Letter 2 America for February 24, 2015

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Dear America,

We are developing a caste system in this country that is becoming no less rigid than the one that has plagued India for millennia.  A Brahmin class is emerging in our corporate boardrooms, which has more to do with the quality of life that the rest of us enjoy than one might think.  These new corporate Brahmins occupy the boardrooms of corporations big and small, and they control their own destinies with absolute impunity...or at least they have until recently.  The way in which they do so is that they elect one another to boards of directors and hire one another as corporate executives, and then they control not just their own compensation, but that of the high level executives they hire for the companies whose boards they sit on, and vice versa.  Thus, the flow of money from corporate coffers, and therefore from the pockets of investors, is essentially guaranteed and in the cases of corporations that issue hundreds of millions of shares--and there are many--by imposing bylaws that prevent in practical terms anyone else from nominating new board members, they live like sybarites in perpetuity.  In recent times, corporations have liberalized their bylaws, but they still essentially prevent interference with the perdurance of the corporate noble class.  The executives nominate the board members over and over again, and the shareholders have no choice but to elect them as they have no opposition.  Then, the board members, who are often compensated with six figure remuneration for attending one or two meetings per year, vote on the seven or eight figure compensation of the chief executive officer and his henchmen who nominated them.  It's a neat little daisy chain that redounds exclusively to their collective and mutual benefit, and it doesn't even depend on whether they succeed in their corporate ministrations.  In the cases of CEO's over the years, they enjoy compensation packages that not only allow them to "earn" more in a year than most people earn in a lifetime in many cases,  they have predetermined termination provisions in their contracts that guaranty them years worth of compensation even if they are fired for incompetence and failure.  In the cases of large corporations in particular, this process is regulated by the Securities and Exchange Commission, which had its own compensation issues a few years ago when its chairman was let go for lack of competence, and his package turned out to be worth over a hundred million dollars.  A few years before that, Jack Welch, the long-serving moron who was CEO of GE for decades, retired or was forced out after a hundred million dollar loss stemming from his efforts to incorporate Honeywell into the GE corporate structure.  But even with that as his legacy, he received the use of a million dollar condominium in Manhattan as part of his compensation package, though there was such an uproar about it that he had to give it up.  In short, corporate governance has become the inbred family business of a select few people, and they have had absolute impunity until now.

What is happening is that strictures on the nominating process for corporate boards have created a furor and regulators have been compelled to take notice.  I wrote about the catch-22 nature of the bylaws at Goodyear several years ago, in which nomination of an alternate corporate board member required a large proportion not just of the attendees at the annual meeting, but of the total number of shares held: a standard that was impossible to meet because so few shareholders actually attend those meetings.  And now, the poster child for the kind of corporate corruption that has dominated American business and industry for a century is Whole Foods Markets.  You would think that a company that specializes in something like organic food for those of us who are morally and health conscious would also be moral, but it isn't.  Shareholders sought to put an on the annual meeting's agenda a new rule to allow holders of 3% of outstanding shares to nominate board members, but Whole Foods prevailed upon the SEC to allow it to exclude that proposal in favor of its own, which requires 5%, a burden that is almost impossible to meet.  To no one's surprise, the SEC took Whole Foods' part, but the hue and cry was so loud that the decision had to be reversed, and now the 3% rule is going to be considered, much to the chagrin of the Whole Foods powers that be.  There will likely be some changes at Whole Foods soon, which means that the silver spoons will no longer be part of the corporate place setting, and thus will not be passed down from generation to generation of corporate mafia members.  But if we have to rely on the SEC to protect shareholders in this way--and by the way, in Europe corporate shareholders owning just 1% have the right to nominate board members--we will have a tough row to hoe.

The alternative is legislation either on the state or federal level, but the likelihood of that occurring is slight at best.  The majority of states now have Republican legislatures, and as everyone knows, that's what we have on the federal level too.  Can you imagine John Boehner and Mitch McConnell permitting bills liberalizing corporate governance to reach a vote on the floor of either the Senate or The House?  It won't happen while they are in power.  So, our Brahmin class will likely live on for a good long time, and who can predict what kind of rapacity they will engage in with the protection of their Republican patrons as secure as it seems to be.

Your friend,

Mike

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This page contains a single entry by Michael Wolf published on February 24, 2015 8:51 AM.

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About this Entry

This page contains a single entry by Michael Wolf published on February 24, 2015 8:51 AM.

Letter 2 America for February 20, 2015 was the previous entry in this blog.

Letter 2 America for February 27, 2015 is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.

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