Much of the investing public has its money tied up in mutual funds, trusting to their professional management. So wouldn’t it be nice to think that funds make sure companies they invest in don't overpay their executives? Too bad the funds largely look the other way.
When your funds don't challenge the fast-climbing pay of chief executive officers and other top managers, your returns are unfairly diminished.
The potential clout of funds in corporate governance is huge. According to the Investment Company Institute, mutual funds own one fifth of U.S. shares. Other estimates are higher. But funds seldom exercise their power, says Robert Monks, founder of Institutional Shareholder Services, quoted in The New York Times.
Meanwhile, CEO pay has exploded, rising 21.7% from 2010 to 2013, the last year with data available, says the Economic Policy Institute.
Here’s a mantra that just isn’t true. You’ve heard this statement, “Our job is to run our company for the benefit of our shareholders.” Every time I hear a company executive say this, I have unprintable thoughts.
Here’s what I say out loud, “Are your kidding? You think you really run the company I’ve invested in for my benefit.” This is one of the biggest lies that anyone in our country utters.
What public company executives do. How could someone work for my benefit when they pay themselves almost 300 times the salary of the average employee in their company? That dismaying ratio is from the EPI. If you paid yourself a salary merely 20 times the average salary, dividends would be significantly higher.
Here’s how it works. When the CEO receives $20 million, the chief financial officer, the chief information officer and all of the top people get paid several million dollars a year. The level below merely makes a low seven-figure salary. The problem with this is that total senior executive compensation really adds up.
This is money that rightfully belongs to the shareholders of the company. What’s worse is when executives get this type of money while their companies perform poorly. How is this good for the shareholders?
Mutual funds could do something about this. Most of the stock in our country is owned for you through either pension plans or mutual funds. Both of these organizations have to vote every year for the boards of directors for the companies that they own.
I often wonder why it is that the directors of the mutual funds and pensions don’t just vote no to any executive who is getting paid too much money. They have the ability to do so. They seldom do. According to an ICI study, funds withheld votes for only 10% of corporate directors in 2007; they likely haven’t increased much since.
Why they don’t. The members of boards of mutual fund companies are also overpaid. It’s like a club. Once you get to this level you have a mentality that you deserve this much money. And if you as a fund director deserve this money, then of course the managers of companies you own also deserve outsized salaries.
The un-virtuous circle. We have developed a society where we scratch the backs of those who scratch ours. It’s a pretty good deal. You run a mutual fund or a public company. You have no personal risk. If your fund does well, you get a big bonus. If your fund doesn’t do well, you move to another fund.
The same is true for the CEO of a public company. You do well and you get a ridiculous bonus. You do poorly and you get a parting gift that could be as much as $50 million. And, whose pocket does this come out of? Yours and mine. This should be money we get to use for our retirement but we won’t.
I find this behavior more than annoying. But nothing will change in the near future about this issue. Maybe someday, before my children retire.
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Josh Patrick is a founding principal of Stage 2 Planning Partners in South Burlington, Vt. He contributes to The New York Times You’re the Boss blog and works with owners of privately held businesses helping them create business and personal value. You can learn more about his Objective Review process at his website.
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