Do MBA CEOs put their interests ahead of their employers?

In Why you should think twice before you appoint a CEO with an MBA Nicole Torres writes that companies run by a CEO with an MBA showed poorer performance than those run by non-MBA CEOs.

Miller and Xu tracked their firms' growth strategies and performance and the CEOs' compensation, and found that CEOs with MBAs were more likely to engage in behaviour that benefitted them but hurt their companies. Specifically, they pursued costlier growth strategies and were less able to sustain superior performance than their non-MBA counterparts.

Has paying CEOs for increasing shareholder value done the opposite?

In CEO pay more complicated than it looks Michael Pascoe discusses a paper that argues that paying CEOs based on "shareholder value" has been a terrible idea because it's led to an eight fold increase in executive remuneration whilst reducing long term shareholder value.

James Montier, a former co-head of global strategy at Société Générale and current member of the asset allocation team at GMO made the case that rewarding CEOs on the basis of "shareholder value" had finished up destroying the value of corporations.

Pascoe also sought feedback from Paul Anderson, former CEO of BHP and Duke Energy.

One of the things that distinguished Paul Anderson, aside from revolutionising BHP and then effectively rescuing Duke Energy, is that he's the only CEO I've interviewed who readily agreed that he had been paid too much. His response to the Buttonwood and GMO paper was characteristically honest and insightful.

"As in all things, it's not that simple," he said. "The era of the long-term manager led to a lot of complacency and managing for the benefit of the CEO as well.  The idea of tying CEO remuneration to shareholder value shakes up that model, but it has gone way too far.

...

"A stockholder once asked if I would work any less if I was paid a million dollars less. I simply answered 'no', but in the back of my mind I was thinking that I couldn't even tell him within a million dollars what I did make.

"I believe the big driver in CEO pay has been the constant public comparisons. CEOs want to feel that they are appropriately recognised and rewarded within their universe. I don't care what I make, but it irritates me if I make less than a bunch of idiots running half-assed companies. Also, compensation committees don't want a policy that says we pay in the bottom quartile and hope to get top quartile performance.

...

Making it to the CEO's office doesn't necessarily mean great talent or wisdom. Sometimes it's pure luck, being in the right place at the right time with a series of fortunate binary decisions on the way there. Sometimes it's a talent for corporate politics and knowing how to smooge the board. Sometimes it's just the Peter Principle at work.

But whatever it is, the board will want to pay him or her wonderfully well.

Stiglitz on the American dream becoming a myth

Professor Joseph Stiglitz, a Nobel laureate in Economics looks at growing inequity in the USA in Trickle-up wealth is making the American dream a myth:

America has the highest level of inequality of any of the advanced countries - and its gap with the rest has been widening. In the "recovery" of 2009-10, the top 1 per cent of US income-earners captured 93 per cent of the income growth. Other inequality indicators - like wealth, health, and life expectancy - are as bad or even worse. The clear trend is one of concentration of wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.

 He goes on to write:

A closer look at those at the top reveals a disproportionate role for rent-seeking. Some have obtained their wealth by exercising monopoly power; others are chief executives who have taken advantage of deficiencies in corporate governance to extract for themselves an excessive share of corporate earnings; and still others have used political connections to benefit from government munificence - either excessively high prices for what the government buys (drugs), or excessively low prices for what the government sells (mineral rights).

Likewise, part of the wealth of those in finance comes from exploiting the poor, through predatory lending and abusive credit-card practices. It might not be so bad if there were even a grain of truth to trickle-down economics - the quaint notion that everyone benefits from enriching those at the top. But most Americans today are worse off - with lower real (inflation-adjusted) incomes - than they were in 1997.

I think the trickle down concept is a myth. If anything money flows upwards. I would almost argue that money is the anti-gravity, except that, like gravity, money seems to attract other money. Just as gravity means that large masses attract and ensnare smaller masses so it appears does money. Anyway I digress. Professor Stiglitz goes on to write:

America is paying a high price for continuing in the opposite direction. Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset - its people - is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education, and technology, impeding the engines of growth.

Recommend reading.

Has the USA exceeded the optimum level of inequality

Richard B. Freeman in Optimal inequality for economic growth, stability, and shared prosperity: the economics behind the Wall Street Occupiers Protest? looks at the level of inequality in the USA and argues that too much inequality reduces peak economic output.

Ross Gittins on the importance of relationships

In Ruthless pursuit of profit at all cost is an excess that can't last Ross Gittins writes about the work of Dr Michael Schluter.

I get to meet a lot of famous and interesting people in my job, but few have had more influence on me than Dr Michael Schluter, the social thinker, social entrepreneur and founder of Britain's Relationships Foundation.

Dr Schluter is advocating a relational approach by company management. That is, promoting relationships between all the stakeholders in a company: shareholders, employees, customers, suppliers and the community. It's an interesting approach that would probably make for a better society. Recommended reading.

Is trickle-down economics a myth

Since the Occupy Wall Street movement started there has been a lot written about the growing inequality in wealth and income, particularly in the USA. Saul Eslake in Why some incomes are just gross writes:

According to data published in the Paris School of Economics' World Top Incomes Database, the share of total household income accruing to the top 10 per cent of the income distribution in the US rose from 34.6 per cent in 1980 to 48.2 per cent in 2008 - an increase of 13.6 percentage points.

Put simply, the top 10 per cent of Americans control almost half the country's household wealth.

Over the same period the share accruing to the top 1 per cent of the income distribution more than doubled, from 10 per cent to 21 per cent; while the share accruing to the top 0.01 per cent of US households ranked by income increased almost fourfold, from 1.3 per cent to 5 per cent.

Indeed, from 1980 to 2008 the average gross income of the richest 1 per cent of American households rose by 172 per cent in real terms.

Over the same period the average real incomes of the bottom 90 per cent of American households rose by just 2 per cent.

Quite staggeringly, the average gross income of households in the bottom 90 per cent of the income distribution was, in real terms, lower in 2008 than it had been in the early 1970s.

He also states:

An increasingly polarised distribution of income and wealth can have adverse consequences for economic performance.

and:

But there's absolutely no guarantee that the distribution of income and wealth produced by markets will be socially desirable, or politically sustainable; indeed, there's plenty of evidence to suggest that more often than not, it won't be.

Thus, if there's to be less government intervention in the means by which incomes are generated by the operation of market forces, based on the belief that the result will be a higher aggregate level of income, there may well need to be more government intervention in the way in which that higher level of income is distributed, in order that the end result is socially and politically sustainable.

To quote Wikipedia:

"Trickle-down economics" and "the trickle-down theory" are terms used in United States politics to refer to the idea that tax breaks or other economic benefits provided by government to businesses and the wealthy will benefit poorer members of society by improving the economy as a whole. The term has been attributed to humorist Will Rogers, who said during the Great Depression that "money was all appropriated for the top in hopes that it would trickle down to the needy." The term is considered pejorative by some proponents of tax cuts.

Proponents of these policies claim that if the top income earners are taxed less that they will invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals.[citation needed] Proponents argue that economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes. However, others have argued that "trickle-down" policies generally do not work, and that the trickle-down effect may be very slim, if indeed it even exists at all.

So, the idea is that the more income available to the wealthy, the more money will flow to everyone else. Yet the reality, as seen in the statistics quoted by Saul Eslake above, seems to suggest that this is not the case.

Edit 03/11: Jessica Irvine is of the opinion that Top bosses' riches are undeserved. Dan Ariely, Professor of Behavioural Economics at Duke University, looks at level of executive compensation, particularly in the financial sector in Better (and more) Social Bonuses. He has a great graph comparing the pay of the leaders of the world's top banks to their market capitalisation. For example, James Dimon of JPMorgan earns $19,651,560. JPMorgan has a market capitalisation of $158.6 billion. Jiang Jianqing of ICBC earns $235,700 while ICBC has a market capitalisation of $250.2 billion.

Edit 20/11: Bruce Guthrie writes that They're not the messiahs, just very overpaid and wonders if executive salaries should be capped at 10 times the Prime Minister's salary. Of course that would mean a significant pay cut for many CEOs.

Edit 21/11: Tony Webber on Why executives are worth their fat salaries.