Workers of America: You're Welcome!

In our previous blog post, we discussed the recent SEC Commission approval of the CEO Pay Rule. Here we discuss Heartland's contribution to the effort.

As the Washington Post reported, two of the SEC's commissioners "belittled the rule as an easily misconstrued burden built to embarrass big businesses. Commissioner Michael Piwowar called it "a page out of the playbook of Big Labor.” What is the Big Labor Play Book? The Commissioner blamed it on Heartland’s very own Working Capital: The Power of Labor’s Pensions, published in 2001 by Cornell University Press.


The CEO pay rule came about after the blowback from the 2008 financial markets collapse, the worst since the Great Depression. Nearly $11 trillion in household wealth vanished, including $4 trillion in retirement accounts and life savings. In addition, millions of jobs were lost and homes were foreclosed, and resources were diverted from important issues such as education, infrastructure and climate change, among many other negative effects.

While some institutional investors recovered, through lawsuits, a small portion of the losses caused by Wall Street’s financial engineering mistakes and blatant frauds, the US government and SEC were famously inept at punishing the illegal actions by bank and investment officials. In all, our federal and state governments recovered a paltry $130 billion from the largest US banks for their actions as of April 20, 2015, according to the Wall Street Journal.

It took a five-year political fight supported by a broad reform coalition to eventually win this compromise version of the rule. But this Commissioner blamed it on our little book from 15 years ago. Here’s what he said:

The push for pay ratio disclosure should come as no surprise to anyone familiar with the use of Saul Alinskyan tactics by Big Labor and their political allies. Nearly fifteen years ago, Big Labor supporters published a book called Working Capital: The Power of Labor’s Pensions that contained a strategy to re-make the capital markets with a so-called “worker-owner” viewpoint. The worker-owner approach would aim to '"inject workers’ welfare, broadly understood, into investment priorities' and depart 'from conventional investment wisdom by expanding the options, methods, and principles that guide capital allocation." As one editor of "Working Capital" later said, "[t]hese decisions need not be driven by a solitary logic of return-seeking. . . . Other goals, values, and methods can, and should, come into play."…This pay ratio rulemaking is literally a page from that Big Labor playbook…

From here on out, we’ll just use the secret code-word for this book: the BLPB. The BLPB also anticipated, a half-decade in advance, the United Nations Principles of Responsible Investment (PRI), by the way. As Fiona Reynolds, Managing Director of the PRI which hosts $59 trillion in signatories, says in her testimonial for our forthcoming Responsible Investor Guidebook:

U.S. pension fund trustees are increasingly recognizing the need to address the long-term value and risk posed by environmental, social, and governance factors (ESG) and move toward a framework that prioritizes long-term value creation.

So, yes, there are other goals, values and methods that should come into play, along with making a profit.

Turns out that the Commissioner was referring to a chapter in the BLPB by co-authors Dean Baker and Archon Fung. In it the authors described excessive CEO pay as a “tax on the corporation.” The fact is that the pay ratio between CEOs and workers in the U.S. has exploded, while the pay ratios of CEOs and workers in hyper-competitive nations like Germany have been more reasonable. Germany's domestically-produced industrial exports have vastly outperformed those of comparable US industries for decades. What do we get in return for the outrageous pay packages, stock options, stock buy-backs, golden parachutes for some of our industry leaders? A record-setting level of income inequality, which thoughtful leaders in business and labor and on both sides of the aisle—and the Pope—all agree is horrible for our economy (not to mention the future of our kids).

There is no evidence that unrestrained executive compensation in the U.S. has yielded higher corporate performance or shareholder profits. In fact, the opposite may be true.

As we point out in the Responsible Investor Guidebook:

Despite these pushbacks on executive accountability, we have a long way to go. In Profits Without Prosperity, University of Massachusetts (Lowell) economics professor William Lazonick documented that through the massive use of share-buybacks, CEOs and top executives are extracting value, instead of creating value, for their firms, their shareholders and society. Between 2003 and 2012, “publicly-listed firms in the S&P 500 used a colossal amount of their earnings—54 percent or $2.4 trillion—to buy back their own stock.” The consequences of these share buybacks were net disinvestment, loss of shareholder value, crippled capacity to innovate, destruction of jobs, runaway executive compensation and windfall gains for activist insiders. Instead of the long-proven retain-and-reinvest approach, which contributes to “sustainable prosperity,” this short-sighted practice leads to employment instability and income inequality.[1]

So, with a bit of tongue in cheek, all of us here at Heartland and the editors and authors of Working Capital have a message for America’s workers on the occasion of the SEC’s historic vote: You’re welcome!

[1] William Lazonick, Profits Without Prosperity, (Cambridge:Harvard Business Review, September 2014). See also, William Lazonick. Sustainable Prosperity in the New Economy, WE Upjohn Institute for Employment Research, (Kalamazoo, MI: 2009). See also, Steve Denning, “HBR: How CEOs Became Takers, Not Makers,”, (8/18/2014).

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