Does Cororate Governance Still Exist?

 Corporate Governance is often defined as “the system of rules, practices, and processes by which a firm is directed and controlled.

The media does not appear to spend a great deal of time on the topic anymore. When I ask people about it, most shrug. A few have said there is little need for oversight since the Sarbanes-Oxley bill was passed in 2002 that laid out new, stricter standards for US boardrooms. 

Well, Don Cole, crusty curmudgeon that he is, does not see things that way.

If you go back to the era of the Robber Barons, large companies were largely controlled by their founders—Rockefeller, Carnegie, Vanderbilt, J.P. Morgan and his senior partners. They owned the bulk of their businesses. In the 20th century, professional managers took over the running of the very large firms. Slowly, things changed.

The management were significant but not large shareholders (over 5%) of the companies that they were running. They were said to answer to their shareholders of their common stock plus stakeholders such as employees, suppliers, lenders, customers, government regulators, even the local communities in which they operated. That all sounds great but on paper it is the board of directors that should play the defining role in setting, accountability, long term strategy and oversight. 

Having the board oversee things sounds great BUT who is on the board? Generally, it is senior or retired executives of other corporations. Sometimes a board member has the CEO of their directorship company serve on their board. The board of directors has a sub-group generally known as the Remuneration Committee. The members of this group as generally quite wealthy and owe their directorship to the CEO on the company. In many, if not most cases, the remuneration team looks at industry averages for similar companies or competitors and assign a compensation package for the CEO and a few fellow travelers. What galls shareholders is that often, large raises or bonuses are awarded to the management team even when sales or profits decline. 

Why don’t shareholders complain? Well, today many people own shares via mutual funds so they do not even see the annual report. Others, especially the young upscales, keep a large amount of money in low fee index funds that may own shares in 500 or more companies. Direct shareholders are often small investors who own 100-1000 shares. They can complain to shareholder relations but are usually dismissed as noisy gadflies. Getting thousands of small shareholders to unite is a herculean task. Sometimes a large shareholder gets a CEO to shape up with a shareholder proposal that is presented to all “owners”, no matter how small. Many fail but sometimes the activist gets a set on the board and can help prevent overreach. 

Over the years, I have asked many people, all small shareholders, about this topic. Most are apathetic. A typical response is, “Yes, with my 300 shares, I am technically an owner. But, I have had the shares for years and they always raise the dividend. I really don’t care if they are feathering their own nests. I am not going to waste time plowing through the annual reports as you do.” 

Let me be clear that all companies are not managed by leaderships that go for their own enrichments and keep piling on the perks. The best example may have been the dynamic duo of Warren Buffett and Charlie Munger at Berkshire Hathaway. They each only took $100,000 in salary, did not give stock options to managers and rarely bought back stock unlike some companies that do it constantly regardless of price. When Warren broke down and arranged for a corporate jet, he jokingly dubbed it “The Indefensible.” Buffett and Munger were laser focused on enhancing shareholder value and their “owners” loved them for it and profited handsomely. 

You may think my rant in this post is something relatively new. Not so. There is a wonderful but long out of print book entitled, THE MODERN CORPORATION AND PRIVATE PROPERTY by Adolf Berle and Gardner Means. It talked about how boards and managers were responsible for risk management, fairness, and transparency. They said that it was not being executed well. That book was published way back in 1932 at the bottom of the Great Depression.

So, things have not really improved in the last 94 years. Many would say that it has gotten worse. With market averages at record levels as I type, it does not appear that many media outlets will address this issue.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

Do We Really Want Democratic Socialism in America?

 In recent years, I have spoken to many young adults, most of whom are college seniors. Some approach me after my spiel and ask me why I bother to discuss marketing or investment issues? What we need, they say, is democratic socialism. Keep in mind, many of these earnest young people are business majors.

The term democratic socialism began to get some traction when Senator Bernie Sanders of Vermont ran for president in 2016. Bernie was clever enough to not throw the market system totally out. What he suggested was that the U.S emulate Denmark and other Scandinavian countries and have a mixed economy rather than a relatively free market model.  Education and health care and some old age benefits are strong in these countries. He also made some scathing remarks about Wall Street excesses, some of which even I agreed with.

It sounds great on the surface, but have you ever investigated what really happens in Denmark, Norway and Sweden? Let’s look at some facts.

Personal income taxes in Scandinavia are much higher than in the U.S. Denmark’s top tier pay 55.9%, Norway 39.6% and Sweden 52.4%. Why is Norway’s so much lower than the other two democratic socialist paradises? Well, to me they got lucky but were also VERY smart. When the North Sea oil was developed decades ago, Norway set up a permanent fund for both education and healthcare for their citizenry. Then they did something brave and ingenious in my view. The oil bonanza was largely invested in global index funds that excluded Norwegian securities. They realized that they were a small nation so looked outside of their home to invest the gigantic windfall (can you imagine Wall Street’s reaction if the US tried even a modified version of Norway’s approach?).

The top income tax rate in the US is technically just over 40% but virtually no one pays it. The super rich pay capital gain taxes at a much lower rate and a handful of serious players use the carried interest loophole to lessen their tax burden. Inheritance taxes in the US largely exist in name only as the well-heeled and genuinely rich place their funds in trusts that work around a death tax. Also, remember that while all US workers’ pay Social Security taxes, some 47-48% pay no federal income tax at all.  Lower income Scandinavian citizens still pay but not at the confiscatory top rates mentioned above.

Also, these nations have a Value Added Tax of 25% on most purchases which is, in essence, a national sales tax. We do not have a national sales tax, and several states such as New Hampshire, Delaware, Montana, and Oregon do not have one at all. Sales taxes are regressive and are felt the most by the lower income groups, so the Value Added Tax does not strike me as very socialistic. 

To sum up, the free education and healthcare provided in these northern European countries is not free. The tax burden on the lower and middle class is much higher than on Americans and on their big earners as well.

Do Americans really want democratic socialism? Mayor Mandami in New York city shrewdly suggested a special tax on non-US citizens having vacation residences in his city. This would raise some revenue but not affect citizens at all. 

Right now, many Americans earning $150,000 or so may only pay 11-15% in Federal Income Taxes. To emulate the Scandinavian model, their taxes would at least double plus a national sales tax (value added) would also have to be employed to cover the social benefits that Denmark, Sweden and Norway enjoy.

Also, can you imagine the army of accountants, tax lawyers and lobbyists for a variety of groups that would descend on Washington if Congress tried to implement a Scandinavian solution? I agree that income inequality is out whack, but authentic tax reform is what is needed.

A few Congressional democrats have suggested busting the trusts that the well to do have and all inheritances would be taxed at normal tax rates. That would face tough sledding in Congress but such imaginative ideas need to be considered in some form.

If you would like to contact Don Cole directly, you can reach him at doncolemedia@gmail.com or leave a message on the blog.