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Shareholders of the World, Unite

You have nothing to lose...

12:00 AM, Apr 21, 2012 • By IRWIN M. STELZER
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Good news for those of us who know that only a reformed version of market capitalism can survive current unhappiness with its performance. Citigroup’s shareholders have told their executive employees, and most especially CEO Vikram Pandit, that it is the owners of the business, not their hired hands, who run the show. And that if these employees want to make the big bucks, they had better deliver stellar performance. So a majority of the shareholders turned down a plan that paid Mr. Pandit almost $15 million last year, and promised to pay him millions more this year despite less-than-stellar performance.

citi

This is important because it addresses one of the discontents with capitalism. True or not, there is a perception that inequality of income and wealth is increasing, that the rise is due not to great performance by executives but to the fact that game is somehow rigged against the ordinary worker. And the president of the United States is building his reelection campaign around the theme of socking it to the rich whom he says are not paying their fair share of taxes, while several nervous politicians in other countries, unable to deliver economic growth, are blaming “fat cat bankers.” In Britain one of that hated breed has been de-ennobled, his peerage rescinded, and his seat in the House of Lords snatched from him.

Well, if the uprising of Citigroup’s shareholders is a harbinger, the so-called fat cats might have to justify their pay checks or become accustomed to a diet of skim milk. We must be careful here not to lapse into the vulgar populism of the campaign trail. The issue is not that some people make a lot of money. No one begrudged Steve Jobs his income, or is outraged at the millions pocketed by Warren Buffett, Bill Gates, Mark Zuckerberg, or others who have been successful investors or built the better mousetraps that benefit consumers and contribute to economic growth. Their compensation was in return for performance that benefited shareholders, created jobs and contributed to growth. The problem at Citi was best stated by the Wall Street Journal, “Instead of tying pay-outs to long-term share appreciation, the [Citi] plan set a low earnings bar that conveniently didn’t count the parts of Citi that aren’t expected to thrive.”

The Dodd-Frank law—much derided by conservatives, with reason, given some but not all of its provisions—requires that shareholders have a “say on pay.” So demands that compensation be performance-related are becoming more common at shareholder meetings. Hewlett-Packard, Janus Capital Group, IGT (gaming equipment), FirstMerit Corp. (regional bank), and Actuant (industrial products) are among more than 40 companies that have had executive pay plans disapproved by shareholders because pay and performance were inadequately linked. To be sure, these rejections are advisory only: directors are free to over-rule the shareholders.

But that does not seem likely, at least in the case of Citi. Richard Parsons, departing chairman of the board, called the shareholder vote “a serious matter,” and has announced that the directors will meet with shareholder representatives, with a view towards bringing the compensation packages more in line with what shareholders deem reasonably related to performance, as General Electric and Lockheed Martin did in advance of their shareholder meetings, and as Britain’s Barclay’s Bank announced yesterday it intends to do.

Parsons has had a distinguished career in politics as a protégé of Nelson Rockefeller, and in business as a protégé of Laurance Rockefeller, who helped him become CEO of Time Warner, where he presided over the unfortunate merger with AOL. Nevertheless, his reputation remained sufficiently intact for him to become chairman of Citi, and he is not likely to risk it by being seen as ignoring the wishes of Citi’s shareholders, whose interests he has a fiduciary obligation to protect.

Which brings us to the question of just who these shareholders are, and what powers they have. In 1932, two scholars, Adolf Berle and Gardiner Means, pointed out that the widely dispersed ownership of shares in large corporations turned effective control of the operation of those companies over to their managers. The result was a self-perpetuating management team that often selected the slates of directors to put before shareholders, creating a corporate governance system in which executives had unchallenged access to the corporate treasury—until Mike Milken and the so-called “predators” and “raiders” fought for and won control of the greatest abusers, and ended the perk parties.

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