If anything seemed to be certain after 2008, it was that capitalism as we knew it was going to change forever.
An obscure financial device, so complicated that even people who were buying and selling it didn’t understand how it worked, very nearly halted the flow of money. Lehman Brothers, Bear Stearns, Citigroup (C), Bank of America (BAC), General Motors (GM)—the list of banks and businesses that were “too big to fail,” and then sometimes did—kept rolling along. The U.S. government was intervening in the market and banking system in ways unimaginable a year before. People were willing to break any taboo, breach any previously unbroken line, to find a way to get the financial system moving again.
Yet four years on, JPMorgan Chase (JPM) just lost $2 billion on a risky bet that is every bit as complicated as the credit default swaps on mortgages were in 2007. Chief Executive Officer Jamie Dimon termed the credit positions “flawed, complex, poorly reviewed, poorly executed, and poorly monitored.”
It’s déjà vu all over again. CEO hubris, following the catharsis of congressional hearings and the Dodd-Frank banking regulations, has hardly missed a beat. Financial news coverage is a murderers’ row of bad-acting executives paraded in front of finger-wagging corporate governance experts, with comic relief from the Occupy movement.
Chesapeake Energy (CHK) founder and CEO Aubrey McClendon tapped his company for everything from loans to help him get a piece of its oil wells to the sale of his personal map collection. Green Mountain Coffee’s (GMCR) CEO and chairman improperly sold company stock to cover margin calls; he had taken out a big loan to buy a 163-foot yacht. Best Buy’s (BBY) chairman and founder was stripped of his chairmanship for not having properly dealt with the infidelity of his protégé CEO. Yahoo! (YHOO) CEO Scott Thompson left after it turned out he’d pumped up his résumé.
Repeatedly burned, stockholders could be expected to demand a larger voice in corporate affairs. Just the opposite is happening. Silicon Valley, especially, is awash in shareholders willing to give up voting rights in exchange for actual or perceived return on hot technology stocks. The biggest example is the $10 billion Facebook offering. For most of its first two centuries of trading, the New York Stock Exchange wouldn’t even list a company with a dual-share structure that put the company in the hands of founders and left shareholders a powerless underclass. Now dual-share companies are flying into the market as fast as lawyers and bankers can print the regulatory filings.
Mark Zuckerberg will control 57 percent of the voting shares of Facebook when it goes public. Demand is so brisk that the company raised the offering range again this week. The Google (GOOG) founders and their chairman control two-thirds of voting power and are going to double down with a new class of shares that give owners absolutely no vote at all. Rupert Murdoch’s News Corp. (NWSA), at which he’s protected from a voicemail hacking scandal by his control of shareholder voting, should be taken as one indication that this is not a good idea.
The trend gives every hint of picking up steam. Only 38 members of the Standard & Poor’s 500-stock index and 271 members of the Russell 3000 index have dual shares, according to GMI Ratings, a governance consulting firm in New York. But since Google’s 2004 debut, at least 27 technology and Internet companies went public with dual shares, according to data compiled by Bloomberg. Of the 266 dual-share issues from all industries since 1999, 23 percent went public from 2009 through this quarter.
The companies argue that dual-share structures allow them to see the big picture—or, in the case of media companies, safeguard journalism—in a way that wouldn’t be possible if regular people who buy shares were actually to own the company. “It’s often motivated by company founders, who think the market is too short-term focused and who feel a very strong attachment to their companies,” says Rakesh Khurana, a Harvard Business School professor who has written about governance issues. Essentially, they don’t trust the public.
The financial crisis gave investors new ways to exert influence. Every company must have a vote, called Say on Pay, to see if its compensation plan passes muster with shareholders. The votes are advisory, but failure is embarrassing. Citigroup agreed to change its pay plan this year after its compensation plan was rejected by investors.
Still, the adjusted average compensation of CEOs in the S&P 500 rose to $12.9 million in 2011, or 380 times the average worker’s pay. That’s up from $625,000, or 42 times the average worker’s pay, in 1980, the AFL-CIO said in a report released last month. Consultants help CEOs pick “peers” that are well-paid, and then the board sets compensation based partly on that—kind of like moving the bull’s-eye after throwing the dart—so the pay raises keep coming. Those votes? Just shy of 98 percent of the compensation packages put to shareholders by public companies so far this proxy season were approved.
Maybe things are changing. Corporate America could be just like the coyote from the old Road Runner cartoons: They have run off a cliff, but their legs are still moving with cartoon-level speed and they have yet to reach the moment when they realize they are going to fall, says Ron Suskind, author of Confidence Men: Wall Street, Washington, and the Education of a President.
“Change happens fast, and then slow,” says Suskind, the A.M. Rosenthal writer-in-residence at Harvard’s Kennedy School of Government.
Suskind sees some reason for optimism, even in the CEO explosions at Best Buy, Yahoo, Chesapeake, Green Mountain, and others. “After three decades in which blind speculation was encouraged as a kind of national policy, the key now is that each of these little explosions of CEOs subtly nudges the cultural consensus over to a place where prudence might, once again, be prized. That’s the key: finding a way to make prudence sexy.”
Or maybe we’re all just trapped by the same human nature that has kept speculation alive and bubbles bursting since the gathering in the Forum of the Roman republic in the second century B.C., as played out in the 1999 history of financial speculation Devil Take the Hindmost, which is peopled with “whores, moneylenders and wealthy men.”
Markets are made to capitalize on different people’s perception of the value of money. It’s called risk management, not risk avoidance.
In the 2011 film Margin Call, a fictionalized version of the 2008 collapse of Lehman, the crisis culminates with Kevin Spacey, who runs the trading desk, trying to quit as Jeremy Irons, loosely based on Lehman’s Richard Fuld, calmly eats his dinner and tries to get Spacey’s character to stay. Irons runs through all the crashes of the past 500 years, from the Dutch tulip bulb mania right up through the panic depicted in the movie.
“It’s all just the same thing, over and over,” he says, chewing on a steak. “We can’t help ourselves.”