An Outrage — and a Distraction From the Bigger Picture

The public is outraged by the bonuses that Wall Street firms are handing out in the wake of last year’s giant bailout.  But that entirely legitimate concern actually obscures a much larger and more momentous issue:  a dramatic shift in the distribution of wealth that has occurred over the past 30 years.

Thirty years ago, the average CEO earned roughly 40 times the wage of entry-level employees.  Now it is a staggering 400 times.  And that does not include other salaries for inhabitants of the corporate “C Suites,” or their stock options, benefits, bonuses, golden handcuffs, golden parachutes, and other forms of largess.  Over time, a new class of super-wealthy corporate leaders has emerged.

In his new book, From Higher Aims to Hired Hands, Rakesh Khurana has delineated the “wholesale transformation in the relations between executives of large, publicly traded companies and shareholders and the appearance of a new type of chief executive, along with the development of a new kind of corporate model in which the interests of corporate executives and shareholders were to be closely linked.” The rationalization for the change was that the executives charged with managing our corporations would do a better job if they had a significant stake in the enterprises they managed.

Khurana adds: “as the image of the ideal executive was transformed from one of a steady, reliable caretaker of the corporation … to that of the swashbuckling, iconoclastic champion of  ‘shareholder value’ a larger story has remained untold and largely uncomprehended.”

The net result is that the people running corporations as well as the banks and investment firms that fund them have come to act like owners.  Boards of directors have largely ceded oversight and control, seldom intervening to exert their fiduciary responsibility, while enjoying the generous fees they collect for presiding. (See my post for December 30, 2009: “Unaccountable Boards.”)

Meanwhile, the actual owners of the enterprises, the shareholders, in whose name this transformation was made, have been largely passive bystanders – and victims.  John Bogle, author of the highly influential book , Common Sense on Mutual Funds, concluded last week in The Wall Street Journal that “the faith of investors has been betrayed.”

“How so? Because the returns generated by our corporate stewards have often been illusory, created by so-called financial engineering and produced only by the assumption of massive risks. What’s more, too many of our professional money managers have failed to act as vigilant stewards of the money that we investors entrusted to them.

“In short, far too many of our corporate and financial agents have failed to honor the interests of their principals. . . . allowing our corporate managers to place their own interests ahead of the interests of their shareholders.” (See, “Restoring Faith in Financial Markets.”)

But now, Bogle argues, the massive accumulation of investments in giant mutual funds and pension plans has created a potential countervailing force.  These funds all have informed professional managers, capable to exerting their clout.  They have not done so, but the recent debacle suggests that they can and should.  The helpless investor may not be so helpless now.

What we don’t know we know about our current rage against financial managers is how long it has been simmering below the surface.