Beyond Climate Change: Starbucks Awash in Cash

While it may be tempting to go after companies for hypocrisy on corporate social responsibility, even deeper criticism may be closer to the bottom line, financially. Even though social media castigated Starbucks for its impact on carbon emissions in agreeing to fly its Southern Californian CEO Brian Niccol to Seattle on a company plane each week, I submit that the amount of spending entailed raises questions about cost-containment and even cast some doubt on whether the company’s price increases in 2024 were wholly justified, and thus even on whether the industry was competitive or an oligarchy.

Before Niccol was to assume his role as CEO on September 9, 2024, Starbucks announced that he would “not be required to relocate to the company’s headquarters” during his employment with the company.[1] Because he would be expected to work at the Seattle office at least three days a week to comply with the company’s policy on hybrid working, he would be flying a distance greater than that which is between Berlin and Rome on a company plane weekly. Why could he not fly commercial (business class) and thereby save the company a lot of money? Is a CEO really above such flying?

I suspect that in the E.U. the answer would be more down-to-earth, or realistic, than in the U.S., where CEO’s are more likely to be reckon as akin to divine emperors. Whereas in Europe, an aristocracy exists that can put the moneyed caste in its proper place, American CEOs reside at the top of the societal pyramid. Being consumed with thoughts of money is valued rather than presumed low. This is not to say that inherited wealth is value-free and thus exempt from a different criticism. Rather, my point is that CEO’s of American companies can get away with being treated like royalty on account of the relatively pro-business (or business-leaning) societal culture.

Rather than criticizing Starbucks for spending too much money on its CEO’s transportation, users of social media expressed anger over the company’s preachments on sustainability while the CEO is to be flown on a private plane weekly, burning thousands of liters of fuel in the atmosphere. On its website, the company claimed that it had “a bold aspiration to be a resource positive company.”[2] The CEO of Conservation International stated that the company was backing up its “commitments with immediate actions to reduce [its] footprint and invest in nature.”[3] The hypocrisy could have been easily obviated by having the CEO fly business in a commercial airline.

It is not as if Niccol would not be able to afford the flights, as his annual salary was announced as $1.6 million, not including a possible performance-related bonus of up to $7.2 million and up to $23 million a year in company stock.[4] Of course, the company would no doubt cover the cost of its CEO’s commute, whether commercial or on a company plane, and such money, together with his compensation-level, suggests that Starbucks had money to burn in 2024 even as it was increasing the prices of its drink products.

In 2023, the CEO-to-worker pay ratio in the United States had increased to 251:1, which was up 26% from 2022. Back in 1965, CEOs were paid on average just 21 times more than the medium worker. In 2021, Chipotle, where Niccol had worked prior to becoming CEO of Starbucks, was at 2,998:1, which was the fifth highest in the United States. I suspect that he had rather high expectations in negotiating with Starbucks. That the company relented even as it felt the need to increase drink prices (presumably to keep afloat financially) is a point that the carbon-emission critics missed.

Considering the rise in prices at restaurants and grocery stores since the pandemic of 2020, it is worthy of note societally that a company raising prices would have enough cash on hand to fly one person weekly on a company plane instead of having him fly commercial (and on his own dime!). That is to say, one might wonder how legitimate the rising prices of food (and drink) were even after the pandemic. In competitive markets, new entrants can offer more competitive prices and thus bring down prices generally in an industry, such that the companies cannot afford to be extravagant in spending. Starbucks may simply have been raising prices because it could get away with it, and could thus afford to fly its CEO on a company plane weekly not only to the company’s headquarters, but on visits to company stores and brewing facilities on a regular basis.

---

1. “Anger Boils Up over Starbucks CEO 1600km ‘Super Commute’ on Private Jet,” Euronews, August 23, 2024.
2. Ibid.
3. Ibid.
4. Ibid.

Nissan's CEO Caught in the Crosshairs of Business and Society in Japan

Ordinarily, courses that include business & society (with business & government, and business ethics material also included as if the three fields were somehow one) have been relegated to the periphery in American business schools. Perhaps the business sector and its sycophantic deans have simply assumed that little actual cost comes from business managements deviating from societal norms and values. Admittedly, such a schism decreases reputational capital, a long-term intangible asset. Even so, the long-term-oriented and intangible can manifest as immediate jolts to such capital, with actual, measurable financial costs kicking in. They are triggered by news-worthy incidents in which a company or even one high-level manager, such as a CEO, are perceived societally as being in the wrong. The general perception of wrongness in turn depends on how far a company or manager have deviated from societal norms and values. Crucially but typically ignored, even though societal norms and values can absorb certain ethical principles or theories, business ethics is a distinct field because reasoning from or to ethical principles or theories lies at the core there. That is, no philosophical reasoning is involved in business & society; rather, the norms/values of a business sector, industry, or company are compared or contrasted with relevant societal norms and values. In this essay, I analyze the case of Carlos Ghosn, who was CEO of Nissan, Renault, and Mitsubishi on November 19, 2018 when he was arrested “on allegations that for years he had withheld millions of dollars in income from Nissan’s financial filings.”[1]
In 1999, Ghosn came to Japan “to carry out an American-style restructuring of a failing Nissan. The Japanese carmaker had $35 billion in debt, provided lifetime employment to a bloated work force and produced a fleet of the kind of cars you’d dread getting at the rental counter.”[2] He closed factories, cut suppliers, and laid off 14 percent of the workforce. As a VP at Renault, he “had helped oversee a turnaround at the middling French automaker, which had agreed to spend $5.4 billion to buy a 36.8 percent stake in Nissan Motors.”[3] On both counts, he was successful even though the CEO of General Motors at the time said Nissan was fixable.

In Japan, whose culture generally viewed outsiders with distrust, Ghosn “achieved a status bestowed on only a handful of chief executives. . . . In 2004, Emperor Akihito awarded him a Blue Ribbon Medal for his extraordinary contributions, making him the first foreign business leader to receive the honor.”[4] Ghosn, “a brash Brazilian-born and Lebanese- and French-educated engineer,” had been accepted in one of the most closed societies in the world.[5] Accolades aside, this made him extremely vulnerable should he intentionally or unintentionally violate a major societal norm or value. “From the start, he faced distrust from the Japanese policymaking and business establishment. The very idea of an outsider’s bringing free-market capitalism to Japan’s quasi-socialist corporate culture jabbed at historical wounds” even though Ghosn was not an American.[6] In other words, in “representing” a foreign economic system that a victor in World War II wore like a crown for the world to admire (even where it didn’t), Ghosn inadvertently put himself in a long-simmering wound in Japan. Not that any ethical principle had been violated; rather, his subtle predicament was predicated on a divide between a strongly valued societal norm and him as well as the company he ran. At the firm level, his “splashy—some would say autocratic—presence was out of sync with modest Japanese culture.”[7] As one Nissan employee put it, “No one dared to say anything that would confront [Ghosn’s] opinions.”[8] So a cleft between business and society can affect the degree to which a business leader’s style is accepted organizationally. That he cut 21,000 jobs but spent more than $200 million for Nissan to be a sponsor of the Rio Olympics in 2016, and that he hopped between homes paid by Nissan and flew in company jets would likely put him out in virtually any society in the world only gave the Japanese fetter for distrusting the foreigner in spite of his early contributions to Nissan and thus Japan’s economy.

The triggering incident that brought down Ghosn’s reputational capital in a flash stemmed from a divergence between how he had handled the matter of his compensation (i.e., business) and how CEO’s in Japan were supposed to handle it (i.e., society). “In Japan, salarymen slave away at the kaisha (or company) with a sense of communal pride almost as important as the salary.”[9] In 2017, Ghosn made $16.9 million ($8.4 million from Renault, $6.5 million from Nissan, and $2 million from Mitsubishi), which was nearly 11 times what the chairman of Toyota, the world’s largest automaker at the time, earned.[10] Astonishingly, Ghosn had “made the case to the public that he was underpaid.”[11] Even at the annual meeting in June, 2018, he said the company remained “financially very disciplined” in rewarding senior management.[12] Asked at the time by the Financial Times if he was overpaid, he laughed and replied, “You won’t have any C.E.O. say, ‘I’m overly compensated.”[13] Breaching yet again a valued societal norm in Japan, his “brazenness rankled employees and the public in Japan.”[14]

So when a whistle-blower in Nissan said in October, 2018, that the CEO had been instructing Greg Kelly, a top aide and a board member (which represents a conflict of interest) to split Ghosn’s compensation between that which would be paid in the current year and reported in the annual report and securities filings, and that which would be paid only after the CEO will have left the company. Nissan went to prosecutors to allege that Ghosn had been underreporting his income since 2009. The company added that Ghosn and Kelly had developed future plans to pay Ghosn a further $124 million in cash and other financial instruments—some as compensation for an advisory position after the CEO’s retirement. The issue was that of committed compensation (yet not to be paid in the year committed) not being reported in securities filings (as well as the annual report). Stakeholders, and the Japanese public at large, could be harmed by not knowing the full amount of the company’s long-term liabilities.

While such harm (as well as the economic inequality even in the CEO’s current compensation) could be useful in an ethical analysis, but in this business-and-society analysis, the issue comes down to whether Ghosn’s deviations from valued societal beliefs and norms added to the severity of the government’s response in going after the gilded CEO—a foreigner nonetheless and thus at bottom to be distrusted in Japan. The issue is not whether Japan’s norms are ethical; rather, in this analysis they are taken as given so a qualitative measure of Ghosn’s deviations can be made and related even causally to the outcome (i.e., the arrests without bail, as well as the extent of the blow to the man’s—and perhaps even his company’s reputational capital). It is indeed easy to conflate such an analysis proper in the field of business & society with that of business ethics, for we tend to apply should or should not to valued norms whether in business or society. Whereas existing norms (and cultural beliefs) are descriptive, ethical principles are normative. The two fields do share a border, however, as in asking whether a cleft between the norms (and related policies and conduct) of a business and of societies in which it conducts business is ethical or not. In going from the descriptive to the normative, ethical analysis is necessary, so I would classify this matter to lie within business ethics, drawing on the descriptive in business & society.

To be sure, legal analysis of the acts of Ghosn and Kelly would carry us a considerable distance in getting to bottom of this case study. Just when the Japanese police were going to release the CEO on bail, they rearrested him “on new charges that he shifted personal losses during the 2008 financial crisis temporarily onto Nissan’s books.”[15] The matter of an associated deviation from societal values may not be a material factor due to the crime itself, which rendered it offensive in virtually any civilized society at least at the time. This crime arguably goes beyond the failure to include committed but not paid out compensation in financial reports to the government (and in company annual reports). The impact of business & society as distinct from legal analysis was likely more significant in the failure to disclose committed compensation because Ghosn had at least gone through the company (admittedly via Kelly) in structuring his compensation. It was not as if he would get the total committed compensation in the years committed. In other words, going against valued societal norms can render a person or company particularly vulnerable, other things equal.

Business managers—even CEOs—may not recognize their own vulnerability and that of the company at which they work. For one thing, we humans tend to discount low-probability, high-cost events, especially if they are not expected in the short term. The immediacy of quarterly earnings (whether for their impact on managerial compensation or investors in the stock market) is typically of much greater concern. The design of Capitalist economy systems that emphasizes the short term is likely due in part to the fact that human beings (homo sapiens) have been “hardwired” through almost 2 million years to be oriented to immediate cravings such as hunger and sex (i.e., survival) and threats (i.e., to avoid getting eaten). Almost all of the natural selection, which gradually changes a species, took place during the hunter-gatherer stage of humanity; agriculture has only existed for the last 9,000 years. In other words, immediacy being foremost is a result not just of economic, political, and social systems giving it emphasis, but also of the context (i.e., hunter-gatherer) of human natural selection. As the context today is greatly different, perhaps systems should be designed that emphasize the long-term so as to counter how our species has evolved.

On the impacts of human evolution (and other sciences) on modern management, see William C. Frederick, Natural Corporate Management, available at Amazon.
For cases of unethical business, see Skip Worden, Cases of Unethical Business, available at Amazon.

---

1. Amy Chozick and Motoko Rich, “The Rise and Fall of Carlos Ghosn,” The New York Times, December 30, 2018.

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

6. Ibid.

7. Ibid.

8. Ibid.

9. Ibid.

10. Ibid.

11. Ibid.

12. Ibid.

13. Ibid.

14. Ibid.

15. Ibid.

How Much Economic Distance Is Justified?

The median household income in the U.S. in 2016 was about $60,000. The following year, Citibank’s CEO, Mike Corbat, received a 48% increase in compensation--$23 million. Goldman Sachs’ Lloyd Blankfein enjoyed a 9% rise, to $24 million. JP Morgan Chase’s Jamie Dimon received $29.5 million.[1] The sheer distance between the median and bank CEOs’ incomes not only begs the question—were the executive compensations justified?—but also raises the question—is such distance itself justified?

---

[1] “How Good Were the Paydays for Bank Chiefs . . . and Shareholders?: DealBook Briefing,” The New York Times, February 16, 2018.

Executive Compensation (Part II): Paying Failure

In late September 2011, Léo Apotheker was fired after 11 months as CEO at Hewlett-Packard. As a reward, he walked with $13.2 million in cash and stock, in addition to a sign-on package worth about $10 million, according to the New York Times. A month earlier, Robert P. Kelly received severance worth $17.2 in cash and stock when he was fired as CEO of Bank of New York Mellon. Even his clashing with board members and senior managers did not obstruct his nice severance package. A few days later, Carol Bartz was let go as CEO of Yahoo with nearly $10 million in spite of the company’s poor performance. Back in April 2011, John Chidsey, the CEO of Burger King, had departed with a severance package worth almost $20 million in the fact that McDonalds had been outcompeting Burger King. Baxter Phillips, the CEO of Massey Energy, got a package worth over $34 million in spite of “presiding over a company barraged with accusations of reckless conduct and with legal claims stemming from one of the deadliest mining disasters in memory,” according to the New York Times. Unfortunately, the list goes on and on. Is this a system of pay-for-failure? Moreover, do chief executives, who seem to outward appearances to be almost exclusively motivated by what they can get in additional compensation, have too much leverage over boards, and thus over even the owners as well? If so, is corporate governance itself severely broken? I answer in the affirmative.

“We repeatedly see companies’ assets go out the door to reward failure,” Scott Zdrazil, the director of corporate governance at a major bank’s investment fund that sought to tighten the restrictions on severance packages at three oil companies in 2010. He claims that investors are frustrated that boards of directors have not prevented such windfalls. Even the Dodd-Frank financial reform law has its mandated “say on pay” stockholder votes on a non-binding basis. It is as though stockholders have given up their property rights in favor of the “rights” having been taken or assumed by their agents—the directors and upper echelon managers. It is as though the business judgment rule trumps property rights even where the compensation of executives who typically control their boards is at issue. The conflict of interest here is extraordinary even as it is assumed to be obviated by the fiction of board independence from management. To be sure, a board of directors is supposed to hold management accountable.

Don’t look to public policy to shore up the property rights of stockholders any time soon. Eric Dash of the New York Times avers that the Obama administration “seemed to lose its bully pulpit for compensation reform after most of the nation’s biggest financial companies repaid their government loans.” Never mind that the administration allowed at least four of the mega-banks to repay early based on the bankers’ desire to avoid limitations on their own compensation.

The bottom line is that CEOs are not really all that interested in serving the owners of the companies; the top executives are primarily interested in their own gain, be it in terms of position/power or compensation. Structuring the latter in stock options with vesting periods and looking to outside directors for accountability are not sufficient checks on the single-minded pursuit of CEOs of their narrow self-interest. Even when a bank is in dire circumstances, such as Merrill Lynch was on September 15, 2008, a CEO can be obsessed with “letters”—statements on his or her compensation (as well as that of other top execs) being honored by the acquiring company.

As negotiations dragged on into the wee hours of Monday morning, Ken Lewis of Bank of America was utterly disgusted with John Thain’s fixation on what he and others at Merrill would get as bonuses (for a year of losses, by the way), even as Merrill and its stockholders held in the balance after midnight (when Lehman filed for bankruptcy). Lewis could only look over at Thain and think to himself, The only thing these Wall Street guys are concerned about is themselves. Even in the midst of a financial system collapse, Thain was focused on getting what he thought he deserved in spite of the huge losses. In fact, he had put off even talking to Lewis at Bank of America—repeatedly rebuffing his president’s (Fleming) lobbying—because the CEO did not like the idea of having to work for Lewis! Do you suppose the Merrill stockholders wanted to risk their entire investment in the bank because Thain didn’t want to end up working for someone else? The board of directors left the contingency plans up to him, so he didn’t have to worry about any pressure to start merger talks. Merrill’s stockholders were at best an afterthought to him, and yet the directors, who had been elected by the owners, had hired him. The eventual $29 per share price, by the way, was a result of Fleming’s negotiating for the stockholders; Thain was still looking for a line of credit from Goldman—risking an entire loss to stockholders so he could retain control of Merrill rather than turn it over to Lewis.

Even after Merrill Lynch had announced a $5.1 billion loss ($5.56 per diluted share) for the third quarter of 2008, Thain was insisting on a cash bonus of $40 million. Fleming and McCann were to get $25 million, while two other senior managers would get $15 million a piece. Thain subsequently admitted that a $20 million cash bonus for himself would be more "realistic." Given Merrill's losses in 2008 and the fact that the bank had to be sold, it is crazy that any cash bonuses would be paid for any senior manager. Thain's suggestion to the board's compensation committee that the bonuses be viewed as "success fees" for the top managers' efforts in putting together the sale of Merrill to Bank of America is nothing less than bizarre, if not comical. Failure as successs? What planet was Thain from? That a man like him ever got to be the CEO of a major bank (one too big to fail!) suggests that major flaws exist in how business practitioners view and value leadership and in how corporate governance is designed and operates.

When times were good, the finance crowd had lauded Thain as a “superman” for modernizing the NYSE. The business world tends to invent “superheroes”--even calling them rockstars!--while ignoring the more ignoble underbellies of its idols. In other words, leadership is worshipped without any clear grasp of the leaders' real contributions, while failure at the top is generally underplayed or ignored, at least financially speaking. This lack of proportion and balance is not by accident, as it is fully in the financial interests of the so-called "leaders." As for the followers and bystanders, these incredulous groupies--retarded court jesters wearing grizzled suits--happily allow themselves to get played as fools. They are dominated, not led, for the weak can dominate but not lead the herd animals.

Besides pointing to the utter bankruptcy and banality of business leadership, the case of Thain demonstrates that the system of corporate governance in the U.S. is broken even as it continues on as the status quo. Sadly, stockholders as a group are severely over-exposed to risk as a result. As long as top executives get what they believe they are worth, they will see to it, in a “by the way” fashion, that stockholders do not lose everything, but is this enough? Must stockholders (and society itself) settle for this? Are they even aware of the risk to their wealth as CEOs risk all to make sure they are taken care of? In academic terms, the system of corporate governance is incurring huge agency costs, yet I suspect we (and stockholders) are blind to their magnitude. As a society, Americans have a bad habit of taking the word of vested interests, who get away with making excuses or simply opining that there is no problem, after all. We assume that executive compensation is set by the invisible hand of the marketplace because it is in the executives’ financial interest that we take this bait and swim along with it in our gullible mouths. We are like fish that do not even realize that there are hooks in our mouths!

It does not occur to us, or to stockholders, that competent managers are out there who would gladly take top management positions for much, much less. Corporate executives have engineered a coup of sorts, having separated ownership from control at the expense of stockholders and even systemic risk in the financial system. The suits have even captured the government, such that stockholder votes on compensation are legally non-binding. This is not the invisible hand connecting demand and supply in the labor market; rather, it is a result of a rich velvet coup under the subterfuge of capitalism and democracy—with the electorate completely beguiled. Let’s not pretend this is the free market doing this, or that the governments in the U.S. are oriented to protecting the interests of stockholders and the public at the expense of the corporate managerial class.

See Essays on the Financial Crisis.

Sources:

Eric Dash, “The Lucrative Fall from Grace,” New York Times, September 30, 2011. 

Gred Farrell, Crash of the Titans (New York: Crown Business, 2010). On Thain's bonus, see chapter 16.

Executive Compensation (Part I): Systemic Risk

In the wake of the financial crisis, according to the Huffington Post, “a number of the nation's largest banks were excused from the government's rescue program before they had returned to a position of complete financial security -- in part because they wanted to avoid restrictions on how much their executives would get paid, according to a new report from the program's government overseer. Citigroup, Wells Fargo, PNC and Bank of America successfully lobbied to leave the federal bailout program early in 2009, even though the Federal Reserve Board and the Federal Deposit Insurance Corporation had recommended they take additional steps to shore up their assets, according to a new report from the Special Inspector General for the Troubled Relief Asset Program, a government watchdog office. Regulators, including the Treasury and the Federal Reserve Board, eventually ‘relaxed’ their criteria for letting the banks out of the program, the report says, leaving questions about whether the banks had strengthened their holdings enough to be able to withstand another systemic crisis.”[1]

The Huffington Post reports that according to SIGTARP, in 2009, the “four banks repeatedly tried to leave the bailout program, also known as TARP, ahead of schedule, claiming that the stigma attached to the bailout would damage investor confidence in their stability. Bank of America was especially persistent, submitting 11 separate exit proposals to the Federal Reserve Board in less than a month. The banks, particularly Citigroup and Bank of America, also expressed concern that if they stayed in TARP, they would be subject to the program's restrictions on executive compensation.

"Ultimately, the federal banking regulators ended up bowing to pressure" to let the banks leave early, said Christy Romero, Acting Special Inspector General for TARP and the author of the report. Romero added that in the event of another shock, many banks could be left with too little capital to endure, raising the possibility that "it could potentially trigger an avalanche of severe consequences to the broader economy." As a result of the regulators’ lenience, Romero told The Huffington Post, the financial system is still carrying considerable systemic risk from huge, interconnected banks, well after the meltdown of 2008. "The institutions that were 'too big to fail' ... are bigger than they were before," said Romero. "It's very critical that regulators remain vigilant to banks' demands to relax capital requirements."[2]

In short, the U.S. Government and its central bank, the Federal Reserve, acquiesced on bank executive’s desire for more (i.e., greed) at the expense of reducing systemic risk. That the bankers presumed themselves as being in a position to lobby—especially to obviate compensation restrictions —given the roles played by the banks in the mortgage securities crisis, is astounding, as is the obsequious reaction of the regulators. The dynamic itself evinces the U.S. as a plutocracy rather than as representative democracies. Furthermore, the motive of the bankers demonstrates a continued fixation on gain at the expense not only of the system (i.e., systemic risk), but also of stockholders. 

See Essays on the Financial Crisis.

1. Alexander Eichler, “BofA, Wells Fargo, Citigroup Left TARP Early to Avoid Restrictions on Executive Pay,” The Huffington Post, September 30, 2011.

2, Ibid.

CEO Pay: American and European Values

To what extent do inequalities in wealth accrue based on structural elements, such as tax deductions that only wealthy people can use, as distinct from factors pertaining to individuals, such as talent, sacrifice, and effort? The two clusters can build on each other, as people who have become rich primarily by exercising a talent and working hard use some of their accrued power to “reform” the system to their advantage at the expense of the poor and middle class. Such structural reforms in turn can make it easier for wealthy people to become even richer. In the context of a society in progress, structural and idiosyncratic factors doubtlessly interact—the trend being of an increasing chasm between the rich and poor. 

 

 

For example, as the graph above indicates, CEO compensation in the U.S. increased at a higher percentage rate than did corporate profits and factory worker pay every year from 1990 to 2005. In 2010, CEO compensation increased 27% while workers saw their compensation increase just 2.1 percent. Meanwhile, the poverty rate increased from 12% to 14%. CEOs in the E.U. were making comparably less. Foreign Policy in Focus reports that in 2006, for example, “the 20 highest-paid European managers made an average of $12.5 million, only one third as much as the 20 highest-earning U.S. executives. The Europeans earned less, despite leading larger firms.” I suspect that societal values have a lot to do with the difference, though changes in the make-up of American executive compensation should not be ignored.

Specifically, the ratio of pay between an American CEO and factory worker has been increasing in part to the growing proportion of executive compensation in the form of stock options. However, it is also true that Americans are relatively accepting of very high incomes (and inequality). A European is more likely to say, Enough is enough once a CEO has made far more than he or she could ever use. Politically, this is reflected in the fact that the Green Party and the Party of the Left are more powerful (and represented) in Europe than in America. Although the American two-party system acts to cut off the “extremes,” I suspect that the proportion of Americans who would agree with a European far-left party is less than in the E.U.

According to Foreign Policy in Focus, “In the United States, only 32 percent of the public [in 2007 supported] an outright pay cap on executive earnings. But average Americans [appeared] to be every bit as outraged over CEO pay excess as average Europeans. Indeed, 77 percent of Americans [said that] corporate executives "earn too much.” This disconnect, which I submit does not exist in Europe, reflects the American value on economic freedom and the association of freedom with putting up with someone else’s objectionable views or conduct.

In Europe, during and after the recession of 2008, “the idea of raising taxes on high-income earners” gained currency. New E.U. and state taxes were proposed, including a tax on financial transactions (E.U.) and a one-time levy on high-income individuals. In the state of Britain, the tax rate on the highest segment was increased from 40% to 50%, and in the state of Italy the government was considering in 2011 an additional 5% tax on annual incomes above 90,000 euros and a 10% on incomes over 150,000 euros. Considering the increasing fiscal demands being put on the E.U. Government and the pressing debt situations in many states, the recessionary risk of increasing tax on the rich may well be worthwhile. Indeed, Liliane Bettencourt and fifteen other billionaires made an open plea for a special tax on the European rich. Recognizing that they had benefitted financially from the European “structure,” they wanted to help preserve it.

As valuable as closing budget-gaps by revenue and spending reforms at the state and E.U. levels is, the matter of addressing a cycle of increasing economic inequality remains unanswered. If a given societal structure acts as a multiplier effect on a given inequality—exacerbating it, in effect—then something more than a new tax may be needed. In other words, any bias in the system that increases the inequality can be neutralized by the addition of a countervailing structure. For example, placing a strict limit, such as $1 million, on what an individual can inherit—with the rest going back to society via the state—would act to counter the “snowball effect” of “old wealth.” At least as of 2011, a person can live comfortably on $1 million; the surplus, being essentially surfeit with respect to what  person is apt to consume, would be better used as a corrective of the tendency of wealth to further accumulate among the rich. In other words, just as banks with assets over $1 trillion are too big to fail, a billionaire getting richer may not be worth the “cost” to society in terms of the increased inequality—to say nothing of the probable compromise to a republic form of government (which can often be too easily bought).

In short, income and even accumulated wealth can reasonably be considered as applying generally to one’s life (and those of one’s kids and grandchildren) and more particularly to being used (i.e., spent). If one’s wealth vastly exceeds what can be spent on things one can consume, this might be an indication that the concentration has gotten out of hand, at the expense of society itself. In other words, if you have a bank account with a balance of $15 billion, do you really need $5 billion more?  Will you ever use it? There is an opportunity cost—part of which being contributing back to society and reducing the economic inequality. Even so, this way of thinking reflects a value on solidarity that is much more European than American, at least in terms of being valued. In other words, the typical American would be more likely to object to any limitation on economic freedom, even if the playing field is tilted in the direction of the wealthy being able to take disproportionate advantage of that freedom, irrespective of whether the additional wealth is usable.  

Sources:

David Gauthier-Villars, “Wealthy French Push for Extra Tax,” Wall Street Journal, August 24, 2011. 

Matt Krantz and Barbara Hansen, “CEO Pay Sours While Workers’ Pay Stalls,” USA Today, April 4, 2011. 

Sarah Anderson, “Executive Pay Debate Raging in Europe and the United States,” Foreign Policy in Focus, August 28, 2007. 

On the Unfairness of the Bonus System on Wall Street

Craig A. Dubow, Gannett’s former chief executive, had a short six-year tenure that was, by most accounts according to The New York Times, “a disaster.” David Carr reports: “Gannett’s stock price declined to about $10 a share from a high of $75 the day after [Dubow] took over; the number of employees at Gannett plummeted to 32,000 from about 52,000, resulting in a remarkable diminution in journalistic boots on the ground at the 82 newspapers the company owns. . . .  the company strip-mined its newspapers in search of earnings, leaving many communities with far less original, serious reporting. . . . Not only did Mr. Dubow retire under his own power because of health reasons, he got a mash note from Marjorie Magner, a member of Gannett’s board, who said without irony that ‘Craig championed our consumers and their ever-changing needs for news and information.’ But the board gave him far more than undeserved plaudits. Mr. Dubow walked out the door with just under $37.1 million in retirement, health and disability benefits. That comes on top of a combined $16 million in salary and bonuses in the last two years.”

Besides the inherent unfairness in an incompetent manager getting millions of dollars in compensation (for championing incompetence?), it is morally problematic when, as Carr puts it, “the consequences of bad decisions land on everyone except those who made them.” As already pointed out above, in the midst of Dubow’s “championing” (this word is so broad it has scarce any real meaning), “the number of employees at Gannett plummeted to 32,000 from about 52,000.” One could just as easily point to Bank of America’s downsizing of its labor force in the wake of Ken Lewis’ shopping spree at Countrywide and Merrill Lynch. Lewis really did exemplify the “walmart” mentality applied to banking: an almost-complete indifference to quality in a desire to be everything to everyone. The “exporting” of bad consequences while exuberant rewards are retained indicates that the corporate executive compensation system in the United States is fundamentally broken. The fixation on aligning an executive’s incentives with the financial enrichment of the stockholders has not functioned as anticipated.

For one thing, the vesting of stock, which is meant to orient an executive to the longer term financial interest of the stockholders, is typically bypassed as an executive gets the equivalent in cash (or stock) from his or her new employer. An executive can thus discount having to look out for the eventual downside in his or her decisions.

Moreover, the sheer amount of the compensation cannot be justified on the basis of a competitive upper echelons labor market (which functions more like an oligarchy). Indeed, the degree of fixation on the bonus system alone has resulted in larger payouts (as executives make decisions primarily from the standpoint of the impact on their bonus). David Carr points to the excess as mentioned in a USA Today editorial: “The bonus system has gone beyond a means of rewarding talent and is now Wall Street’s primary business. Institutions take huge gambles because the short-term returns are a rationale for their rich payouts. But even when the consequences of their risky behavior come back to haunt them, they still pay huge bonuses.” Carr’s overall point is that this hypertrophy allies to corporate America—not just Wall Street, though certainly it is salient there too.

When John Thain of Merrill Lynch gave lip-service to serving the stockholders, even his own subordinates knew he was more concerned with having to play second fiddle to Ken Lewis at Bank of America than with keeping Merrill’s stockholders from losing everything (as Lehman Brothers’ stockholders did). Even as Fleming got $29 per share as a buyout price from Lewis, Thain preferred a line of credit of billions from Goldman Sachs in exchange for a 10% ownership that would keep Thain on top. That was Thain’s driving motivation: to remain CEO. Meanwhile, the general public assumed that CEOs, including Thain, were motivated to act in their stockholder interests—that boards of directors insisted on this agency. However, where a CEO is focused on his or her bonus (Thain insisted on $40 million cash bonus even as Merrill was losing billions) and position (and thus future bonuses) and the CEO controls “his or her” board, the stockholders are in actuality left unknowingly fluttering in the wind—relying on a system of executive compensation that supposedly aligns the executives’ motivation with the financial interests of the stockholders. Much too much is being assumed here, yet assumptions, like habits, are difficult to break.

Source:

 David Carr, “Why Not Occupy Newsrooms?” The New York Times, October 24, 2011. http://www.nytimes.com/2011/10/24/business/media/why-not-occupy-newsrooms.html

Problems in American Executive Compensation: The Ethical Dimension

According to The New York Post, 66% of the income growth in the United States between 2001 and 2007 went to the top 1% of all Americans. In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. By the year 2000, that ratio had exploded to between 300 to 500 to one. Because American executives tend to be paid more in total compensation than do their European colleagues, the ratios are lower in in the E.U. Hence one might ask what is behind the trajectory in the United States. 

Does a shift from manufacturing to knowledge-based industries occasion a widening economic gulf? Even as late as 2010, the United States still had the largest manufacturing sector in the world. I suspect that the change is not so much tied to the number or even proportion of factory workers as it is to changes in executive compensation. Specifically, in the 1990s stock options took off as a part of such compensation because boards wanted to tie executives' compensation to long term firm performance. Even if the alignment of incentives was strengthened, a side effect was an explosion in the overall level of a given executive's compensation. In other words, if an executive's company did well, so too did his or her total compensation package. This byproduct in turn raised the ethical issue of fairness.  Specifically, is a CEO's work really worth tens of millions in a given year to a firm or to society at large?  Is a CEO's effort really so much more than that of a mid-level manager or an employee in operations?  

To obviate any ethical violations of fairness, which human beings seem able to detect innately, boards could reduce the overall compensation packages of executive managers even as the proportion in stock options is increased.  Lest it be argued that the market demands the higher amounts, it could be argued that that market is an oligarchy rather than being competitive. If so, there might be a legitimate role for the U.S. Government as an umpire establishing and protecting competitive markets. Otherwise, an oligarchy can become a self-perpetuating club that functions primarily in the interest of its members, which occasions the ethical objection of fairness.

Source:

"So Long, Middle Class," New York Post, August 1, 2010.

A Religious Stockholder-Test for Wells Fargo: Confronting Mediocre Accountability

Orienting executive compensation to accountability is easier said than done. For example, it might be supposed that the cause of accountability was aptly served by John Stumpf’s forfeit of $41 million in unvested stock when he resigned under pressure as Wells Fargo’s CEO because of the bank’s systemic overzealousness in signing customers up for unwanted services. Unfortunately, he “realized pretax earnings of more than $83 million by exercising vested stock options, amassed over his 34 years at the bank, and receiving payouts on certain stock awards.”[1] In other words, the man who presided over unethical business practices at the expense of customers received double that which he was forfeiting. How can accountability have any meaning against $83 million? This figure connotes reward rather than punishment. Tim Sloan, who succeeded Stumpf as the bank’s CEO, received compensation in 2016 of $13, up from the $11 million in 2015. Interestingly, it may have been religion to the rescue.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

Rousseau: Natural and Artificial Inequalities

In his Discourse on Inequalities, Rousseau distinguishes two types of inequality among people: natural and moral.[1] Natural inequalities, which exist in the state of nature as well as society, result in difference outcomes owing to innate differences in “genius, beauty, strength or address, merit or talents.” Such differences—both in sources and outcomes—pale in comparison with those from “moral” inequalities, such as exist between rich and poor, professionals and the unskilled, and the powerful and the subjugated.

Jean-Jacques Rousseau (1712-1778)

“Now, if we compare the prodigious variety in the education and manner of living of the different orders of men in a civil state, with the simplicity and uniformity that prevails in the animal and savage life, where all the individuals make use of the same aliments, live in the same manner, and do exactly the same things, we shall easily conceive how much the difference between man and man in the state of nature must be less than in the state of society, and how much every inequality of institution must increase the natural inequalities of the human species.”

Wealth is a case in point—the extremes in the American societies, for example, dwarfing the subsistence differences in the state of nature.

“Riches, before the invention of signs to represent them, could scarce consist in anything but lands and cattle, the only real goods which men can possess. But when estates increased so much in number and in extent as to take in whole countries and touch each other, it became impossible for one man to aggrandise himself but at the expense of some other; and the supernumerary inhabitants, who were too weak or too indolent to make such acquisitions in their turn, impoverished without losing anything, because while everything about them changed they alone remained the same, were obliged to receive or force their subsistence from the hands of the rich.”

Moral inequalities are marketed by the “haves” as moral and thus legitimate and even generally beneficial to society, when in truth the inequalities involve much undeserved harm.

“In fine, an insatiable ambition, the rage of raising their relative fortunes, not so much through real necessity, as to over-top others, inspire all men with a wicked inclination to injure each other, and with a secret jealousy so much the more dangerous, as to carry its point with the greater security, it often puts on the face of benevolence.”

The sordid “moral” inequalities are possible only in a civil state, which in turn exists in a society, as such inequalities stem from institutions in business, higher education, and government (among others). For example, corporations may be designed so that executives and board members benefit disproportionately relative to middle managers and “below.” Governments, even if democratic, may fit into a societal system more broadly in exchanging campaign contributions for legislation that would modify the system in favor of increasing economic inequality. 

Moreover, according to Rousseau, society is not simply biased toward increasing inequality; society gives rise to the inequalities. “(A)s there is scarce any inequality among men in a state of nature, all that which we now behold owes its force and its growth to the development of our faculties and the improvement of our understanding, and at last becomes permanent and lawful by the establishment of property and of laws.” To protect these from usurpers, warfare and aggression come to dwarf the pre-existing natural human compassion or empathy for those who are suffering. “(I)t is merely the spirit of society, and the inequality which society engenders, that thus change and transform all our natural inclinations.” Indeed, being in society may transform human nature itself.

Society engenders the “universal desire of reputation, of honours, of preference, with which we are all devoured, exercises and compares our talents and our forces.” Society thus “excites and multiplies our passions; and, by creating an universal competition, rivalship, or rather enmity among men, how many disappointments, successes, and catastrophes of every kind . . .  it is to this itch of being spoken of, to this fury of distinguishing ourselves which seldom or never gives us a moment's respite, that we owe both the best and the worst things among us, our virtues and our vices, our sciences and our errors, our conquerors and our philosophers; that is to say, a great many bad things to a very few good ones.

Most significantly, “the origin of society and of the laws . . . increased the fetters of the weak, and the strength of the rich; irretrievably destroyed natural liberty, fixed [forever] the laws of property and inequality; changed an artful usurpation into an irrevocable title; and for the benefit of a few ambitious individuals subjected the rest of mankind to perpetual labour, servitude, and misery.”  The artificial variety of inequalities can be expected to increase, silently aided by institutional designs, until the people bled dry finally have had enough and revolt. This involves a different sort of state of nature than that out of which society originally arises.

“The progress of inequality: “the establishment of laws and of the right of property was the first term of it; the institution of magistrates the second; and the third and last the changing of legal into arbitrary power; so that the different states of rich and poor were authorized by the first epoch; those of powerful and weak by the second; and by the third those of master and slave, which formed the last degree of inequality, and the term in which all the rest at last end, till new revolutions entirely dissolve the government, or bring it back nearer to its legal constitution. . . . Tis here that everything returns to the sole law of the strongest, and of course to a new state of nature different from that with which we began, in as much as the first was the state of nature in its purity, and the last the consequence of excessive corruption.”

In short, the sort of inequalities that society and its various species of institutions create and perpetuate clashes with natural right. The exceptional inequality of incomes between CEOs and workers in the U.S. is simply not natural, given the human nature that happily exists in the state of nature. Put another way, the tremendous inequality of wealth both results from and encourages a transformation of natural inclinations that could alter even human nature itself into something much uglier than what it was in the state of nature. The “kind of inequality which obtains in all civilised nations . . . is evidently against the law of nature that . . . a handful of men should be ready to choke with superfluities, while the famished multitude want the commonest necessaries of life.” This is bound not to end well for the human race, whether through society’s impact on the planet (e.g., global warming) or something within the human race, such as nuclear war or a plague.

---

1. All quotes in this essay from Rousseau are taken from Jean-Jacques Rousseau, Discourse on the Origins of Inequality, Harvard Classics, Charles W. Eliot, ed., Vol. 34 (Cambridge: Harvard University Press,1910).

McDonalds and Income Inequality: The Role of Opportunity

In his text, Capital in the Twenty-First Century, Thomas Piketty claims that economic inequality increases societally when the rate of return on capital exceeds the growth rate in national income or GNP. Rather than being an aberration, this condition tends to be the case, the economist contends. To be sure, expanding opportunity can mitigate the increasing inequality, but the “floorboard” is slanted and thus is bound to favor capital over labor. Whereas Marx thought the tendency is unlimited in extent, Piketty argues that at some point the inequality of wealth will stop worsening. This idea seems like Einstein’s thesis that nothing can go faster than the speed of light.  In the light of Piketty’s theory, we can perhaps read more into Don Thompson’s response as workers were protesting the company’s shareholder meeting on May 22, 2014. In short, the CEO illustrates not only a preference for capital over labor in line with ROI>income-increase, but also the weakness in increased opportunity as a mitigating factor.

Thomas Piketty, a European economist specializing on inequality 

(Image Source: The Guardian)

With 800 protesters outside vocalizing their $15-per-hour proposal (“demand” is too strong, and, frankly, rather presumptuous), Thompson told the shareholders, “We respect the fact that they want to challenge us relative to wages.”[1] This rather odd statement essentially relativizes the pressure as “challenging.” In other words, the language is euphemistic. Similarly, it could be said that the CEO is challenged by the English language. Consider, for example, “relative to wages.” How about: “We respect the fact that our hard-working workers want a raise.” Instead, Thompson tried to make the issue about opportunity, as if that effectively counters the inequality. Again being challenged by English, the native speaker told stockholders, “We pay fair and competitive wages and we provide opportunity, and we provide job opportunities and training for those entering the workforce.”[2] McDonalds provides opportunity and job opportunities. How much is Thompson’s total annual compensation?

Even if opening the labor-force up were a sufficient justification for paying $7.25 an hour, only one-third of the company’s non-supervisory employees were on their first job.[3] As one of the protesting workers put it, “McDonalds can keep on saying that we are teenagers, but saying it over and over again doesn’t make it true.”[4] The patina of rhetoric is a rather pallid recipe for reputational capital, particularly if the words run up against the brick wall of actual circumstance. That worker had been working at a McDonald’s restaurant for 10 years at $7.25 per hour. The matter of opportunity was exogenous to her case. Ironically, expanding opportunity could actually be expected to put downward pressure on her wage, or at least keep it from increasing even with experience. That is, even a real push for greater opportunity in terms of opening up the job-force to new aspirants could increase the economic inequality between the corporate managers at the headquarters and the workers in the restaurants.

Put in terms of Piketty’s theory, might it be that greater opportunity might increase the economic inequality in some unforeseen ways? At the very least, Thompson’s attempted pivot to opportunity suggests that it may actually be in line with the interests of capital over labor. The fact that an employee had been kept at $7.25 for ten years even as the company enabled teenagers to enter the workforce hints of the underlying existence of a slanted relationship between capital and labor wherein the rate of return can be expected to exceed the rate of increase in income generally and especially at the non-supervisory levels. Leveling the playing field may be more difficult than Piketty supposes.

---

[1] Bruce Horovitz, “McDonalds Plays Offense on Wages,” USA Today, May 23, 2014.

[2] Ibid.

[3] Ibid.

[4] Ibid.

Reining in Corporate Pay: Europe as a Model of Fairness for America

Corporate compensation—executive pay in particular—represents a “clear market failure,” so said Vince Cable, the business secretary in the E.U. state of Britain.[1] While suspected, the sheer explicitness, or blatant manner, of this verdict is itself noteworthy. Moreover, it stands as an opportunity for the E.U. to surpass the U.S. on economic fairness, which is a type of justice (see John Rawls). That is to say, Europe had an opportunity at the time of Cable’s statement to set the E.U. on a trajectory that would make the unfairness in the American system more transparent.

The full essay is at "Reining in Corporate Pay."

1, Julia Werdigier, “British Government Works to Rein in Corporate Pay,” The New York Times, January 23, 2012.