Feb 17, 2014, Vol. 19, No. 22 • By IRWIN M. STELZER
Conservatives of the world, unite! You have nothing to lose but your corporate sponsors. We must save capitalism from the capitalists. We must persuade our corporate and political classes that it is difficult for people to retain their belief that market capitalism works for them when they are struggling to find work, or to keep their homes, or to avoid declines in their living standards as their real wages stagnate and their taxes disappear into bailouts of banks and subsidies for solar millionaires.
Jamie Dimon: million CEO?
World Economic Forum
Decisions once reported only in the financial pages are now page-one news and the subjects of countless blogs, and critics of capitalism are riding a wave of belief that inequality is rising and opportunity for the ordinary person is not; that the deck is stacked against the guy without access to a private cell phone number on K Street. Corporate elites who believe their decisions on matters such as compensation, plant closings, and foreign investment, to mention only a few items discussed in boardrooms and executive suites, should think again. Sure, some have political advisers to warn them how to cope, after the fact, with the often-predictably unpopular consequences of their decisions. But those consequences should be considered before the fact—before deciding to join a government-union-corporate axis to push for immigration reform that well might help the overall rate of economic growth and profits, but evoke a lack of enthusiasm from the unemployed programmers who will have to compete with the new high-skilled immigrants, or an unwelcoming attitude towards the unskilled newcomers who drive down wages. Or before handing out multimillion-dollar bonuses to bankers so recently bailed out by the taxpayer. Or before exposing valuable technology to theft by China’s state-owned enterprises in order to sell a few more feet of rope in that emerging market.
There’s no need to cater to occupiers, or to egalitarian hustlers, or to climate-change extremists. But there is a need to consider the effect of business decisions beyond quarterly profits and earnings per share, and of political decisions on people besides members of focus groups. Support for the preservation of the wondrous capitalist system that has produced unparalleled material prosperity is worth a few moments of thought, even by executives whose every minute is worth so much in the market. And even by the political class.
Take a break from reading the polls and weighing electoral prospects (nothing wrong with that—we all want to keep our jobs), and spare a moment for consideration of future support for our political and economic system. We have long passed the day of the silent majority, and if howls of righteous anger are not to result in support for measures that will make unhealthy changes in our system, the majority must have a sense that government, as well as business, is on their side. Preservation of our system is the ultimate goal.
In the depths of the Great Depression, Italy’s Benito Mussolini seemed to be converting a clapped-out economy into a model of state-run efficiency, with the cooperation of big business, enchanted by trains that ran on time. Never mind a bit of roughing up of any opposition. In Germany, Hitler’s National Socialism seemingly had his nation on the road to economic recovery, with millions pouring into capitalists’ coffers as the nation rearmed, and the annoying trade unions were tamed. Never mind a bit of broken glass here and there. In Soviet Russia, Lenin and Stalin commanded a wave of industrialization that was the envy of America’s “useful idiots,” dazzled by statistics of rising output and tours of Potemkin Villages, and eager to sell the Soviets the rope with which to hang themselves, as Lenin so pithily put it. Never mind the stacks of frozen corpses behind the myriad infrastructure projects.
Competing with these models of the future was a depression-ridden America, with millions out of work and out of luck, banks failing, and hotel clerks asking people who requested accommodation on high floors whether the rooms were for sleeping or leaping—or so my father, who nevertheless despised FDR’s support for trade unions, told me. By many traditional measures, the New Deal was a failure, with double-digit unemployment eliminated only by stepped up war production. Roosevelt’s farm program repealed the law of supply and demand in agriculture markets, his labor policies allowed workers to collude against employers when setting wages, his National Industrial Recovery Act involved central planning that was more Karl Marx than Adam Smith. But what those and other programs (some of which were certainly ill-conceived) did do was provide hope and change, hope that things would get better, and change that seemed to put government and reformed market capitalism on the side of the people. FDR might have been a traitor to his class, as his enemies proclaimed him, but he proved to be the savior of the very capitalists who failed to hear the tumbrils rumbling in the distance. Some traitor, some class, to paraphrase Winston Churchill’s “some chicken, some neck” speech in Canada.
Then it was reforming liberals who saved capitalism. Now it is conservatives’ turn to restore faith in market capitalism. True, the threat is not as great today: Fascism, National Socialism, and communism have been consigned to the scrapheap of history. But a recent challenger remains a contestant for economic model-to-be-emulated. Bloomberg Businessweek reports the emergence of a “Beijing Consensus” in Southeast Asia, as nations “have shifted their development strategy from one based on free markets to one based on semi-free markets and an illiberal political system,” in the words of Indonesian scholar Ignatius Wibowo. True, this model of repressive state-run mercantilism suffers its own strains: Banks are stuffed with uncollectible IOUs from regime cronies, the masses are resentful of the massive inequalities and the conspicuous consumption of billionaire party favorites who stow their capital in New York and London while per capita income, as measured by the World Bank, languishes at the level of Tunisia, Albania, and Bosnia, three of the 91 countries China has yet to overtake. But to many Asians bad banks, inequality, conspicuous consumption, and cronyism seem as much American as Chinese problems these days. And a 7-plus-percent growth rate—to which American businesses contribute—sure beats 2 percent.
What conservatives must do is persuade the nation’s capitalists that preservation of the system by which they have done so well, and widespread international acceptance of our economic model, must be factored into what to them seem ordinary profit-and-loss, costs-and-benefits business decisions. If you think fostering such a broadening of visions, or as some might call it, personal restraint, is an easy chore, consider this.
A few weeks ago three exemplars of the best that corporate America produces gathered in solemn convocation to consider just how much Jamie Dimon’s toil in 2013 was worth to the shareholders of the company he leads as CEO and chairman of the board, JPMorgan Chase. Lee Raymond, former chairman and chief executive of ExxonMobil (whose retirement package came to $400 million); Stephen Burke, CEO of NBCUniversal; and William Weldon, former chairman and chief executive of Johnson & Johnson, had no easy task. JPMorgan Chase was coming off a year in which it had paid some $20 billion in fines for management miscues that led to violations of a variety of statutes and regulations, but in which its shares rose almost 40 percent and its customers expressed satisfaction with their dealings with the bank. That three-man compensation committee had to consider the red-hot market for corporate talent, and that Goldman Sachs’s Lloyd Blankfein had received about $23 million for running a much smaller bank, part of his reward for laying off thousands of staff, reducing the compensation of several of the bank’s employees, and navigating Goldman through the maze of new regulations that are forcing it to make drastic changes to its business model. It also had to keep in mind the need to continue the long hunt for the Holy Grail of pay-for-performance in order to keep Dimon in hot pursuit of shareholder value: Much of his compensation will depend on the value of JPMorgan Chase shares in years to come.
Whether the 74 percent raise to $20 million that the compensation committee decided upon is the correct mixture of reward for past and incentive for future performance I leave to experts in the field of compensation. According to the usually well-informed James Stewart, writing in the New York Times, most compensation experts seem satisfied that Raymond and his colleagues did a reasonable job of balancing all the factors that go into pay. They avoided having Dimon opt for free agency by letting the $6 billion “London Whale” trading fiasco and other management failures be bygones, while punishing Dimon by leaving him $3 million short of his 2011 compensation.
But here’s the rub. Stewart reports that Professor David Larcker, a corporate compensation expert who is director of Stanford’s Corporate Governance Research Program, stressed, in Stewart’s words, that “the board’s duty is to shareholders, not the public at large.” Negative reaction by the public, one member of the compensation committee told Stewart, was not allowed to influence the committee’s decision.
Which is why corporate America desperately needs advice from conservatives. Public reaction matters. In a period of protracted high unemployment, with middle-class wages stagnant, and millions of workers too discouraged to continue pounding the pavements and their computer keyboards in search of work, a decision to pay someone with Dimon’s mixed record some $20 million, however that compensation package may be structured, is of relevance to more than shareholders.
I am not arguing that the decision was wrong, given the frame of reference within which it was considered. After all, it is foolish to quarrel with Warren Buffett, who said, “If I owned JPMorgan Chase, [Dimon] would . . . be making more money than the directors are paying him.” Rather, I am suggesting that it would be in the long-term interest of America if its corporate leaders were to consider, along with the usual factors, a question more important than whether the shareholders will be pleased now, right now, with their decisions. To adopt such a narrow focus is to misunderstand the situation in which market capitalism finds itself. Irving Kristol famously noted that when businessmen slapped him on the back and urged him to go back to the academy and carry the flag for capitalism by explaining what a splendid thing the profit motive is, “Since such occasions do not lend themselves to philosophical discussion, I smile weakly, mumble something unintelligible, and change the subject as quickly as possible.”
Unfortunately, we find ourselves in times when a smile and a mumble just won’t do. Attention must be paid lest we stumble into a new, unattractive form of economic organization that can produce neither the freedom nor the well-being of our current system.
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