Shareholder Capitalism Is Dead

by John T. Landry for Harvard Business Review, July 21st, 2011.

The verdict is in, and it serves as a convenient end point for the era of shareholder capitalism: Say-on-pay has been a dud.

Fewer than 100 corporations, about 1.5%, lost these mandatory but nonbinding votes on executive pay practices. Most got well over 90% in favor. Say-on-pay may have led some to modify their practices before the votes, but it’s clear that executive worries of investor interference have not played out.

Why does this matter now? Most investors, including the big institutional players, have long tolerated rising compensation. Pay started taking off in the 1980s, at the beginning of the era of shareholder capitalism. Companies were putting renewed focus on investors relative to workers or society. Shareholders were fine with paying executives more if that boosted their returns.

At some point, though, the tail started wagging the dog. Shareholder returns and executive pay diverged after the market bust of 2000. Since 2001, shareholders have typically made nothing on their stock after inflation, while executive compensation has continued its long boom. For a variety of reasons, stock-based compensation is no guarantee that pay will rise and fall with stock returns. Even the Great Recession, blamed partly on compensation practices, now looks to be only a hiccup in the pay rise.

Another data point is the decline in dividends since the 1990s. Companies now generally pay out far less than half of their earnings, the lowest in decades. Cutting dividends might make sense if firms were growing rapidly, but that’s hardly the case these days. (continue reading… )


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