CEOs and Proletariats

Comment by Mark Lacter

Some years ago I remember interviewing the chief executive of a very large company in one of those anonymous conference halls at the downtown convention center. The guy was making a speech at some event and could only meet me afterwards. He seemed like a nice enough fellow and we kept talking well after everyone else had left. Then, as we walked to the deserted parking area, I came face to face with class separation, big-time. He eased into a black Lincoln Town Car that pulled up just at the right moment. I trudged to my Toyota.

Make no mistake, it does pay to run a company, even when you're presumably taking orders from a higher power, otherwise known as the shareholders. Which, in a nutshell, explains the current outcry about excessive executive compensation especially timely given the abuses that are being played out each day in the papers.

Most CEOs are not crooks, of course, but more than a few are perfectly willing to lobby for huge pay packages regardless of how the company performs. Instead of pay-for-performance, they're calling it pay-for-failure.

An especially outrageous example reported by The New York Times involves Coca-Cola Co., which set aside one million shares of stock for recently named CEO Douglas Daft but only if the company's earnings grew at least 20 percent per year over five years, beginning in 2001. By April of that year, it was clear that Coke would not make the goal. What did the board do? It lowered the benchmarks.

This year, the big debate centers on how to account for the awarding of stock options to these same top managers. The rationale for handing out options is sound enough provide an ownership stake, and thus a greater incentive, for the people managing the company to produce better results and with it, a higher stock price. But there's scant evidence of such a direct cause-and-effect.

Meanwhile, granting options has negative effects on stockholders starting with the dilution of shares held by everyone else. In order to counteract that dilution, companies must buy back shares, but that costs money the company could spend in more productive ways. Like growth. Federal Reserve Chairman Alan Greenspan and a bipartisan group of lawmakers are pushing legislation that would overhaul these practices, but don't hold your breath. Corporate lobbyists are certain to keep things pretty much as they are. As they've always been.

It's not that corporate chieftains are necessarily conspiring against a hapless proletariat, as the radical left kept claiming in the '60s. Nor is there an actual Old Boys Club, where graybeards sit back in their rich leather chairs and determine which of their breed will run what multinational. Yet, there's no mistaking that the CEO club is privileged and, whether deliberately or not, exclusionary.

If you have doubts, consider the limited number of women chief executives and then consider the extra scrutiny they attract. Consider, too, that the naming of an African-American to run a major corporation is front-page news because it is so extraordinary.

The apologists weakly argue that it takes time for women and minorities to work their way up the ranks and that one of these days, by golly, they will have their own Town Cars. But they've been saying that for years and the CEO ranks are still dominated by white guys with WASPish, Ivy League pedigrees.

The reasons for this are both intriguing and confounding. We'll tackle them next week.

Mark Lacter is editor of the Business Journal.

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