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The New Robber Barons

Is It Time for Salary Caps on Publicly Held Corporations?

November 2006 By Denny Hatch
13

In the News

Ex-CEO of Cendant Is Found Guilty In Third Trial
A federal jury found former Cendant Corp. Chairman Walter A. Forbes guilty of conspiracy to commit securities fraud and two counts of making false statements in a massive fraud scheme that inflated the travel and real-estate company’s earnings and crippled the company’s once-stellar reputation.
—Wall Street Journal News Roundup, Nov. 1, 2006
In the late 1970s, I was hired to write a membership mailing for Comp-U-Card, a Stamford, Conn. organization that claimed to have built “a data base of price and product information on approximately 60,000 brand name products.” Consumers could tap into this wealth of information and presumably save many times the $25 membership fee. Goods were shipped directly from wholesalers to the customer.

I met briefly with the president, Walter A. Forbes, who was good-looking, articulate and very intense. At one point in our meeting, he took a phone call and asked me to step outside, which I did.

When I returned, Forbes told me that the call was from one of his investors, Wiley T. Buchanan, who had been the U.S. Chief of Protocol from 1957-1961 under President Eisenhower, and had just returned from being an Ambassador to Austria.

I was dazzled that this young guy—Forbes was 34 at the time—was being called by a Washington legend. It was my first encounter with a well-connected, hot young entrepreneur. I created the mailing and was paid promptly.

Forbes built Comp-U-Card—later called CUC—into a highly profitable business. In 1997, CUC merged with Henry Silverman’s Hospitality Franchise Systems (HFC) that owned Avis, Ramada, Days Inn and Century 21. The new conglomerate was called Cendant, with Silverman as CEO and Forbes as chairman. In an unusual arrangement, they agreed to switch positions in 2000.

Now, 30 years later, Forbes has been convicted of a $14 billion accounting fraud, and takes his place in the pantheon of corporate rogues along with Enron’s Ken Lay and Jeff Skilling, Bernard Ebbers of WorldCom, Tyco’s Dennis Kozlowski, and the Rigas boys of Adelphia—père et fils. Forbes stands to spend up to 20 years in the pokey.

What in the world is going on with American business?

The Newest Scam
With the Federal crackdown on corporate crime, you would think that top management would be smart enough to walk the straight and narrow.

But no, a new scam has surfaced—the backdating of stock options.

If you have a stock option, it means you can buy a share of that stock from the company at the option price any time after the date of issue. For example, if the stock is trading at $20 with an option price of $30 and the stock goes up to $50, you can buy the stock for $30, turn around and sell it at $50, and make an instant $20.

Takeaway Points to Consider:

* If you want a publicly-held company to be your personal piggy bank, take it private first.

* “Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we’re looking for the source of our troubles, we shouldn’t test people for drugs, we should test them for stupidity, ignorance, GREED and love of power.”
—P.J. O’Rourke

* “It has always been my belief that a man should do his best, regardless of how much he receives for his services, or the number of people he may be serving or the class of people served.”
—Napoleon Hill

* “Work itself is the reward. If I choose challenging work it will pay me back with interest. At least I’ll be interested even if nobody else is. And this attempt for excellence is what sustains the most well-lived and satisfying, successful lives.”
—Meryl Streep

* “If a business does well, the stock eventually follows.”
—Warren Buffett

* “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
—Warren Buffett

* “Money is just a method of keeping score now. I certainly don’t need more money. No one needs this much money.”
—Lawrence Ellison, founder of Oracle, the fourth richest man on the Forbes’ 400 list and owner of the 453’ Rising Sun, the second largest private yacht in the world.

* “Money is a good servant, but a poor master.”
—Dominique Bouhours (1628-1702)

* “Greed is all right, by the way … I think greed is healthy. You can be greedy and still feel good about yourself.”
—Financier Ivan Boesky, from a 1985 commencement address at the University of California, Berkeley. The following year, Boesky was convicted of insider trading, paid a $100 million fine and served 22 months in prison.

* “The point is that you can’t be too greedy.”
—Donald Trump

Web Sites Related to Today's Edition:

About Warren Buffett
http://www.berkshirehathaway.com/

About Alfrederick Smith Hatch
http://www.jackcorbett.com/
 

Companies Mentioned:
13

COMMENTS

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Comment *
Most Recent Comments:
Tim McCreight - Posted on November 03, 2006
I think what you're seeing in the behavior of the corporate 'kleptocracy'is the consequence of unmediated reliance on markets. We have become enthralled in these United States with the idea that any result thrown up by the free market is by definition the best solution. It might be. But anyone familiar with dialectic reasoning (something the people of the United States are usually not conversant with) would admit that the opposite could be equally true. Kudos to Denny for airing his disgust (my word), which I share. I know everyone else has offered mechanical solutions. Here's a longer term, attitudinal solution: don't let anyone take a class in economics without also taking a class in ethics or moral philosophy. Because Adam Smith of invisible hand fame held a chair in moral philosophy and I'd submit that an internalized sense of limits is the best medicine for anyone who believes in honest effort and doing the greatest good (or any good or at least no harm) in the short time we're given on this planet.
Rick Rakauskas - Posted on November 02, 2006
Having stock options that vest 2, 5, 10 years down the track could create a long term business bulding approach that benefits everybody. You aren't going to kite the stock price if you can't sell your options - you'd be forced to create long term value in the business.
wash Phillips - Posted on November 02, 2006
Respondant Scott said: "In all of the cited examples of bad acts, there were consequences: fines, imprisonment, and the destruction of reputations that will become legacies. That is as it should be. But I do not want the liberties of well-run American companies with ethical management to be defined by the bad acts of criminals."

However, we are not talking here of "well-run companies"only. Moreover, the on-going "bad acts of criminals" are not limited to only those presently caught or exposed. We never really know to what breadth and depth such corruption runs, until it is revealed.

Alas, the act of unfolding these mis-deeds via government subpoena of all records can have chilling--even devastating--effects on the workforce and daily operations--foundation of the successful enterprise--not to mention the stock price.

Though we need to admit of the latter that--after the Initial Public Offering in most cases--stock prices rarely benefit the corporate enterprise itself (since increases don't accrue to the business per se but to those invested in it.

The very idea of C-level folk kiting stock prices for additional personal gain is a clear violation of public (stockholder) trust, especially when such gains fail soon after. The regret is that we capitalists are bound by philosophy and practice to such gambles.

The Warren Buffet example is a good one for relating money and life. Whereas Mrs. Lay complained (before her husband's death) that she was "down to only four houses." Mr. Buffet uses the resources of a billionaire but does not succumb to the vanity attendant to world-class success.

Damon T - Posted on November 02, 2006
The ongoing efforts at campaign finance reform point to the problem involved when you impose caps. When you squeeze the balloon on one end, the air simply rushes over to a more lax area.

But one problem we learned from Enron was that some of the bonuses and benefits that were originally intended to provide incentives to lower-level employees are often being given to executives at the highest level, who are playing a completely different game. As another poster wrote, the company is merely a commodity to them, and the incentives play out in a perverse manner at the highest levels. Perhaps we could use tax law to make those types of benefits off limits or at least undesirable at the upper echelons.
Scott - Posted on November 02, 2006
A government regulation that limits the competitiveness of American corporations by limiting the amount of money they can choose to spend on talent. Yeah, it doesn?t sound so good when you say it that way. It strikes me as an emotional reaction to a minority of extreme examples. And the sports league analogy is invalid. Caps might work there because they level the talent pool, making games more exciting and increasing the entertainment value for fans. The overall league is the business and the franchise caps works as part of its entertainment model.

It?s interesting how everyone talks about money and power corrupting otherwise inherently good people. Aleksandr Solzhenitsyn lamented that he wished it was only as easy as cutting the evil men off from the rest of society -- but that it was impossible since the potential for good and evil exists at the very heart of every man. The point here is that nobody is inherently and completely good. But money and power will have less of an effect on an individual with an established set of core values and a good sense of the golden rule. The position won?t corrupt the person whose capacity for goodness far outweighs all else.

So what of the possibility that CEO positions do attract a group of applicants who are disproportionately prone to bad acts? Is the solution to limit the money a corporation can use to attract its very top talent? To financially punish the achievement of the decent soul who may end up with the job? No. Stealing is against the law and we?ll do fine to just enforce that without handcuffing and robbing companies of their competitivness and ability to make business decisions regarding top talent. The market, without interference of a salary cap, should decide who shows up for the interviews.

In all of the cited examples of bad acts, there were consequences: fines, imprisonment, and the destruction of reputations that will become legacies. That is as it should be. But I do not want the liberties of well-run American companies with ethical management to be defined by the bad acts of criminals.

Carl Street - Posted on November 02, 2006
Capping salaries may be popular but realistically it will only be substituting one form of bureaucracy and corruption for another. Despite the popular mythology there is such a thing as the "public sector" the fact is the Government itself is just another business. Admittedly it is one that claims a monopoly on force and uses weapon bearing sales agents to do its marketing; but there is NOTHING special about it despite the erroneous near religious belief of public ignoramuses that "the government is us". All large institutions whether governments or corporate entities become oligarchially controlled enterprises by those who learn how to game the system. These vast enterprises often mask that control by offering people a chance to vote. But that is like claiming passengers on an ocean liner have a say in the ship's navigation because they are given an oar. The fact is large scale enterprises cannot be controlled by the public because the insiders running them control not only the enterprise; but also the information the public is allowed to hear. Thus, the public is deprived of the information it needs in order to make valid judgements -- which renders voting, even highly motivated voting largely ineffective. In addition, the oligarchial elite (insiders) always have contingency plans that allow them to offset any reform by the voters. This is equally true of both government entitites and corporate. If you doubt my word, I suggest you compare the turnover rates in Congress with that of the Russian Politburo or the Chinese Central Committee. You will find that the turnover in these admittedly despotic systems is substantially larger than in "free democratic" America. That may not be popular or politically correct; but it is factual. Mores the pity...

Carl Street
carl_street@cjstreet.com
Dee Long - Posted on November 02, 2006
A secondary question to what is wrong with American business is -- what has happened to our sense of morality? Seems like too many 21st century CEO's took the fictional "Gordon Gecko's" message of "greed is good" to heart. The goal of every business should be true prosperity, NOT greed!
Dev. Kinney - Posted on November 02, 2006
Problem is, a business in America is just a commodity to be traded. CEOs have no interest in anything but the stock price. Manipulation is desired and sanctioned by the stockholder, leading to all kinds of fixes...including government. In such an environment, the criminals captured are not necessarily the worst ones, but some who have fallen out of favor. Tying all compensation to company performance instead of stock price would be one solution. Caps are only suited for monopolies like pro sports.
David Garfinkel - Posted on November 02, 2006
I grew up in DC suburbs with both parents as government workers. This was at a time where at least by appearances, there was some sense of public service and not sticking one's snout too piggishly into the public trough. When a company goes public, it's really no longer private enterprise anymore. Neither is it a public-sector monstrosity (thank God). But by the very nature of the opportunity to sell stock to the public, and the yoke that comes with it, a public company has obligations a private company doesn't -- and so it should have restraints that go with the obligations. I think a salary cap is a good idea because it would discourage the rapists and pillagers and bring in achievers who understand a sense of service and balance. As long as the cap isn't unreasonably low, of course.
Tracy Hoffmann - Posted on November 02, 2006
Maximum C-level compensation should be tied as a percentage to the lowest paid employee. One can only imagine the economic impact of these C-Level folks passing the millions they receive in bonuses back to their employees. If each employee took the bonus split and purchased consumer goods it would stimulate the economy far greater and deeper than any spending the C-Level executives would do. One yacht versus 500 cars or 20,000 refrigerators. It seems like simple math to me.
Barb - Posted on November 02, 2006
Abraham Lincoln said that if you want to find a man's true character, you observe not how he deals with adversity, but how he deals with power. There is very little room for integrity when there is so much money in these men's pockets. Meanwhile, our school system is laying off teachers and cutting funding for programs like art and music. I don't have a solution, because the best solution would be personal integrity and honesty, and you can't force that. It's a sad state of affairs. You can't trust anybody any more.
Peter Hochsstein - Posted on November 02, 2006
Salary caps won't do it, because CEOs won't accept them.

What will work is a massive "max tax" on corporate remuneration over $2 million.

A 70% or even 98% maximum tax rate on outrageous incomes siphoned off at the stockholders' trough will remove the "temptation" (it's actually an incentive) to lie, cheat and steal that has infested so many executive suites and corporate broadrooms.

I've been pumping for a mega-max-tax on my own blog, The New York Crank.

For an example, see this recent post:
http://thenewyorkcrank.blogspot.com/2006/10/why-health-care-is-too-important-to_16.html
Sean Woodruff - Posted on November 02, 2006
I'm not sure what a salary cap would do. This would just happen at a lesser degree.

It seems to me it is being taken care of by the system that is in place to monitor these things. As new "stuff" is uncovered, the system evolves to get rid of these people. That's as it should be.
Click here to view archived comments...
Archived Comments:
Tim McCreight - Posted on November 03, 2006
I think what you're seeing in the behavior of the corporate 'kleptocracy'is the consequence of unmediated reliance on markets. We have become enthralled in these United States with the idea that any result thrown up by the free market is by definition the best solution. It might be. But anyone familiar with dialectic reasoning (something the people of the United States are usually not conversant with) would admit that the opposite could be equally true. Kudos to Denny for airing his disgust (my word), which I share. I know everyone else has offered mechanical solutions. Here's a longer term, attitudinal solution: don't let anyone take a class in economics without also taking a class in ethics or moral philosophy. Because Adam Smith of invisible hand fame held a chair in moral philosophy and I'd submit that an internalized sense of limits is the best medicine for anyone who believes in honest effort and doing the greatest good (or any good or at least no harm) in the short time we're given on this planet.
Rick Rakauskas - Posted on November 02, 2006
Having stock options that vest 2, 5, 10 years down the track could create a long term business bulding approach that benefits everybody. You aren't going to kite the stock price if you can't sell your options - you'd be forced to create long term value in the business.
wash Phillips - Posted on November 02, 2006
Respondant Scott said: "In all of the cited examples of bad acts, there were consequences: fines, imprisonment, and the destruction of reputations that will become legacies. That is as it should be. But I do not want the liberties of well-run American companies with ethical management to be defined by the bad acts of criminals."

However, we are not talking here of "well-run companies"only. Moreover, the on-going "bad acts of criminals" are not limited to only those presently caught or exposed. We never really know to what breadth and depth such corruption runs, until it is revealed.

Alas, the act of unfolding these mis-deeds via government subpoena of all records can have chilling--even devastating--effects on the workforce and daily operations--foundation of the successful enterprise--not to mention the stock price.

Though we need to admit of the latter that--after the Initial Public Offering in most cases--stock prices rarely benefit the corporate enterprise itself (since increases don't accrue to the business per se but to those invested in it.

The very idea of C-level folk kiting stock prices for additional personal gain is a clear violation of public (stockholder) trust, especially when such gains fail soon after. The regret is that we capitalists are bound by philosophy and practice to such gambles.

The Warren Buffet example is a good one for relating money and life. Whereas Mrs. Lay complained (before her husband's death) that she was "down to only four houses." Mr. Buffet uses the resources of a billionaire but does not succumb to the vanity attendant to world-class success.

Damon T - Posted on November 02, 2006
The ongoing efforts at campaign finance reform point to the problem involved when you impose caps. When you squeeze the balloon on one end, the air simply rushes over to a more lax area.

But one problem we learned from Enron was that some of the bonuses and benefits that were originally intended to provide incentives to lower-level employees are often being given to executives at the highest level, who are playing a completely different game. As another poster wrote, the company is merely a commodity to them, and the incentives play out in a perverse manner at the highest levels. Perhaps we could use tax law to make those types of benefits off limits or at least undesirable at the upper echelons.
Scott - Posted on November 02, 2006
A government regulation that limits the competitiveness of American corporations by limiting the amount of money they can choose to spend on talent. Yeah, it doesn?t sound so good when you say it that way. It strikes me as an emotional reaction to a minority of extreme examples. And the sports league analogy is invalid. Caps might work there because they level the talent pool, making games more exciting and increasing the entertainment value for fans. The overall league is the business and the franchise caps works as part of its entertainment model.

It?s interesting how everyone talks about money and power corrupting otherwise inherently good people. Aleksandr Solzhenitsyn lamented that he wished it was only as easy as cutting the evil men off from the rest of society -- but that it was impossible since the potential for good and evil exists at the very heart of every man. The point here is that nobody is inherently and completely good. But money and power will have less of an effect on an individual with an established set of core values and a good sense of the golden rule. The position won?t corrupt the person whose capacity for goodness far outweighs all else.

So what of the possibility that CEO positions do attract a group of applicants who are disproportionately prone to bad acts? Is the solution to limit the money a corporation can use to attract its very top talent? To financially punish the achievement of the decent soul who may end up with the job? No. Stealing is against the law and we?ll do fine to just enforce that without handcuffing and robbing companies of their competitivness and ability to make business decisions regarding top talent. The market, without interference of a salary cap, should decide who shows up for the interviews.

In all of the cited examples of bad acts, there were consequences: fines, imprisonment, and the destruction of reputations that will become legacies. That is as it should be. But I do not want the liberties of well-run American companies with ethical management to be defined by the bad acts of criminals.

Carl Street - Posted on November 02, 2006
Capping salaries may be popular but realistically it will only be substituting one form of bureaucracy and corruption for another. Despite the popular mythology there is such a thing as the "public sector" the fact is the Government itself is just another business. Admittedly it is one that claims a monopoly on force and uses weapon bearing sales agents to do its marketing; but there is NOTHING special about it despite the erroneous near religious belief of public ignoramuses that "the government is us". All large institutions whether governments or corporate entities become oligarchially controlled enterprises by those who learn how to game the system. These vast enterprises often mask that control by offering people a chance to vote. But that is like claiming passengers on an ocean liner have a say in the ship's navigation because they are given an oar. The fact is large scale enterprises cannot be controlled by the public because the insiders running them control not only the enterprise; but also the information the public is allowed to hear. Thus, the public is deprived of the information it needs in order to make valid judgements -- which renders voting, even highly motivated voting largely ineffective. In addition, the oligarchial elite (insiders) always have contingency plans that allow them to offset any reform by the voters. This is equally true of both government entitites and corporate. If you doubt my word, I suggest you compare the turnover rates in Congress with that of the Russian Politburo or the Chinese Central Committee. You will find that the turnover in these admittedly despotic systems is substantially larger than in "free democratic" America. That may not be popular or politically correct; but it is factual. Mores the pity...

Carl Street
carl_street@cjstreet.com
Dee Long - Posted on November 02, 2006
A secondary question to what is wrong with American business is -- what has happened to our sense of morality? Seems like too many 21st century CEO's took the fictional "Gordon Gecko's" message of "greed is good" to heart. The goal of every business should be true prosperity, NOT greed!
Dev. Kinney - Posted on November 02, 2006
Problem is, a business in America is just a commodity to be traded. CEOs have no interest in anything but the stock price. Manipulation is desired and sanctioned by the stockholder, leading to all kinds of fixes...including government. In such an environment, the criminals captured are not necessarily the worst ones, but some who have fallen out of favor. Tying all compensation to company performance instead of stock price would be one solution. Caps are only suited for monopolies like pro sports.
David Garfinkel - Posted on November 02, 2006
I grew up in DC suburbs with both parents as government workers. This was at a time where at least by appearances, there was some sense of public service and not sticking one's snout too piggishly into the public trough. When a company goes public, it's really no longer private enterprise anymore. Neither is it a public-sector monstrosity (thank God). But by the very nature of the opportunity to sell stock to the public, and the yoke that comes with it, a public company has obligations a private company doesn't -- and so it should have restraints that go with the obligations. I think a salary cap is a good idea because it would discourage the rapists and pillagers and bring in achievers who understand a sense of service and balance. As long as the cap isn't unreasonably low, of course.
Tracy Hoffmann - Posted on November 02, 2006
Maximum C-level compensation should be tied as a percentage to the lowest paid employee. One can only imagine the economic impact of these C-Level folks passing the millions they receive in bonuses back to their employees. If each employee took the bonus split and purchased consumer goods it would stimulate the economy far greater and deeper than any spending the C-Level executives would do. One yacht versus 500 cars or 20,000 refrigerators. It seems like simple math to me.
Barb - Posted on November 02, 2006
Abraham Lincoln said that if you want to find a man's true character, you observe not how he deals with adversity, but how he deals with power. There is very little room for integrity when there is so much money in these men's pockets. Meanwhile, our school system is laying off teachers and cutting funding for programs like art and music. I don't have a solution, because the best solution would be personal integrity and honesty, and you can't force that. It's a sad state of affairs. You can't trust anybody any more.
Peter Hochsstein - Posted on November 02, 2006
Salary caps won't do it, because CEOs won't accept them.

What will work is a massive "max tax" on corporate remuneration over $2 million.

A 70% or even 98% maximum tax rate on outrageous incomes siphoned off at the stockholders' trough will remove the "temptation" (it's actually an incentive) to lie, cheat and steal that has infested so many executive suites and corporate broadrooms.

I've been pumping for a mega-max-tax on my own blog, The New York Crank.

For an example, see this recent post:
http://thenewyorkcrank.blogspot.com/2006/10/why-health-care-is-too-important-to_16.html
Sean Woodruff - Posted on November 02, 2006
I'm not sure what a salary cap would do. This would just happen at a lesser degree.

It seems to me it is being taken care of by the system that is in place to monitor these things. As new "stuff" is uncovered, the system evolves to get rid of these people. That's as it should be.