On a Saturday morning in the fall of 2011 I was driving through downtown Tampa with my teenage daughter. As we passed a city park she asked me who the people were that had gathered there.
It looked like just a bunch of umbrellas at the time, but I knew it was 25 to 30 people… our local version of the Occupy Wall Street (OWS) movement.
I told her it was a group of people protesting Wall Street. She asked me what they wanted. Good question. I had no answer. But then again, neither did anyone from Occupy Wall Street, that I could tell.
Did they want to live in city parks for five months? Did they want to be made fun of and ridiculed as people went by? Did they enjoy eating and sleeping in oppressive heat, bitter cold, and rain? It had to be more than that, but their proclamations were vague.
Consider this statement on their website…
“The one thing we all have in common is that we are the 99% that will no longer tolerate the greed and corruption of the 1%.”
What does that mean? It doesn’t take me anywhere as a reader or a listener. It just sounds mad. And that’s unfortunate because Occupy Wall Street as an idea could have been so much more, and supported by millions more people. They just needed the right target.
Instead of starting with vague intentions and eventually moving toward an agenda of nationalization and big government, the group could have called for a housecleaning of the current system.
They could have demanded that people in positions of power and responsibility – not middlemen and low-level managers – be held responsible for the debacle of the Great Recession and the general sclerosis of American business that simply feeds itself instead of fostering growth.
In short, they could have called for individual responsibility. And there is a really good place to start on this one – corporate boards of directors.
Companies aren’t people. They are legal entities that serve as a structure for aggregating capital and engaging in commerce. The owners of companies select people to oversee everything. In public companies CEOs and presidents get a lot of attention, but it’s the boards of directors that hold all the power, even if they don’t exercise it.
Shareholders vote on these groups in order to protect their interests, but unfortunately management typically recommends them.
Directors are supposed to be the watchdogs, overseeing the CEOs, presidents, and generally the activities of the companies they serve. When it comes to big companies, directors tend to have really impressive resumes, which sounds good in theory but obviously doesn’t mean a heck of a lot in practice.
If Occupy Wall Street had been laser-like in its focus, it could have taken aim at boards of directors and asked the obvious question: “If they have all this power, why aren’t they accountable?”
If board members take the job of overseeing a company and then get paid quite handsomely for it, shouldn’t they bear the burden of actually doing the job?
If you’re on the compensation committee, shouldn’t you be asking why it is that executives earn salaries in the millions while the company loses millions?
If you serve on the risk committee, shouldn’t it strike you as odd that the company required bailouts from the U.S. government and yet no one in the organization ended up in pinstripes?
If Occupy Wall Street had asked these types of questions, they might have found the answer. That is, boards of directors seem to exist simply to perpetuate boards. And with good reason. It pays really, really well.
By law, public companies must issue a proxy statement every year listing their current boards of directors, nominees, the affiliations of all these people, and the compensation paid to each director.
I pulled up the proxy statement from General Electric and perused the board members. One of the directors is a gentleman named James Cash.
I don’t know him but he’s listed as a Harvard Professor. I’ll make the assumption that he’s a good guy who brings a lot of knowledge and expertise to the GE board. I make this assumption because other people want Mr. Cash as well. Like Chubb Insurance and Walmart. He serves on both of their boards in addition to serving on the board of GE.
From the three of them Mr. Cash earned $812,915 in compensation in 2011. Not bad. Not bad at all. Keep in mind this is not Mr. Cash’s day job. He moonlights as a board member to three companies and for his troubles receives over three quarters of a million dollars a year.
As I said, I don’t know Mr. Cash. He simply provides a good example of what is called an Interlocking Board, or a board that shares members with other boards. If you drew a diagram of the common directors among the fortune 500 companies it would look like a spider web.
Each of these companies pays their board members for their service, typically in the six figures. This makes sitting on corporate boards a very rewarding position, as long as you stay there.
Remember that most board members are recommended by other board members as well as management. This makes the process of oversight less than arm’s length. Shareholders can put nominees on the ballot, but the overwhelming number of directors selected are those the company recommends.
It’s hard to see how a person can serve the shareholders of several companies simultaneously, or why a company would want board members that currently serve on other boards. Is there some special talent to attending meetings?
If you aren’t going to do the job of governing the company, overseeing management, and protecting shareholders, then what element of the position of director is so important that it should go to people who serve on lots of other boards?
Given the record of many companies during the recent downturn, I’m sure any number of people could have done just as good a job of sitting by while these entities were run into the ground.
Which brings me back to Occupy Wall Street…
The movement could have specifically called for the indictment of board members who were charged with overseeing the likes of General Electric, General Motors (GM), Citi, AIG, Bank of America, Fannie Mae, Freddie Mac, and a slew of other companies that were so woefully mismanaged that they required billions of dollars in U.S. government bailout money.
Clearly the directors of such companies were not doing their jobs, and yet they were paid handsomely. Some of them are still on their respective boards, collecting their fees.
Bringing the directors to heel would have both held the people at the top accountable and sent the message that such oversight has teeth. I’m sure that, looking back, the stockholders of GM and Fannie Mae wish there’d been a bit more oversight of the companies they owned, and would gladly see the people that allowed those firms to go so far astray be called on the carpet for the lack of action.
Unfortunately nothing of the sort is taking place. Instead, Occupy Wall Street and like-minded people who want change keep calling for government intervention. They should be careful what they wish for.
Putting politicians in the mix simply makes things worse… just ask the bondholders of GM who could only watch as junior creditors like the UAW jumped ahead of them in the government-orchestrated bankruptcy.
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Ahead of the Curve
A couple years ago, Warren Buffett’s secretary became “Exhibit A,” of sorts, in his argument for raising the tax rate on capital gains. The idea of the secretary-to-a-billionaire paying a higher tax rate than the billionaire himself was a poignant comparison aimed to invoke a guttural reply, summed up as: “That’s NOT fair!”