CEO resignations reached an all-time high in 2019. Is the corporate model of management fundamentally changing? We speak to white collar criminologist Bill Black.
This is a rush transcript and may contain errors. It will be updated.
Greg Wilpert: It’s the Real News Network. I’m Greg Wilpert in Arlington, Virginia.
In 2019, a record number of 1640 CEOs resigned from major corporations. For January 2020 alone, the number was 219, indicating that CEO departures could reach an even higher number this year. Prominent CEOs to leave or announce their departures in 2020 include the CEOs of Match Group, [inaudible 00:00:28], L Brands, Outdoor Voices, MasterCard, Fastly, Harley Davidson, IBM, T-mobile, LinkedIn, and Disney, among many others. Why are so many CEOs resigning and why has the number been increasing recently?
The reasons seem to vary. Some analysts talk about a management restructuring, some say it’s because of a failure to meet the company’s goals, others definitely have stepped down because of sexual harassment scandals or because of a failure to address sexual misconduct within their companies. But it cannot be necessarily a coincidence that CEOs are departing at an increasing rate. The trend calls for an analysis of what is going on, for which we have our guests Bill Black today.
Bill is a white collar criminologist, former financial regulator, and associate professor of economics and law at the University of Missouri, Kansas City. He’s also the author of the book The Best Way to Rob a Bank is to Own One. Thanks for joining us again, Bill.
Bill Black: Thank you.
Greg Wilpert: So, Fortune Magazine says that the reason for the record number of CEO resignations is the MeToo movement because so many CEOs got entangled in scandals over sexual misconduct, either themselves, or for turning a blind eye to what was happening in their own companies. Do you agree with that analysis?
Bill Black: No, but that is a contributor. It is actually one of the remarkable changes in the last several years that one of the best ways for really powerful CEOs to lose their job is to have what used to be described as a consensual sexual relationship with a subordinate.
Greg Wilpert: So one of the things that’s happened is that CEO compensation skyrocketed during the second half of the 20th century and has only continued to accelerate since then. Some sociologists and economists have even argued that the economy entered a managerial revolution in the 1940s and 50s and that we are now in what could be called managerial capitalism, where managers constitute the new ruling class instead of the owners of companies [inaudible 00:02:30]. Would you agree with that? And if so, what does such a high CEO turnover mean for how the upper echelons of our society is run?
Bill Black: Okay, so to do the super brief version of this, we had the rise first of the robber barons, as they were called. These were individuals that not only ran their own companies, they ran all the competitive companies, and the reason we call it antitrust is that there were trust agreements drawn up by the lawyers that facilitated this, that gave one person effective power over all the seeming competitors. So those were the bigger than life entrepreneurs who, you know, literally said money was something you should throw off the back of trains, and were notorious.
Then came the first manager revolution, and that’s more the 30s and 40s and 50s, and GM is the quintessential example of that, and it was in contrast to Ford Motor Company. Ford Motor Company of course run by an entrepreneur, GM run by professional managers who had MBAs and such, which didn’t use to be a particular really good way of becoming the head of a company and such.
Then they had the current revolution, which is more the 70s is when it starts taking off and it’s huge by the 80s. And I’ll give just a super brief version. The other thing that’s happening at the same time is all kinds of entities that used to be key restraints, the investment banks, the accounting firms, the credit rating agencies and such, used to be owned in true partnership form, and that meant that all the general partners were subject to what’s called joint and several liability. What that means is, you, the general partner, one of the general partners, need not have done anything wrong. If any of your general partners do anything wrong that causes losses, you personally are on the hook for all of the losses of the partnership. They can come and take your home, your art collection, all those kinds of things.
You can imagine that that made people a whole lot more reluctant to make other people partners because they were on the hook for what they did and made them monitor it as well. So when they move away from partnership to corporation, whoa, this is the era of the massive stock benefits and such. This is the revolution in corporate pay. And the analytics, the way it was sold was, oh, the problem is managers aren’t taking enough risks. Their fuddy duddies. The only way to get fired is to take a big risk and lose, so they, you know, don’t do much and that’s why the United States isn’t as productive as it used to be because they pursue their own interests instead of the interest of the corporation.
So we will align the interests of the CEO with the shareholders by giving them huge stock positions, and that will mean there’ll great managers and they’ll take much more risks, and of course we did this and we made the CEOs massively wealthy. We made it, you know, child’s play for them to engage in accounting fraud, to report huge short term gains, and they based their pay, not as economists said that you should on longterm performance, but on short term pay, which is of course far easier to manipulate.
So that is the, you know, the revolution that has brought us the disaster. And by the way, instead of producing record gains in productivity, productivity gains have roughly been cut in half under this managerial revolution.
Greg Wilpert: Well, the point that you make about connecting CEO compensation to the stock performance is something very important and something many people have analyzed, and of course, obviously, that’s become the main trend. And what I’m wondering though is that if that’s the case, that of course would also tie the compensation and the work of the CEOs very closely, not just to the stock price, but the stock price is also to some extent dependent on perceptions.
So, in other words, I’m wondering if maybe the trend, you know, the MeToo movement and sexual harassment, the general perception of a company’s performance and its ethics, is ending up having an impact on the CEO’s ability to act, essentially, and if that’s one of the things, in other words, perception becoming more important than perhaps actual productivity and performance.
Bill Black: I don’t think that aspect of it, but perhaps something a little bit analogous that makes your point or draws on your point about perceptions.
So all of this has meant that investors are super, super short term oriented, and that means corporations do all kinds of things that are stupid for the economy, stupid for productivity in the longer run, but which will boost share prices this quarter. So in addition to all the usual, you know, frauds that I talk about using accounting, they simply now, and if anyone wants to read, read professor [inaudible 00:08:24] on this, they do unbelievably huge stock buybacks. So instead of building productive things with their retained earnings, they buy back stock using the corporation’s money, which has the effect of raising stock prices.
So I think what’s really changing right about now is that all of these folks have, you know, had the greatest opportunity to big pigs at the trough in modern history, and that was the Trump tax cut. So again, what really wealthy people put their money in is not so much yachts, because you can only buy so many yachts, is the stock market. All right? And so when you give enormous trillion dollar cuts in taxes of the wealthy people, what are they going to do with all that additional income? Well, you know, after tax income, they’re going to buy more stock, and you’re going to get this huge run up in stocks.
That can only work for so long and we’re overdue for recessions, and we don’t know exactly what’s going to cause it, but, you know, most people think recessions are coming relatively soon. Obviously the coronavirus is pushing a number of countries over that margin into near-term recessions. So I think that first, all these people got incredibly filthy rich. They don’t need money, and they certainly don’t need their current job.
Greg Wilpert: That’s an interesting point, but that brings me to my next and last question, which is that, you know, you have this basic trend of something that we’ve of course talked about everywhere, and progressives in general and Bernie Sanders certainly has pointed it out, is extreme growth in income inequality and in the fact that CEOs are doing so well. Of course, they have the luxury of being able to resign from a job that they’re feeling is getting too stressful.
I’m wondering though about what that also says about, you know, the other tier and the relationship between the two, that is, the workers don’t have that luxury. If anything, especially if they are contingent workers or if they’re part time workers or if they’re working on a contract or something like that, there’s a huge division clearly, and I’m wondering if these resignations could be a sign of that, the continuation, basically, of these two worlds, of between management and basically the lower two thirds of society. What do you think?
Bill Black: Oh, absolutely. What you have to do, and Jack Welsh has just died at GE, and his nickname that he was proud of was Neutron Jack after the neutron bomb that kills people, but leaves the building standing. So he was infamous for firing people. He was infamous for ranking yank, which is, we will say that we’re firing you because you were a poor performer. So not only will you lose your job, you’ll be stigmatized for life. But who was really being fired? The people who weren’t to play the accounting scams, right? So the best people were being fired and being labeled as the worst people, and the stock price was surging under all of this.
I would like to say, you know, that CEOs are resigning because they don’t want to do that. I frankly don’t think many CEOs resigned because they’re unwilling to do this.
I’m going to describe documents which you can get online. These are the plutonomy memos by Citi to their wealthiest clients, and they call this a managerial aristocracy. That’s their phrase. They say it creates a plutonomy. In other words, an economy in which virtually all the wealth is held by a tiny group of folks and where the workers get a smaller and smaller pie, and they say, since the elections are coming, the key thing, problem, the key risk we have is workers still get to vote and they may eventually go to the polls and stop this.
So they described that as a risk to the continuation of this managerial aristocracy and this ability to take virtually all of the, again, reduced gains because they’re doing stupid things in the way they run the companies that greatly reduced productivity. So it’s a smaller pie. Remember, the justification was a trickle down? Well, you get a big pie, and even if you don’t get much of it, as long as the pie is growing, great. Well now, the growth of the pie has been dramatically reduced by these scams. And as I said, Citi openly says this is going to get even more extreme unless and until the voters rebel.
Greg Wilpert: Wow. Well this is a good point to end, especially considering that in the middle of this week’s, you know, Super Tuesday and the primary season, but we’re going to leave it there for now. I was speaking to Bill Black, associate professor of economics and law at the University of Missouri, Kansas City. Thanks again, Bill, for having joined us today.
Bill Black: Thank you.
Greg Wilpert: And thank you for joining the Real News Network.
Studio: Will Arenas, Bababtunde Ogunfolaju
Production: Genevieve Montinar, Bababtunde Ogunfolaju, Andrew Corkery