Summary
We need to measure differently. We need to reward differently. Our present system does not work anymore and is tilted out of control.
Analysis
Everyday we hear more and more terrible economic news. We are almost overwhelmed with the magnitude of the numbers of companies failing, folks losing their jobs and homes. The human suffering touches the hearts of all but a few. I become very sad every time I read or hear some of the stories of individual suffering. Folks with young children losing jobs, saving’s, homes, and their feelings of self-worth and pride.
We have lived during a time when the norm has become for iconic companies to fail or be sold to foreign ownership. Companies like GM, Ford, and Chrysler on the verge of extinction. A Steel industry reduced to a much smaller size than the past. The Rubber industry sold to foreign ownership. Firestone sold to the Japanese. Uniroyal and BF Goodrich sold to the French. General Tire sold to the Germans. I could fill a page with similar examples, but I think you get what I am trying to say. We have taken a path that shifts the good paying jobs off/shore. We are told that these will be replaced with good paying high-tech jobs of the future. Try telling that to a fifty year old 25 year seniority employee with two kids in college after he is told his plant is closing. The product will be produced in China. I suggest that you might want to do that from a distance.
We are fed a lot of gobbly-gook buzz words for the reason that our economic situation is so dire. We hear things like “Globalization”,” Credit Market Freeze”,” Mortgage Packing”, “Derivatives Swaps” etc. Most of us do not even understand these words much less their true meaning. Why are they afraid to tell us the truth in the simplest terms?
Let’s take the housing situation and attempt to put it in the simplest terms. Our Legislators in the Congress and Senate pressured Freddie Mac and Fannie May to see that money was made available for low income folks to be able to afford housing. Money was loaned to folks without the capability of paying it back with no down payment and pay interest only for a period of time or an adjustable rate that kicked in a few years later. Why would they do this? Two reasons! The first reason is some legislators like Barney Frank/Chris Dodd wanted to look like a hero to this group of people so they effectively blocked the smell every time the stench increased to a higher level that more people could smell. It is very obvious that they hurt this group and other groups more than they helped them. The second reason is that the “Executives” or leaders in these companies and lending organizations made millions and millions of dollars doing this. The more they loaned the more they made individually. Sounds like the American dream? This might be true for the lenders, but not so good for folks losing their homes.
Let’s break it down to what is really wrong with our country and why we are in an economic situation unlike anything we have experienced since the great depression. There is one dominating factor that overshadows all others. A sickness has infected almost all aspects of our society banking, manufacturing, health care etc. Every segment of our society has been infected. The disease is called “Executivitis” and one of the causes is GREED. We have taken generations of extremely bright and hard working people and infected them with “Executivitis”. Executive suites and Board rooms across the country are filled with these folks and we created them. How did we create and spread this disease. Think about it. Let’s just list a few of the reasons.
1. We went from paying our CEO’s 10-15 times more than the folks doing the work to 400-500 times more than the folks doing the work. 2. We introduced stock options under guise of aligning interest of the CEO with the shareholders. What a crock!
3. We negotiated contracts with CEO’s that allowed them to become enormously wealth while failing miserably at their jobs and causing huge job losses.
4. We tied performance to share price without a lot of thought as to how that parameter was accomplished.
5. We almost completely ignored the stakeholders in our evaluations.
6. We allowed “the good old boy-sail with the wind” types to fill our boards to the extent that they were “rubber stamps”.
I could probably list 10-15 more, but before you think that this is just another disgruntled person writing this, I will just review a few factual examples of this disease. One of the more famous one’s was ENRON. We paid guys like Ken Lay and Jeff Skilling hundreds of millions of dollars to destroy the company and thousands of folk’s lives. Skilling was convicted, but that did not help the thousands of folks involved. How about Bernie Ebbers (convicted) at Worldcom or Dennis Kosolosky(convicted) at Tyco or John Rigas(convicted) at Adelphia. Every day we have reports of CEO’s destroying a company and being paid obscenely to accomplish the destruction. This disease caused by greed has done more damage to our country than most of the wars we have fought.
What is the solution? We need to change the measurement system. We should incorporate into the performance objectives business growth and job creation. I am not advocating disemboweling the capitalist system or stifling individual initiative. This is not meant to lessen the importance of being profitable or returning good returns to investors. Most of these top level folks did not reach their present level without being hard working and well educated. They do what we ask them to do. We need to ask them to focus on growth, job creation, and investment to remain competitive. We need to get realistic on pay. Pay them well, pay for performance, but get real! There are not many folks who contribute $100mm to $500mm individually to an organization. We need to change the “old buddy” system at the board of director’s level. We need board members who will say no to compensation packages that are not realistic in comparison to performance and the company as a whole. We need boards that do not lower stock option prices when share price drops due to poor performance. A quote from an anonymous shareholder dissident: “Boards are like subatomic particles, they behave differently when observed”. We need to make all compensation transparent by putting stock options in the expense column and including them in reporting.
Let me close by asking you do a little visualization. Picture a CEO sitting behind his huge desk in the corner office on the top floor. Sitting in front of the desk are several members of his trusted inner circle. The CEO is exhilarated. He is expounding on what a great country we live in. He tells his trusted cronies, “Where else but America could the merger have failed, we announced a major recall of the product, the stock price went in the toilet, we reduced our employment by 6,000, and we all are still fabulously wealthy. Is this a great country or what?
