August 19, 2019
The Washington Post had a major front-page article announcing in the headline “Group of top CEOs says maximizing shareholder profits no longer can be the primary goal of corporations.” The piece refers to a statement by the Business Roundtable, a group comprising many of the country’s largest companies, which argues for an alleged shift in direction.
The problem with the statement and the piece is that that there is little evidence companies have been maximizing shareholder profits in the last two decades. The average real return to shareholders since December of 1997 is 4.8 percent. This compares to a longer-term average of more than 7.0 percent. (I went back to 1997 instead of taking the more natural 20-year average to avoid distortions created by the stock bubble. The twenty-year return has been just 3.6 percent.) These relatively low returns are especially striking since corporations have gotten so much assistance from government tax cuts over this period.
Rather than maximizing shareholder returns, it seems more plausible that CEOs have been maximizing CEO pay, which has risen 940 percent since 1978. Excessive CEO pay, which comes at the expense of the corporation, is far more pernicious than returns to shareholders. While shareholders include middle-class people with 401(k)s and pension funds, every dollar that goes to CEOs goes to someone in the 0.01 percent of the income distribution.
More importantly, excessive CEO pay distorts pay structures in the economy as a whole. If the CEO is earning $15 million, the rest of the top five corporate executives likely earn close to $10 million and even the third tier likely earn well over $1 million. This affects pay structures elsewhere. Presidents at universities and large non-profits now routinely make over $1 million a year and government cabinet secretaries whine about the sacrifice of public service where they make $211,000 a year.
It would be much better if our top CEOs started bringing their pay down to earth than change a focus that they don’t in any obvious way now have.
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