Common Cents on August 3, 2018

August 3, 2018, by John Norris

This morning, the Bureau of Labor Statistics (BLS) released the Employment Situation report for July. The economy created 157K net, new payroll jobs during the month and the Unemployment Rate fell to 3.9%. In so many words, it was a pretty dull report. There wasn’t anything particularly bearish or bullish in the release, even if plenty of seemingly intelligent people will spend hours overanalyzing and commenting on it.

Yep, as Forrest Gump might say: “That’s all I have to say about that.”

What I DID find interesting this morning was an email from a certain, nameless business magazine/website. The lead or teaser article was something about the highest paid directors at publicly traded companies within a particular geographic entity, which I will also keep nameless. There are no two ways about it, it was a little discouraging or disheartening or something along those lines.

The numbers in the article dwarf the pay packet of the vast majority of Americas. In fact, even the least well-compensated on the list still would have made in the Top 3% of US households in 2017 in terms of income. This for their services as a director for ONE company, which isn’t really a full-time job as we all well know.

Frankly, and I mean this as someone who is a pretty strident capitalist, it is no wonder why folks like Bernie Sanders and Alexandria Ocasio-Cortez have struck a nerve with so many people. While I might disagree mightily with their worldviews and economic theories, articles like the one I read this morning make the argument FOR corporate America a little more difficult.

To be sure, there isn’t anything unethical or illegal with paying directors a princely sum for their efforts. After all, they are ultimately on the hook for what happens at the/a company, at least in theory. I understand all of that. I also understand not ALL of the so-called income is cash, as there is ordinarily an equity component of some variety included.

However, sometimes things just don’t pass the proverbial smell test, and executive/director pay at publicly traded companies can often stink up the kitchen…if you catch my drift. As an aside: I am available for a director’s gig at just about any Russell 3000 company.

Please feel free to pass that on along to the appropriate parties.

However, as strange as this may sound, the system isn’t necessarily broken, or stacked for or against anyone in particular. Nope. Market, um, efficiency has made it thus…seriously.

I won’t name any names, but one company in the article stood out more than others. So much so, shareholders probably should ask a question or two. The problem is there aren’t a lot of individual shareholders. Large institutional firms own or control almost the entire company. To that end, according to Bloomberg, as of 7/29/2018, ‘investment advisors’ own about 86.59% of the company; individuals own another 4.25%, and everyone/thing else (hedge funds, pension funds, endowments, foundations, etc.) own the remaining 9.16%. If you count those latter entities as ‘institutional,’ brother, corporations own this corporation.

What’s more, enormous chunks of that 86.59% is in mutual funds and ETFs, as opposed to individual brokerage accounts. BlackRock (iShares) owns 11.01%; Vanguard (index funds) controls another 9.14%; State Street and SPDRs take home another 3.40%, and the list goes on and on. Make no bones about it, somewhat impersonal fund managers own this company. Interestingly enough, ‘we’ have impersonal fund managers because the hoi polloi now has the means and capability to invest. Hmm.

Now, I am going to ask what might seem to be a relative cold question: what do ‘global’ investment managers care about? Director compensation at a modest to small holding? Or earnings per share (EPS), understanding that director compensation is a fraction of SG&A when it comes calculating profit at even a modestly sized publicly traded company?

I think you get the picture. The people (or machines) voting the proxies at, say, BlackRock, et al., could no more tell you the director compensation at XYZ company than flying to the moon, let alone the names of the directors themselves. As much as I hate to admit it, been there and done that at some point in my career. Vote for or against management? Unless the company’s stock is falling apart, the former is the low hanging fruit 99.9% of the time.

Let’s be honest: do you, as a hypothetical investor of ABC company, really care if director compensation passes the old smell test or if the company’s stock price is going up? What has been happening since the start of 2009, for the most part? As the S&P 500 has produced a total return in excess of 300%?

Corporate ownership and investor complacency? Brother, that is a powerful combination when it comes to executive and director compensation. After all, it would seem the checks and balanced have been checked into the glass (for all the hockey fans). The lone wolf individual investor with a fistful of shares can yell at the top of their lungs, but, as long as the company’s income statement and business model aren’t falling apart, it won’t make any difference.

Seriously and sadly enough. But what is to be done? How to reverse this trend, if you can call it a trend? It seems like more of a systemic characteristic at this point.

To me, it would make sense to separate institutional and individual ownership in some form or fashion. Certainly, the devil is in the details, and all of that. However, the salaries and bonuses for some of these temporary position holders, and that is what a lot of these folks are, are outrageous. But, then again, the arms’ length corporate owners really don’t care….and aren’t really compensated all that much to do so (as crazy at that might sound).

In the end, as I mentioned last week, the country arguably isn’t as capitalistic as it was when I was a young man. Articles like the one I read this morning perhaps shed some light on why this has come to pass. Has this type of inequality and corporate largesse always been in place? To be sure, to some extent. However, the accounting hasn’t been as transparent, and, in a lot of ways, the peasants are better able to see into the palace in 2018 than they were in 1983.

So much so, corporate America had better figure out a way to reign it in a little bit before folks like Bernie Sanders and Alexandria Ocasio-Cortez are no longer fringe politicians…if you catch my drift. How it does so will be a lot more interesting than this morning’s Employment Situation report.

You can trust me on that.