The American Nightmare
Wall Street protestors aren’t just calling for change they are “Taking it to the Streets.” An army of hundreds has quickly mushroomed into thousands with union re-enforcements on the way. The list seems nearly endless with groups as diverse as the Transit Workers Union to the Chinatown Tenants Union joining forces with political activists like MoveOn.org to send Wall Street a message.
Masters of the Universe had better listen because this voice isn’t going away anytime soon. Frustrated with no jobs, decimated pensions and headlines of CEOs being rewarded for failure they are demanding action.
Many are starting to ask if this is America’s Arab Spring. Armed with the same tools that launched a revolution in the Middle East protestors are able to quickly get their message out on social media sites like Facebook and Twitter. Similar protests are currently being planned for as many as 50 cities throughout the U.S.
The protestors are convinced the system is broken and needs to be overhauled. While they have been unable to articulate their real concerns or offer any concrete solutions one thing is certain. THEY ARE RIGHT!
The system IS broken and it is time for us to take the necessary steps to restore our credibility. If one is looking for Ground Zero in this epic battle you need to look no further than the board of directors. With a mandate to protect shareholders it is clear that their first loyalty is to the executive suite.
Let’s take a look at the life of a CEO. When first hired by the board there is excitement around the potential of the new chief executive to drive shareholder returns. Negotiated up front is a severance package for the CEO in case he is let go or the company is acquired. Usually given a mandate the CEO takes the helm and the corporate ship sets sail.
It is understandable that Chief Executives should want to be paid large sums of money when they succeed, but must we reward failure. Leo Apotheker was fired from Hewlett-Packard (HPQ) and given a $13 Million severance package. Add that to the $10 Million he received for signing, he made a cool $23 Million for 11 months work while the company burned in flames causing $Billions in losses for shareholders. I doubt any of the unemployed protestors received anything more than 2 week’s severance if they were lucky.
Weapons of Mass Destruction
Stock option compensation has become a weapon of mass destruction. Given to executives at the discretion of the board of directors it is supposed to align the interests of management and shareholders. However, studies show that the practice encourages risk taking to drive the stock higher so that options are in the money. A 2003 Louisiana State University study concluded that firms known to have committed fraud often had significantly larger equity-based compensation plans than similar firms within the industry.
Corporate waste and greed takes many forms. Investors get excited when they see corporate buybacks. Usually it is advertised as a return of capital, but when you delve into the numbers what you soon find is that the true purpose of the buyback was to offset the continued dilution of earnings due to stock option compensation plans. Cisco (CSCO) over the years has wasted $Billions in shareholder capital for stock buyback programs. The end beneficiaries were the executive suite and in turn the board.
We could devote a book to the Wall Street excess that created the housing bubble but frankly I think most in the industry recognize what went wrong. The good news is much has been done to improve oversight and leverage in the system has been significantly reduced.
Great companies are born with a vision and great leaders recognize that their success walks the same path as their employees. Steve Jobs the iconic founder and visionary of Apple (AAPL) understood that message.
If the protest is to have any real merit it is important that they focus not on our capitalist system but its perversion. Let’s not attack the leaders and visionaries who built our great industrial empire. Let’s make our focus the abuses within our corporate culture and the manipulation of our markets. It is time to level the playing field so our children and their children can realize the American Dream before it becomes the American Nightmare.
Talk to your kids and listen to what they have to say. They want real change that lifts society and gives them an opportunity to succeed. A disenfranchised youth will in time tear down the walls. If we turn a deaf ear we do so at our own peril.