What do CEOs do to earn their pay? Presumably, something very valuable, since the average CEO pay at Fortune 500 companies in 2014 was a cool $13.8 million.
Yet even as CEO paychecks have ballooned to roughly 300 times that of their median employee (up from just 20 times 50 years ago), their achievements have become harder and harder to discern. Time was when CEOs put their companies’ capital into projects that produced new technologies that bettered their compatriots’ lives, and that employed vast numbers of workers at middle-class wages. Yet as their incomes soared, CEOs stopped doing that.To be sure, the tech sector—Silicon Valley, et al.—has indeed invested in innovation and generated new products that have revolutionized communications, the distribution of entertainment, and a lot of what was formerly back-office paperwork. But as Northwestern University economist Robert Gordon documents in his lightning bolt of a new book, The Rise and Fall of American Growth, no comparable breakthroughs have emerged in recent decades in the other, more basic spheres of life. Electric power, jet planes, autos, indoor plumbing, food processing, movies, television, air conditioning—innovations that transformed existence and boosted productivity as they spread across the West during the first 70 years of the 20th century—have not been superseded or improved by something significantly better in the past half-century.
Nor is the corporate sector beyond Silicon Valley trying all that hard to reach the next breakthrough. Publicly traded companies devote just half the percentage of their assets to investment that their privately held counterparts do, according to research by economists John Asker, Alexander Ljungqvist, and Joan Farre-Mensa. What do our CEOs actually do with their companies’ assets, then? They stash a lot of it—more than $2 trillion—overseas, where their companies can pay lower tax rates or defer taxation altogether. Of late, they buy foreign companies and relocate their corporate citizenship to those companies’ homelands in order to cease paying U.S. taxes altogether—even though, in almost every case, their headquarters and main facilities remain in the United States. Or, they merge with another U.S.-based company, combining existing product lines rather than developing new ones. The funds going to mergers and acquisitions, foreign and domestic, hit an all-time high last year.
Increasingly, however, what CEOs do is funnel money to shareholders. University of Massachusetts economist William Lazonick has documented that 91 percent of the net earnings of the corporations on the Fortune 500 list from 2003 through 2012 was sent to shareholders in the form of dividends or share buybacks. In a paper for the Roosevelt Institute, economist J.W. Mason showed that the amount that the U.S. corporate sector showered on shareholders over the past decade was equal to all corporate borrowing. In the 1960s and 1970s, about 40 cents of every dollar that a corporation either borrowed or realized in net earnings went into investment in its facilities, research, or new hires. Since the 1980s, however, just 10 cents on the dollar has gone to investment.
Indeed, when corporations take on debt, they do so increasingly to pay off shareholders. “The businesses that have been borrowing the most since the end of the recession have not been those with the highest levels of investment, but rather those with the highest dividend payments and share repurchases,” Mason writes. “Finance is no longer an instrument for getting money into productive businesses, but instead for getting money out of them.”
In rewarding shareholders, of course, CEOs are compelled to reward themselves, as, beginning in the 1990s, the pay and bonuses that the overwhelming majority of CEOs receive either comes in the form of shares or is linked to the share price, or both. It’s a tough job, but somebody’s got to do it.
Corporations are governmentally chartered institutions, of course; the theory behind that is that in the broadest sense, having corporations serves the public good. To whatever degree that may once have been the case, it’s clear that today, corporations serve a much narrower stratum of the public than they once did. They no longer devote as large a share of their resources to investment; they often prefer to subcontract or offshore work rather than having to pay employees decent wages and offer them benefits; they have failed, outside the tech sector, to improve the quality of most people’s lives for the past half-century. And by depressing workers’ incomes, they also depress consumption, creating a vicious circle in which the diminished buying power of the American public justifies diminished investment in expanding product lines or developing new products.
There are ways out of this vicious cycle, but they’re not to be found within the confines of the existing corporate world. The investment gap needs to be filled by public investment. Rebuilding the nation’s increasingly shabby infrastructure is a good place to start, and that’s a task toward which Hillary Clinton has pledged to spend roughly $350 billion over the next decade, and Bernie Sanders, nearly three times that. (Of course, in both cases, that would require persuading what is likely to be a Republican House either to appropriate the funds or vote to establish a public bank, or both.)
The other way would be to change the governance of corporations so that major shareholders don’t hold a monopoly of power. The German laws, which require corporations to split their boards between shareholder and management representatives on the one hand, and worker representatives on the other, provide a model for doing this—a model that’s enabled Germany to thrive in the global economy by retaining a high-value-added manufacturing sector within its borders.
Absent these kinds of reforms, however, the job of the modern American CEO will remain simply to reward himself (they’re usually guys, these CEOS) and people like him, largely by suppressing the kinds of activities that would benefit a far greater number of his compatriots, his own employees very much included. Nice work—particularly for narcissists—if you can get it.