Bear Market Silver Linings
[Editor’s Note: The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway, or any other entity referenced.]
Maybe a bear market — if that’s what we’re headed into — will force Corporate America and Wall Street to make changes that could be easily rebuffed when times were better.
I’m thinking of three practices in particular that could be characterized as “shareholder-indifferent” (if not outright hostile) that have resisted reformers’ efforts for years now.
“One Share . . . One Two Votes”
One. Multiple classes of stock.
Mark Zuckerberg owns “only” 28.2% of Facebook.
But, thanks to multiple classes of common stock with unequal voting rights, he reportedly controls almost 57% of the shareholder votes for the board of directors, which putatively picks the management team that runs the company.
Result: Zuckerberg really isn’t accountable to shareholders in any meaningful way.
That’s fine when everybody (especially Zuckerberg) is getting rich.
But, in a down market, shareholders might not be so thrilled with a corporate governance model that essentially says, “trust us, we know what we’re doing.”
Restraining Runaway Pay
Two. Executive Compensation. It’s hardly a secret that, as pay for ordinary Americans has stagnated the last 30 years or so, CEO pay has skyrocketed.
In fact, pay at the top is now so munificent, it’s hard to accurately calculate: while Fortune 500 CEO’s now receive an average(!) of $11 million a year in salary and stock options, perks like extravagant pensions and other retirement benefits swell the total much more.
When the tide is rising, shareholders begrudge CEO’s this largesse.
But, when the tide goes out, the behavior looks — shall we say — “piggier” and harder to defend.
At the very least, it’s certainly more conspicuous (or if it’s not — thanks, SEC — it certainly should be).
Three. Skimpy dividends. In an environment of zero per cent interest rates (“ZIRP”), desperate shareholders are grateful for any payout on their investment.
So, even though corporate dividends have been rising, at today’s 2.3% rate, they’re still below historical averages.
Instead, CEO’s have used the money to buy back their stock, pursue acquisitions, or spend it in other ways that don’t directly benefit rank-and-file shareholders.
In a world where investors once again might actually get paid interest, and capital gains aren’t a given, CEO’s might have to show shareholders a little more love to entice them to park their money with them.
Or keep it there.
Wishful Thinking, or, “Getting While the Getting’s Good”
If all these reforms came to pass, I would regard a bear market — however painful in the short run — as well worth it.
But, the cynic in me is dubious that even a serious downturn would have that effect.
I base that on two things:
One. Wall Street’s behavior in the wake of the 2008 Crash.
When financial executives feared that their ship might be sinking, many actually hiked their pay.
Exhibit A: the shameful (and largely unchallenged) behavior of Merrill Lynch’s management prior to being acquired by Bank of America.
Call it, “getting yours while the getting’s good.”
Two. In tougher, more challenging times, I can easily imagine lavishly paid CEO’s arguing that their role has never been more difficult, crucial etc.
As a result, they should be paid even more.
There!
I feel better (sorry if you don’t).
