On the Folly of Lord Spencer
Tone deaf?
Or just plain stupid?
Both, perhaps?
I don’t know anything about Lord Michael Spencer other than what I just read in today’s Financial Times. He is, apparently, a billionaire and the founder of something called ICAP which is, I am led to believe, a brokerage. I know, consequently, that Lord Spencer does not produce anything. His billion is the result of moving money around. Oh, and he was at one point the Treasurer of the UK’s Conservative Party. His London financial pedigree is thus secure.
Lord Spencer is concerned about the movement of business listings away from the London Stock Exchange and towards its American equivalent. Of course he is. His business feeds on listings. His billion was made in the movement of paper around the London Stock Exchange and its ecosystem. Without such paper to move Lord Spencer would have to find something else to do.
His solution to the aforementioned leakage is to pay UK based CEOs lots more money. The average pay of a top UK CEO averages a paltry $5.2 million a year compared with their American peer group whose average is $16 million a year.
The poor dears! How do they manage?
Well, they manage badly. Really badly.
We know this because the UK economy sucks — its business sector must be truly miserable because UK growth is pretty rotten. And we know this because of the constant flow of articles talking about the UK economy being in a very sick place. UK CEOs are doing a bad job of growing. Especially that part of whatever business they manage that is resident in the UK. Just yesterday the FT itself published a long article by its own Martin Wolf decrying the slowdown in growth. So we know that UK business is not very well run. It doesn’t produce the results.
Maybe that’s because its CEOs are underpaid? They lack the incentive to do whatever high paid CEOs do — cut costs, hold down wages, move production abroad, increase dividends, and initiate share buybacks etc. CEOs are indispensable. Who else can shovel the cash to shareholders and away from workers? Who else can cut the benefits? Who else can shrink the work hours or shift the work to a gig basis? Or outsource the workload to a lower paying service company? And all those other essential GDP building activities that CEOs are hired to do?
Being a CEO is very tiring. They need more compensation. Obviously.
Lord Spencer points out that the UK public has no aversion to paying its football stars huge wages. So why, he asks, do high CEO wages get such a poor reception?
Perhaps — and I am going out on a limb here — its because football stars are popular. They entertain. And they get paid for producing something the public appreciates. Their wages are thus socially acceptable. People, mostly anyway, see value in football stars. They are, after all, stars. They do not hide away behind public relations or human resource departments. They do not hide away behind jargon, consultant-speak, or business school garbage. They do not cut jobs in the name of profit. They do not diminish the standard of living of their employees. They do not, in short, act in an egregiously anti-social manner in the name of some abstraction called shareholder value. They play a game at a very high level and are entirely transparent — they perform in public, not in secret behind closed doors.
In short they do the job. In the open. And the job they do is to entertain a broad section of the public. They do not do the bidding of only a small and privileged slice of the community. The difference is vast.
But Lord Spencer is a broker. Perhaps he doesn’t see it that way.
And here’s the thing:
Have we not just seen a populist uprising against the failures of leadership throughout the western world? And is not one part — perhaps a very large part — of that uprising driven by the rampant inequality now embedded in what were previously more fairly rewarded societies? The public is looking for something that Lord Spencer appears oblivious to — a fair share. It is looking for a return to something that once existed, but which has been undone by the ideology now embraced by the very CEOs Lord Spencer thinks are unfairly paid.
Why does he appear so tone deaf? Why does he sound so incredibly stupid? I assume he is a very smart person — after all he wrangled a billion from moving paper around. That surely needs smarts!
The problem I think is that people like Lord Spencer have fallen into a trap. It is the trap set by fools like Milton Friedman all those years ago. The business of business, those fools argued, is to do the bidding of shareholders. This is the ideology of modern business. Shareholder value. Arrant nonsense, but widely accepted as the single goal of management. Produce the goods for shareholders or get kicked out by activist ‘investors’. When this ideology is amended to include such ridiculous concepts as the ‘alignment’ of management and shareholders via the method of giving managers ‘skin in the game’, i.e. shares, and you create a runaway train that pillages business coffers and enriches a small slice of society. Those coffers, incidentally, might otherwise have funded investment — which, in turn, might have stimulated GDP growth and allowed poor Martin Wolf more sleep in these low growth days.
What the fools like Friedman neatly side-stepped is that there is another player in the corporate game. That is society itself. After all who grants a corporation its license to do business? Society does. Who grants the shareholders of a modern corporation the hugely valuable shelter of limited liability? Society does. Who grants the modern corporation a host of tax dodges, wheezes, and incentives? Society does. To put it in language that Lord Spencer might understand, society also has ‘skin in the game’.
Why does society hand out these privileges and largesse? Because it expects something in return. Society has an equal seat at the table when management is deciding whom to serve. Indeed it has the lead seat — it, after all, creates the prior safety within which shareholders can subsequently invest and earn returns. It also, incidentally, enforces all those contracts so essential to the practice of business — a service without which modern business is not possible.
People like Lord Spencer seem to have forgotten that business has more than one master to serve. The public matters. Just as it does in football.
And, it appears, the UK public values the job its football stars do more than the job its CEOs do.
But, let’s be fair to Lord Spencer. Let’s see how we can make it clear for him.
Here’s one way: the UK’s football stars earn their living in what is considered one of, if not the most, competitive environments. They do it in full view of the public. They rise and fall on easily measured performance — does their team win? Do they score goals? Do they prevent the other team from scoring? And so on. There are no hidden measures. There are no made-up measures. None of those footballers has a wage that rises if the entire league starts scoring more or winning more — unlike CEO stock option prices that slavishly move with the general market. No, footballers are held individually accountable. Oh, and the word ‘team’ has real meaning in a football environment. It doesn’t have the hollow ring to it that corporate ‘teams’ have.
So, accountability. Real accountability. Do the job. Publicly. In full view. And on behalf of all, not some small clique.
One more thing: bleating about how more an American CEO gets paid is simply to draw attention to the even more disastrous state of American society. American CEOs are massively overpaid. They need to be cut down in status and pay. They are bureaucrats after all. They run bureaucracies. Their social standing ought to reflect that modest station.
The recent assassination of a healthcare CEO in New York City is a salutary moment for folks like Lord Spencer. That particular CEO ran a business whose public objective — to provide cash to cover healthcare costs— conflicted with its private objective — to suck as much cash out for shareholders. The CEO was very good at the latter. And he was paid $10 million a year for doing such a great job. He was patently awful at his public service. The company he ran is notorious for finding every which way to avoid doing the very thing its says it is founded to do. There is, of course, no morality in assassination. Nor is there any morality in denying the service you purport to do in order to feather the nest of a CEO and sundry shareholders. The two immoralities may not be equivalent, but business has lost its way when it cannot see that it has a public service to perform. CEO pay ought to be tied to public as well as private service.
And, yes, all you who about to bloviate on how do we construct such incentives — I know it might be difficult.
Meanwhile Lord Spencer and his ilk need to ponder quite what they have contributed to society before they bleat on about poorly they are rewarded.
Take a look at the UK’s recent GDP performance. Just how good are these CEOs? If shareholder value is the private scorecard, then economic growth is the public scorecard against which they can be measured. Right now they suck.
So here’s some advice for Lord Spencer: get UK GDP growth rates up to US growth rates, then get back to us about that differential in pay.
We call it pay for performance. What do you call it?
Addendum:
1]. I find myself having to use the word ‘investor’ in circumstances when the word ‘speculator’ is more appropriate. Investors are the people who provide capital to businesses which then make and sell things. People who merely purchase financial claims in a secondary market are speculators accumulating those claims in order to make a profit off of someone else’s original investment. There is a major categorical difference between investment and speculation. The former helps undergird growth. The latter simply leeches off that growth. Which, I wonder, is the basis for Lord Spencer’s fortune?
2]. And, yes, when I say ‘make and sell things’ I do not confine myself to suggesting that the making and selling ought be restricted to material things. Even I reckon use much of today’s produce is entirely information, experiential, or digital.
3]. And, yes again — I know a lot more goes into GDP production than simply the accumulation of business performance. Maybe that’s why we should pay more attention to the public sector? And stop glorifying business? Maybe. But it cannot be an accident that subsequent to the acceptance of the shareholder value ideology in business the relationship between CEO pay and GDP growth appears to have broken down. Hasn’t it? Prove me wrong?
