Archive for June, 2011

Football Again

June 27th, 2011 by under The University Today. No Comments.

In 2011 Jim Tressel, Ohio State’s winning football coach was forced to resign because of an infraction of NCAA rules, his failure to report the violations, and for lying about his knowledge in a signed report to the NCAA according to Yahoo News and the AP (5/30/2011). The infractions involve players who purportedly received cash and discounted tattoos from a local parlor.

The NCAA suspended the players including a star quarterback for the beginning of the 2011 season, but evidently to teach everyone a lesson, it let them play in the Sugar Bowl which Ohio State won. The president of the University appointed a committee to investigate and reported his decision to the trustees.

One has to wonder why a university with the mission of education and research has to be distracted by the behavior of the players and coaches. Is it because they don’t really belong in a university? Are they really a professional sports corporation that happens to be located on the campus? If so, then we are close to my favored solution for these problems, that we franchise the name of the University to a corporation that hires players and coaches. The University can rent facilities including a stadium to the corporation. There will be no need for the NCAA and if local merchants want to give gifts to professional athletes who are not students, they will be free to do so. We can still have a college football team, but it will not corrupt the rest of the institution.

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The New American Aristocracy

June 27th, 2011 by under The American Aristocracy. No Comments.

It would appear that government tax policies and boards of directors are trying hard to create an American aristocracy like that of England and France in past centuries. A 2010 column by Nicholas Kristof estimates that the top 1% of American earners take home almost 24% of income, up from 9 percent in 1976. CEOs of our largest companies earned an average of 42 times the average worker in 1980, but 531 times as much in 2001. From 1980 to 2005, over four-fifths of the total increase in American incomes went to the richest one percent (New York Times, 11/6/2010).

How is the government contributing to building an aristocracy? The Bush tax cuts were not related to income so that a high wage earner had the same percentage reduction as a middle income worker. Given the high income of the top 1%, they benefited much more in dollar terms than anyone else. In addition this bill reduced the tax on capital gains and stock dividends, a policy much more valuable to the wealthy than middle income or poor Americans.

Unfortunately, these tax cuts did very little to stimulate the economy. Some argue that it is important to keep the tax burden low so that people will start companies and create jobs. Let’s think about that. Did Bill Gates say “I don’t want to start a new company to make software for PCs because if it is tremendously successful, I will have to pay more taxes?”

Many of the highest earners are in the financial industry that created the 2007 financial crisis. What kind of jobs do they create? Does a hedge fund manager start new businesses? Yet tax policy greatly favors the earnings of hedge fund managers; they pay a much lower percentage of their income in taxes than the rest of us. About the only financiers that do help create jobs are Venture Capitalists (who, by the way, appear to bear no blame for the recent economic meltdown).

How do boards contribute to creating an aristocracy? Through their compensation committees the boards set executive pay.

The New York Times retained Equilar, an executive compensation data firm, to analyze the pay of the 200 most highly paid CEOs with companies having at least $10.78 billion in revenue in 2010. The highest ad of these CEOs was Phillipe Daumanof Viacom who received $84.5 million after signing a long term contract with stock grants. Next came Leslie Moonves of CBS who had 32% raise to $56.9 million. Michael White of DirecTV got $32.9 million and Brian Roberts of Comcast and Robert Iger of Walt Disney each took home $28 million. The average pay for the 200 CEOs in 2010 was $10.8 million, a 23% increase over 2009. Very few workers received 20% + raises in 2010. Is a manager really worth $80 million in a year, or over several years? It does not take many years of earning $10 million or more to build up the kind of wealth that entitles one to be a part of the new American Aristocracy.

Boards of directors present a huge dilemma for public policy. Most board members are acquaintances or friends of the CEO. They are very friendly toward current management and most seem willing to lavish riches on at least the CEO if not other company executives. They also approve bonus plans which played a major part in providing incentives for financial executives throughout the industry to take risks that led to 2007’s economic crisis.

CEOs argue that a board made up of strangers elected by the shareholders in a real election would be adversarial and could not fulfill its role in formulating corporate strategy. This may be a valid argument, but I think the excesses of the current process far outweigh its value. You can always hire consultants to help with strategy.

Boards in the financial industry were unaware or unappreciative of the risks the firms were taking on. Maybe the companies did not reveal what they were doing, or maybe the boards did not understand risk. Did AIG ever report to its board on what might happen if mortgage backed securities it insured with credit default swaps suddenly began to lose value?

These boards approved compensation packages and severance payments that were sometimes in excess of $100 million to executives who helped destroy much of the value of their companies. It boggles the mind.

Do we want a country in the next few years and for future generations in which a small number of people have all the wealth? Our political system has been very stable due in part to a middle class that has been able to live comfortably. Will that continue as a growing part of the country’s annual income goes to the top 1%? What happens when the 24% they earn now becomes 30, 40 or 50%?

What is the solution? One is a sensible tax policy; the wealthy have gained tremendously by living and working in the U.S. They have a responsibility to support the government and the country. Remember that fifty years ago marginal tax rates exceeded 90%. Today we are arguing about numbers that are less than 40%.

We do need to reform boards. Let the CEO have a few friends and colleagues, but also include someone who understands risks and asks questions about it. Include a board member who represents the employees of the firm (not a highly-paid executive).

I was on the board of an electronics manufacturing company for three years. When there were no profits, there were no management bonuses. None. In the financial industry, people earned bonuses when their firms not only lost money, but when they failed as in the case of Bank of America buying Merrill Lynch to keep the firm from collapsing. The industry says it has to pay bonuses even if there are no profits to keep valuable employees. If this is true we need a law that prohibits bonus payments if the firm as a whole loses money.

And it would be nice if an influential business group or the government adopted a pay standard for CEOs that required their compensation to be a more reasonable multiple of the lowest paid worker in the organization. We need some data to figure that number out, but it is bound to be less than 500%.

If the top 1% continues to earn an increasing share of the country’s income, America risks losing its middle class which has been the foundation of the country and democracy. Do we want tax policy and boards of directors that lead to a wealthy aristocracy concerned with their own well-being, or do we want wealth that is invested in creating new businesses and jobs? If the latter is our choice, it is time to start serious reform of tax policy and corporate governance.

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