an interest in ramping up share values. If their company’s shares rose they could make millions by exercising their options, and immediately selling the cheaply acquired shares. CEOs and CFOs boosted share price in a way that did nothing to serve the long-term interests of shareholders. Between 1994 and 1999 they borrowed $1.2 trillion from the banks, supposedly for the purpose of strengthening their investment programmes. But instead they used most of this money – 57 per cent – to buy back shares in the companies they ran.19 This naturally boosted shares prices. The CEOs and CFOs then sold their share options for a massive profit. Men like Jack Welch of GE, Charles Wang of Computer Associates and Ken Lay of Enron became multi-millionaires. Huge inequalities opened up. By 2001 the

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