Rod Dreher

Three Louisiana stories

U.S. capitalism rewards failure. Why?

By Rod Dreher • October 8, 2011, 8:39 PM

Jeffrey Goldberg says he doesn’t support the Occupy Wall Street movement because its goals are “inchoate and ridiculous.” But he says that this kind of thing makes him think about it:

The CEO of Gannett, Craig Dubow, is quitting for health reasons, but his golden years will be very comfortable: He stands to collect as much as $37 million in retirement and disability benefits. During his five years as CEO, Gannett’s stock price dropped from $72 to $10, and the company laid off hundreds of journalists, including people I know to have been very good journalists. I’m pretty sure that none of the fired journalists received a $37 million retirement package. I’m not even sure if collectively, all the journalists fired by Dubow’s company received $37 million.

Does this strike you as unjust and immoral? What are you, some kind of socialist?

24 Responses to U.S. capitalism rewards failure. Why?

Peterk says:

October 8, 2011 at 10:58 pm

unjust? immoral? not really it was contractual obligation. are the salaries paid to athletes unjust and immoral? what about the recent pension scandal in Chicago involving union officials? where is the outrage over that? Gannett’s board hired Dubow with open eyes, the negotiated a contract with him and they agreed to the terms. What are they supposed to do abrogate the contract? Under what conditions? did he meet the requirements of the contract?
Bruce Ross says:

October 9, 2011 at 12:43 am

I don’t know that it is fair to call Gannett a failure. Its results the past five years have been awful, with falling circulation, collapsing revenue and massive layoffs simply to keep the ship floating. You could say the same, though, about every other newspaper company.

And let’s be honest about the nature of public companies. Gannett owns roughly 100 newspapers. If they were independent companies, and the publisher of an average one retired on disability (after a decades-long career) and received a $370,000 payout, it wouldn’t be particularly remarkable. But the whole point of corporate empire-building is to concentrate the rewards of ownership — and that system is working as designed.

None of which is to say it is just or moral, but the logic of the system is clear enough.

Oh, and just to be clear, when the revolution comes …. oh, never mind.
ChrisB says:

October 9, 2011 at 1:27 am

You see, Rod, if it weren’t for Dubow’s amAzing skilz, Gannett’s stock surely would’ve been a penny stock by now, so he MUST be worth $37m.

The problem is, I’m sure mainstream cons would argue that the board is free to do what it wants, not seeing what seems obvious to the rest of us.
JonF says:

October 9, 2011 at 7:16 am

Re: unjust? immoral? not really it was contractual obligation.

See: non sequitur.
Contracts can be unjust and immoral too. I assume you would not dismiss a contract for murder with the claim “It’s a contractual obligation!”
Rod Dreher says:

October 9, 2011 at 7:18 am

Peter, I’m not advocating that Gannett breach its contract with this guy. I’m saying there’s something really wrong with a system that permits such a contract to be reached in the first place. I don’t know what the answer is, however. Gannett, as a matter of fact, reported earlier this year that while US workers haven’t seen a pay raise in forever, CEO salaries have skyrocketed to near pre-recession levels. And, of course, we all have seen the reporting showing how wildly disproportionate CEO pay has grown to worker pay over the last 30 years. In a democracy, you can’t have millions struggling to make monthly rent, while the very few rake in tens of millions — especially when, as the USA Today report I cited says, the CEOs who have done so very well recently oversaw companies that slashed payrolls. In other words, they were paid millions upon millions for firing people.
Russell Arben Fox says:

October 9, 2011 at 8:45 am

Does this strike you as unjust and immoral?

Yes, it does–and fiscally unwise and socially unhealthy as well.

What are you, some kind of socialist?

Why yes, Rod, I am. The real question is, why aren’t you? Why aren’t more Americans? Sure, Obama’s a post-colonial radical Marxist lunatic, public employee unions represent the thin-edge of a creeping, vicious totalitarian state, all taxation is theft, blah, blah, blah. But I mean seriously, aside from those on the margins who will believe any damn fool thing because they read it on the internet, why don’t more people recognize that gross economic inequality gets in the way of self-government? The obvious reasons, I suppose, are 1) that the horrible legacy of state socialism from the old Soviet Union still defines how most Americans think when they hear the word, and 2) that there are powerful financial and ideological interests which work hard to make certain that legacy maintains its presence in our public discourse. Still, the USSR has been gone for twenty years, and we’re nearly that far into the internet revolution and its diversification of information. It’s a genuine mystery to me why, in the face of the meltdown of 2008, so many people apparently still remain convinced that, whatever else is wrong with our country, the folks on Wall Street didn’t do anything fundamentally immoral or unjust.
Rod Dreher says:

October 9, 2011 at 9:09 am

Leaving aside the socialism discussion — we’re leaving for church momentarily — I will say, Russell, that you are indisputably correct that such a situation is “socially unhealthy,” especially in a democracy. FDR saw that capitalism had to be reformed to be saved.
Gilbert Berdine says:

October 9, 2011 at 10:27 am

This is just another example of how the US stock market is mostly a scam to part US investors from their money.

If you were the owner of a profitable business, why would you sell shares of that business to strangers? The only possible motivation would be if the sales price was more than the company was truly worth. Management makes a transition from earning profits to conning a never ending stream of greater fools into believing that the company will be worth even more tomorrow. Needless to say, management puts its own interest above the interest of the shareholder marks.

The stock market is less a mechanism to raise capital for new enterprise and more a casino for speculators. Nothing is morally wrong with any of this (assuming the pitch is not outright fraud which it usually is not), but the public needs to understand they are the sucker in the poker game.
Hugh says:

October 9, 2011 at 11:05 am

Russell why do you dislike Soviet socialism when you have published a paen to Moaist agricultural policy replete with a violent fantasy of pressing pitchforks into the living flesh of those you find counterrevolutionary?

Rod, was FDR the type of Conservative that you embrace? Also, please let us know how FDR’s statist & corporatist reforms “saved” capitalism.

So Rod, how would you draft the contract? If you’re trying to hire what you hope to be the Steve Jobs of whatever industry your in, what do you offer? A big payday for upside but nothing for downside? Ok, but what if the guy your hoping will lead you into great success says no, I want protection even if things go badly? Do you say no and go with someone who isn’t who you think will be best for your business? You can bet that the vast amount of the successful CEO’s have similar downside provisions in their contracts. How would you incentivize the very few individuals qualified to be a CEO? It’s important to considere because the number of selfless, New Dealing, Maoist, micro farming, Kirk devotee, Antiochian, distributists is limited. And apparently some of them are busy planning novel ways to kill the Kulacks.
Naturalmom says:

October 9, 2011 at 12:49 pm

the CEOs who have done so very well recently oversaw companies that slashed payrolls. In other words, they were paid millions upon millions for firing people.

So much for being “job creators” huh? They were profit creators first and foremost. Nothing wrong with profit, per se, but when maximum profit becomes the end at all costs, there’s bound to be trouble in the community at large eventually. It’s just common sense.
Mitt Perry-Cain says:

October 9, 2011 at 1:25 pm

Nothing to see over there, look over here! See that union guy? He gets $20 per hour and health insurance! Imagine that! That old lady there, she gets Social Security! She’s just putting a gun to your head and stealing your money. And this poor guy here? You know why he’s so sad? The Nazi socialist Kenyan Obama won’t let him pour the waste oil in the river!
Rod Dreher says:

October 9, 2011 at 1:39 pm

Hugh: Rod, was FDR the type of Conservative that you embrace? Also, please let us know how FDR’s statist & corporatist reforms “saved” capitalism.

FDR wasn’t a big-c Conservative, obviously. But capitalism was in worldwide crisis. In Europe and Russia, the crisis of mass suffering and instability caused people to give themselves over to radical statist solutions of the Left (Bolshevism) and the Right (National Socialism). In our country, there was a non-trivial chance that a demagogue like Huey P. Long could ride the wave of desperation — which was real — and discontent to national power.

Long’s story is vexing because it doesn’t offer a clean moral lesson. He was a corrupt socialist dictator of the state of Louisiana as its governor; yet there were so very, very many extremely poor people who had nothing, and who would have continued having nothing had Long not used the power of government to more equitably distribute wealth, and to give a small measure of security and relief to the majority of people who were living on next to nothing. Yet his legacy of statism has proved damaging to the political health of Louisiana in the long run.

Similarly with Roosevelt, if he hadn’t co-opted what men like Long were saying, and produced a watered-down version of same, we might have had a revolution in this country, or at least a more radical politics. It is my belief that FDR, whatever his excesses, saved our capitalist system from radicalism of left or right. True, we needed a robust post-New Deal conservatism to pare back the statism, but very few conservatives today advocate returning to the pre-New Deal status quo, even as they (we) push for a rollback in state power.

So, Rod, how would you draft the contract?

Like I said, I don’t know how to handle this. I don’t object to any CEO having guarantees in case things go wrong, but it strikes me as deeply wrong that a CEO can fail so spectacularly and be rewarded so spectacularly. From a recent James Stewart piece in the NYT about Leo Apotheker’s disastrous run at HP:

Léo Apotheker’s short, turbulent reign as the chief executive of Hewlett-Packard was by nearly all accounts a disaster. The board demanded his resignation, and if ever there was a case for firing someone for cause, this would seem to be it.

So why is H.P. paying Mr. Apotheker more than $13 million in termination benefits?

Just three years after the financial crisis generated widespread public outrage that Wall Street chief executives walked away with hundreds of millions in bonuses and other compensation after driving their companies into insolvency and plunging the nation’s economy into crisis, multimillion-dollar pay for failure is flourishing like never before. H.P. is simply the latest example, albeit an especially egregious one. It’s hard to fault Mr. Apotheker for taking what H.P. offered. But among the many questions shareholders should be asking the board is why it approved an employment agreement for Mr. Apotheker that arguably made it more lucrative for him to fail — and the sooner the better — than to succeed.

“It’s a great irony that spectacular failure is rewarded lavishly,” John J. Donohue, a professor at Stanford law school and the president of the American Law and Economics Association, told me. “It is a terrible mistake to set up a structure where the top person walks away with millions even if the company is laid waste by their poor decision-making, yet this is what’s happening. It’s a shocking departure from capitalist incentives if you lavish riches on the losers.”

More from this piece:

“The system is a mess; it’s a joke,” the compensation expert Graef S. Crystal told me. Yet Congress has shown scant appetite for remedying even the most egregious practices.

I have a simple proposition: in all employment contracts, “cause” should mean the standard dictionary definition (“sufficient reason,” according to Webster’s). It shouldn’t have a specialized, absurdly narrow meaning only for top executives, such as conviction of a felony. In my experience, when language is seriously distorted — when Wall Street analyst ratings of hold actually mean sell — it’s a sign of trouble.

And the termination benefits extended to top executives should be the same for all employees. I suspect that would swiftly end the practice of bestowing multimillions on those at the top who fail. In my experience, most people don’t resent high pay for outstanding performance. But lavish termination payments ought to be anathema to anyone who aspires to a just society. It’s merit, and not failure, that should be rewarded.

I’m not a doctor, Hugh, but I can tell when someone is sick and in need of treatment. Same deal here. This is a sick situation. Do you not agree? Do you not agree that an economic system that lavishly rewards failure, not merit, is irrational and not likely to keep the support of most people over time?
Peter H says:

October 9, 2011 at 2:59 pm

Bruce Ross wrote: “But the whole point of corporate empire-building is to concentrate the rewards of ownership — and that system is working as designed.”

But Dubow isn’t/wasn’t the owner of the company.
Bruce Ross says:

October 9, 2011 at 5:43 pm

“But Dubow isn’t/wasn’t the owner of the company.”

True enough, but he’s the owners’ agent.
Bern says:

October 9, 2011 at 9:06 pm

Rod, I find your observations about FDR and Huey Long quite interesting. When I was a senior in college (1965) I took a course called Catholic Social Thought. What I remember distinctly was the professor telling us students was that we did not realize how close the US was to a complete change in direction (capitalism to socialism) during the Great Depression.
thomas tucker says:

October 9, 2011 at 9:23 pm

Technically, he is the owner’s agent. Except that is not the way things work in practical terms. And supposedly the Board has the interests of the company as its priority. But we all know that that’s BS because the Board and the CEO’s all scratch each other’s backs and form incestuous relationships in the corporate world.
It is a unhealthy system that is grossly unfair. It calls for reform, and it seems to me that an enterprising attorney should be able to represent shareholders in a class-action lawsuit in more than one of these situations.
gcochran says:

October 9, 2011 at 11:22 pm

CEOs and high executives have, over the years, being gaining leverage over their stockholders. They appoint the boards, feather the nests of the board members, with the understanding that they had better keep the boss happy.
In this situation people with green eyeshades do not end up on the compensation committee. Why do stockholders let this happen? In part, I think because ownership is so dispersed (via mutual funds) that the number of people who care a lot about any particular company is small.

CEO compensation is determined more by relative power than economics.
sdb says:

October 9, 2011 at 11:33 pm

Jonah Goldberg has noted that many of the grievances between the OWS crowd and the TP crowd overlap. The problem is that there is a huge divide between the proposed solutions. Ross Douthat wrote a column several months ago about the Canadian experience of cutting services – largely doable because of social cohesion and trust in government. Something we lack. The partisan divide and level of distrust makes real progress nearly impossible.

For example, we know that taxing things makes them more expensive and reduces use (at least at the margins). So why not cut taxes on labor (payroll tax) and replace it with an energy tax? Maybe economists have good reasons, but when I’ve discussed it with my (noneconomist) colleagues, it generally comes down to – democrats would see it as a way for republicans to drive a wedge between the tax and the benefit and open the door to dismantling SS. Republicans would see it as a way for democrats to sneak in tax increases with the inevitable mission creep. So since our politicians are evidently incapable of acting in good faith, we can’t shift our tax base in such away that would might help in the current economy.

It seems to me that our real problem is cultural and social. I’m not sure we need a leader to rally around (political or otherwise), but we do need to find away to rebuild some level of goodwill and trust across the divides that separate us – religious, political, moral, etc… I’m don’t know how that happens.
thomas tucker says:

October 10, 2011 at 12:10 am

The more I have thought about how this system works in pratice, as opposed to in theory, the more it seems analagous to how our representative democracy is supposed to work. Yes, in theory, our Congressman represents us the people. In reality, we know that they represent high-dollar monied interests. Both systems are corrupt.
Siarlys Jenkins says:

October 10, 2011 at 1:01 am

Russell Arben Fox already said this, but I will say it again, for myself:

“Does this strike you as unjust and immoral? What are you, some kind of socialist?”

Yes, and yes.

(I’m a libertarian socialist. The bigger the concentration of capital, the longer the supply chain, the more the good or service has become essential — one that a full participant in our society can’t be without, the more ownership should be socialized. Any brand new enterprise that someone can create, they are welcome to make and keep several million dollars off of it. That goes for Hewlett and Packard, but NOT for Fiorina and Apotheker, who just walked into what someone else built long since).

How would I establish the contract? The lowest paid employee of any enterprise must be paid no less than 1% of the total compensation package for the highest paid executive. I suspect that CEO compensation would fall from $70 million to $7 million a year, so that the janitor would make no more than $70,000. The other $63 million could go into

a) shareholder dividends (what a novel way to make money from an investment)

b) higher wages for hourly employees (yes, they darn well do deserve a bigger share of the productivity of the enterprise)

c) lowering prices for consumers

d) all of the above

e) new investment in productive capacity or R & D, which would actually create new jobs and provide new goods and services.
Stef says:

October 10, 2011 at 8:29 am

I would say that the shareholders of Gannett already voted with their feet, but the company still had enough money to pay obscene compensation to their former CEO.

Yes, it is disgusting, just as it’s disgusting how companies are hoarding cash, instead of returning cash to shareholders.

And yes, @Peterk, the whole sports-industrial complex is just as revolting, starting with the whole idea that there are “teams” which you can “fan” and spend money on, and that these people are any kind of models or idols for anyone.

Some in the #OWS movement have suggested that people move their money out of big corporate banks into local banks, and to move any money out of stocks into more sustainable investments.

The first is relatively easy; the second is very difficult, because people who have any money at all to invest have been brainwashed for decades about investing in the stock market. Thus many more people are exposed to the market, when perhaps they shouldn’t be. At the same time, the market becomes more dominated by manipulators than ever, both human and computer.
sdb says:

October 10, 2011 at 9:44 am

Stephen Bainbridge presents a counterintuitive of corporatitons:
http://www.professorbainbridge.com/professorbainbridgecom/2011/10/i-just-love-corporations.html
sdb says:

October 10, 2011 at 10:10 am

The $37Million number does seem large, but the news story says that the payout could be as large as $37M. What does that mean exactly? Is it a pension paid out over many years or a lump sum payment? He was overseeing a company with $5b/yr in revenue and 32,000 employees. If he took that 37M and gave all of it way to the employees, we are looking at something like $1000 per person (before taxes) spread out over his retirement. Maybe what he is being paid is too high, and emotionally, it just doesn’t feel right. But the reason people are struggling isn’t that CEOs are getting paid big bucks.

Also, how does one regulate executive compensation without opening the door to public influence of all private contracts? Such interference would create chaos – safe investments would cease to exist. There are also a number of thorny technical legal and economic issues that come into play. See more from my favorite Kirkian:
http://www.professorbainbridge.com/professorbainbridgecom/executive-compensation/
thomas tucker says:

October 10, 2011 at 11:57 am

Stef- the problem is that there aren’t any “sustainable investments.”