The original suggestion’s intention was to allow people with fewer shares to be able to effectively exercise their right to vote. Currently, a couple of people hold enormous shares of a company and the majority, that is millions of shares, are owned by millions of people. The latter are virtually unable to influence the company while the former dominate it, giving publicly traded companies the political structure of a dictatorship with very high salaries in upper management. This is in contrast to functioning democracies where even heads of state earn a relatively meager salary. So Yammer is a step in the intended direction by providing a platform to discuss policy and distribute information, but it lacks in easing voting.
Part of the problem is that most shares that are nominally held by individuals are actually held for them by retirement funds and the like, creating even further distance.
Well, you can think of the choice of retirement fund as first tier in a multi-tiered democracy. Individual → Fund → Director. Yes, the fund is managing other people’s money and thus has eroded incentives, but on the other hand it is a full-time job and its votes are concentrated enough that people will actually talk to it.
But forget about individuals—is it a democracy of investment funds? Yes, they really get to choose the directors, and the directors really (can) run the company. And the investment funds talk to each other. But they are spread too thin. They own too small a share of too many companies to keep up with them. The way that the large shareholders control companies is by convincing investment funds to vote for their candidates. Once they have control of the board, it’s pretty easy to keep it, because the board nominates new candidates and there is standing source of opposition. But just because someone, say, Icahn, has 5 or 10% of the shares, doesn’t mean he has much power. Sometimes the board will just accept his advice, but other times he has to lobby the investment funds to democratically take over the board.
Anyhow, my point is that the funds do a lot of talking, so I am skeptical that the problem is not talking.
The Economist lists Singapore as a hybrid regime with elements of authoritarianism and democracy. It ranks in its democracy index below Malaysia and Indonesia. Thus I do not think it is ‘arguably the best functioning democracy in the world’.
It functions well and it is a democracy. I didn’t mean to imply it achieved any unusual height of democracy. Rather, it achieves other things very well.
Fair enough. The author’s claim was that any sufficiently democratic organizations works in the interest of its members. If an authoritarian regime works to the benefits of the public it is by virtue of a benevolent dictator that has nevertheless to follow the rules of power.
I’m pretty sure that low salaries are a dysfunction of democracies rather than high salaries being a dysfunction of companies. In particular, it’s not the case with every company that a couple of people hold enormous shares. And aside from that, even when there is clear evidence that “the majority” gets directly involved in CEO compensation, it doesn’t seem that the salaries go down all that much.
Or looking at it differently, if the high salaries were the consequence of an undue concentration of power, we would expect that when one CEO leaves, and a different one who was not previously affiliated with the power holders is installed, the salary of the new one would be much much lower. However, I think this is rarely the case.
I don’t think your second point really is one, seeing as a CEO can not be installed without being affiliated with the power holders. Can you back up your first point?
I don’t think your second point really is one, seeing as a CEO can not be installed without being affiliated with the power holders.
Why not? Some CEOs (especially for smaller companies, I think) are found via specialised recruiting companies, which I’d say is pretty unaffiliated. And in any case, it’s not clear to me how you think the affiliation would be increasing pay. Do you imagine potential CEO candidates hold an auction in which they offer kickbacks to major shareholders/powerholders from their pay or something? Because I haven’t heard of that ever happening, and I’m having trouble imagining what more plausible scenario you have in mind. (Obviously there are cases where major shareholders also serve as CEOs/whatever, but if you’re claiming that every person in such position with high pay is a major power holder shares/board-wise, I’d like to see evidence for it, since I find that extremely unlikely.)
Can you back up your first point?
If you mean about new executives receiving pay comparable to old ones, I dunno, it’s hard. I think I’d have to search company-by-company and even then it would be hard to determine what’s happening. For example, I looked up Barclay’s, which switched Bob Diamond for Antony Jenkins last year. Diamond had a base salary of £1.3mil. Jenkins has a base salary of £1.1mil. However, Diamond got a lot of non-salary money (much of which he gave up due to scandal), and it’s not clear how Jenkins’ compensation compares to that. Also, it’s not clear how much the reduction (if there is any) is the result of public outrage (or ongoing economic difficulties).
If you mean about high salaries probably being appropriate, I can back that up on a theoretical level. If you assume a CEO has a high level of influence over a huge company, then it’s straightforward that there is going to be intense competition for the best individuals. Even someone who can improve profits by 0.1% would be worth extra millions of dollars to a multi-billion dollar company.
The original suggestion’s intention was to allow people with fewer shares to be able to effectively exercise their right to vote. Currently, a couple of people hold enormous shares of a company and the majority, that is millions of shares, are owned by millions of people. The latter are virtually unable to influence the company while the former dominate it, giving publicly traded companies the political structure of a dictatorship with very high salaries in upper management. This is in contrast to functioning democracies where even heads of state earn a relatively meager salary. So Yammer is a step in the intended direction by providing a platform to discuss policy and distribute information, but it lacks in easing voting.
Part of the problem is that most shares that are nominally held by individuals are actually held for them by retirement funds and the like, creating even further distance.
Well, you can think of the choice of retirement fund as first tier in a multi-tiered democracy. Individual → Fund → Director. Yes, the fund is managing other people’s money and thus has eroded incentives, but on the other hand it is a full-time job and its votes are concentrated enough that people will actually talk to it.
But forget about individuals—is it a democracy of investment funds? Yes, they really get to choose the directors, and the directors really (can) run the company. And the investment funds talk to each other. But they are spread too thin. They own too small a share of too many companies to keep up with them. The way that the large shareholders control companies is by convincing investment funds to vote for their candidates. Once they have control of the board, it’s pretty easy to keep it, because the board nominates new candidates and there is standing source of opposition. But just because someone, say, Icahn, has 5 or 10% of the shares, doesn’t mean he has much power. Sometimes the board will just accept his advice, but other times he has to lobby the investment funds to democratically take over the board.
Anyhow, my point is that the funds do a lot of talking, so I am skeptical that the problem is not talking.
The point of the original proposal was not the talking but the exercise of the right to vote, similar to a democracy. Good post, though.
Singapore, arguably the best functioning democracy in the world, pays its head of state millions of dollars.. I realise this is probably still not enough.
The Economist lists Singapore as a hybrid regime with elements of authoritarianism and democracy. It ranks in its democracy index below Malaysia and Indonesia. Thus I do not think it is ‘arguably the best functioning democracy in the world’.
It functions well and it is a democracy. I didn’t mean to imply it achieved any unusual height of democracy. Rather, it achieves other things very well.
Fair enough. The author’s claim was that any sufficiently democratic organizations works in the interest of its members. If an authoritarian regime works to the benefits of the public it is by virtue of a benevolent dictator that has nevertheless to follow the rules of power.
I’m pretty sure that low salaries are a dysfunction of democracies rather than high salaries being a dysfunction of companies. In particular, it’s not the case with every company that a couple of people hold enormous shares. And aside from that, even when there is clear evidence that “the majority” gets directly involved in CEO compensation, it doesn’t seem that the salaries go down all that much.
Or looking at it differently, if the high salaries were the consequence of an undue concentration of power, we would expect that when one CEO leaves, and a different one who was not previously affiliated with the power holders is installed, the salary of the new one would be much much lower. However, I think this is rarely the case.
I don’t think your second point really is one, seeing as a CEO can not be installed without being affiliated with the power holders. Can you back up your first point?
Why not? Some CEOs (especially for smaller companies, I think) are found via specialised recruiting companies, which I’d say is pretty unaffiliated. And in any case, it’s not clear to me how you think the affiliation would be increasing pay. Do you imagine potential CEO candidates hold an auction in which they offer kickbacks to major shareholders/powerholders from their pay or something? Because I haven’t heard of that ever happening, and I’m having trouble imagining what more plausible scenario you have in mind. (Obviously there are cases where major shareholders also serve as CEOs/whatever, but if you’re claiming that every person in such position with high pay is a major power holder shares/board-wise, I’d like to see evidence for it, since I find that extremely unlikely.)
If you mean about new executives receiving pay comparable to old ones, I dunno, it’s hard. I think I’d have to search company-by-company and even then it would be hard to determine what’s happening. For example, I looked up Barclay’s, which switched Bob Diamond for Antony Jenkins last year. Diamond had a base salary of £1.3mil. Jenkins has a base salary of £1.1mil. However, Diamond got a lot of non-salary money (much of which he gave up due to scandal), and it’s not clear how Jenkins’ compensation compares to that. Also, it’s not clear how much the reduction (if there is any) is the result of public outrage (or ongoing economic difficulties).
If you mean about high salaries probably being appropriate, I can back that up on a theoretical level. If you assume a CEO has a high level of influence over a huge company, then it’s straightforward that there is going to be intense competition for the best individuals. Even someone who can improve profits by 0.1% would be worth extra millions of dollars to a multi-billion dollar company.
Related things I found while looking around: “highly concentrated ownership in listed companies in New Zealand is a significant contributor to [a] poor pay-for-performance relation”, “institutional ownership concentration is positively related to the pay-for-performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry, investment opportunities, and performance”, “results indicate that power is more concentrated than ownership”. (Not that I read much more than abstracts.)
Interesting. I will have to read through that later.