Monthly Archives: July 2007

CEOs Under Academic Fire

The National Journal has just published a long piece, CEOs Under Fire, by John Maggs, which reviews in detail the academic work on executive compensation by Lucian Bebchuk, Erik Lie, and Xavier Gabaix.  The piece runs as follows:

On March 13, after meeting with President Bush, Attorney General Alberto Gonzales faced the cameras and gave his initial defense of his role in the firing of U.S. attorneys: “I believe in accountability. Like every CEO of a major organization, I am responsible for what happens at the Department of Justice.”

His being a “CEO,” however, didn’t mean that Gonzales was responsible, exactly: “I accept responsibility for whatever happens in this department. But I have 110,000 people working in the department. Obviously there are going to be decisions made that I’m not aware of all the time.” Thus, he argued, he actually shouldn’t be held responsible.

Gonzales has used many arguments to justify his role in the firings, but comparing himself to a CEO was probably not the best way to win over the American public. Today, people disdain CEOs, with all their wealth and power–even more than they did during the “Decade of Greed” in the 1980s. CEOs’ reputation is so bad that they rank even lower than politicians in public opinion polls. Last year, about a month after former Enron head Jeffrey Skilling failed to convince a jury that he wasn’t responsible for everything in his organization, a poll found that only 17 percent of the public expected CEOs to tell the truth. Compare that with 25 percent for members of Congress in a year marked by lobbying and sex scandals.

The deteriorating view of corporate executives emerges against a backdrop of diminished esteem for business in general. In 2007, 58 percent of Americans believe that corporations don’t strike a fair balance between profits and the public interest, according to the Pew Research Center for the People and the Press. That percentage was 48 percent in 1987 and again as recently as 1999.

The rise in the public’s derision toward CEOs has been dramatic. In the late 1990s, corporate execs were among the most revered people in America; people credited their entrepreneurship with helping to drive one of the most prosperous decades in U.S. history. Warren Buffet, Bill Gates, and especially Jack Welch were worshipped as geniuses. But after the stock bubble burst, the names in the news were Skilling; Bernard Ebbers of WorldCom; and Dennis Kozlowski, the former Tyco head whose company paid for a birthday party in Sardinia for his wife that featured an ice sculpture of Michelangelo’s David “urinating” Stolichnaya vodka.

The focus of the public’s ire is money. By any measure, CEO compensation has risen tremendously in recent years. In 1984, the head of Ford Motor, the fourth-biggest corporation in the United States, earned $7 million, or $15 million in today’s dollars. In 1987, Lee Iacocca courted controversy when his compensation from Chrysler topped $20 million (equivalent to $38 million today). In 1997, the top earner was Millard Drexler of the Gap, who earned $104 million ($135 million today). In 2002, the highest earner, after inflation, was Larry Ellison of Oracle, whose pay was equal to $804 million today.

But then, controversy has often besieged the top earners. Consider Charles Wang of Computer Associates. In 2000, the year he was the highest-paid CEO in the country (with $650 million in compensation), he was forced to resign after a flurry of lawsuits accused the company’s executives of falsifying their earnings.

The flood of fraud and accounting scandals that began with Enron and WorldCom in 2001 has continued for six years, sweeping through more companies and putting more high-profile executives on trial than at any time since the Progressive era of the early 20th century. Even beyond the proportionally tiny number charged with breaking the law, the indictment of CEOs is much broader. A multifront attack–which the media has joined and some pathbreaking academic research has supported–against exorbitant executive compensation has roused some torpid investors to take action. It has also tapped into a growing public unrest with inequality in America. The contenders for the 2008 presidential election are taking note.


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