The Corporate Capture of the United States

Posted by Robert A.G. Monks, Principal, Lens Governance Advisors, on Thursday January 5, 2012 at 10:21 am
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Editor’s Note: Robert Monks is the founder of Lens Governance Advisors, a law firm that advises on corporate governance in the settlement of shareholder litigation.

American corporations today are like the great European monarchies of yore: They have the power to control the rules under which they function and to direct the allocation of public resources. This is not a prediction of what’s to come; this is a simple statement of the present state of affairs. Corporations have effectively captured the United States: its judiciary, its political system, and its national wealth, without assuming any of the responsibilities of dominion. Evidence is everywhere.

The “smoking gun” is CEO pay. Compensation is an expression of concentrated power — of enterprise power concentrated in the chief executive officer and of national power concentrated in corporations. Median US CEO pay for 2010 was up 35 percent in the midst of a lingering recession, while CEO pay over the last decade has doubled as a percentage of pre-tax corporate income. Yet there has been no justification for current levels of CEO pay based on economic value added.

When Lee Raymond retired as CEO of ExxonMobil at the end of 2005, after six years at the helm of the merged firm and another six as head of Exxon before that, he walked away with more than a quarter billion dollars in realizable equity. In his final year alone, Raymond received in excess of $70 million in total compensation — an hourly wage of about $34,500 calculated at 40 hours a week for 50 weeks. No metric can justify such a raid on the corporate treasury and shareholder equity, but Raymond is only a particularly egregious and early example of what has since become common practice. Little wonder that the driving concern of banks receiving TARP “bailout” money was to pay it back so as to escape any restriction on executive pay.

Retirement risk has been transferred to employees. During the same period that CEOs were doubling their own compensation, the “best” CEOs of the “best” companies abrogated the century-old commitment by employers to provide pensions to their workers. IBM has been the corporate leader in abolishing a “real” pension system for its employees. The 2006 elimination of on-going defined benefit plans will “save [IBM] as much as $3 billion through the next few years and provide it with a more ‘predictable cost structure’,” TK said at the time. Translation: The worker bees are on their own.

This is the essence of “capture” – CEOs are enriched, while all other corporate constituencies, including government, are left with liabilities. A relatively few autocrats have taken control over the policies and wealth allocation of the United States.

The financial power of American corporations now controls every stage of politics — legislative, executive, and ultimately judicial. With its January 2010 decision in the Citizens United case, the Supreme Court removed all legal restraints on the extent of corporate financial involvement in politics, a grotesque decision that can have only one effect: maximizing corporate – not national — value. Today’s CEOs have been granted the power to direct political payments and organize PAC programs to achieve objectives entirely in their own self-interest, and they have been quick to use it.

More than $300 million was “invested” by corporations in the 2008 Presidential elections. The totals will be vastly higher in 2012 when the full impact of Citizens United is expressed, and the distribution will be politically agnostic. As Bill Moyers recently noted, President Obama “has raised more money from banks, hedge funds and private equity managers than any Republican candidate.” [1]

Capture has been further implemented through the extensive lobbying power of corporations. Abraham Lincoln’s warning about “corporations enthroned” and Dwight Eisenhower’s about the “unwarranted influence by the military/industrial complex” have been fully realized in our own time. Reported lobbying expenditures have risen annually, to $3.5 billion in 2010. Half of the Senators and 42 percent of House members who left Congress between 1998 and 2004 became lobbyists, as did 310 former appointees of George W. Bush and 283 of Bill Clinton.

Capture has focused on particular industries. Two powerful Democratic administrations have not been able even to propose a system of “single payer” health insurance. Meanwhile, business interests have assured that whatever program of “universal coverage” emerges will lock in the interests of the insurance and the pharmaceutical industries.

History has yet to sort out whether the second Iraq War served any national objectives beyond military and industrial ones, but the suspicion that oil interests played a critical role in the rush to battle is enhanced by Vice President Cheney’s refusal to reveal the names of the participants in his energy transition committee. Simultaneously, the inability to force public disclosure of those participants offers a window into how thoroughly the energy industry controls its own agenda, destiny, and information flow. Not only has the industry succeeded in achieving and maintaining special regulatory and tax treatment; in multiple other ways, it functions virtually as an independent state.

Capture has placed the most powerful CEOs above the reach of the law and beyond its effective enforcement. Extensive evidence of Wall Street’s critical involvement in the financial crisis notwithstanding, not a single senior Wall Street executive has lost his job, and pay levels have been rigorously maintained even when, as noted earlier, TARP payments had to be refinanced in order to remove any possible restrictions.

While several financial firms have paid civil penalties for their abuses, the amounts involved bear little relation to the malfeasance. US District Judge Jed S. Rakoff recently — and rightly — rejected the $285-million settlement agreed to between Citigroup Inc. and the Securities and Exchange Commission as “neither fair, nor reasonable, nor adequate, not in the public interest.”

Worse, such fines as have been imposed on the financial industry are basically being paid by the government itself. At the same time that various regulatory agencies boast of record setting penalties assessed against banks, the Federal Reserve pays banks interest on money that is not being lent, resulting in an “interest margin” realized by U.S. banks in the first six months of this year of $211 billion — more than ample funding for any penalties suffered.

Finally, capture has been perpetuated through the removal of property “off shore,” where it is neither regulated nor taxed. The social contract between Americans and their corporations was supposed to go roughly as follows: In exchange for limited liability and other privileges, corporations were to be held to a set of obligations that legitimatized the powers they were given. But modern corporations have assumed the right to relocate to different jurisdictions, almost at will, irrespective of where they really do business, and thus avoid the constraints of those obligations.

As Nicholas Shaxson writes in Treasure Islands, “The privileges have been preserved and enhanced, but the obligations have withered.” Meanwhile, the U.S. Treasury is estimated to be losing $100 billion annually from off-shore tax abuses.

Government cannot and will not hold corporations to account. That much is now obvious. Indeed, the dawning realization of this truth is what has informed the Occupy movement, but only the owners of corporations can create the accountability that will ultimately unwind the knot of government capture.

The essence of the problem is quite straightforward: a failed system of corporate governance. So is the cause: the unwillingness of trustee owners of America’s corporations to assert their responsibility, legal duty, and civic obligation to monitor and oversee the corporations they invest in. Fiduciary institutions own 80 percent of the outstanding shares of corporate America and thus bear at least 80 percent of the responsibility for present circumstances as well as 80 percent of the onus for saving the system itself. And the largest institutional investors — the Bill and Melinda Gates Foundation, Harvard University, and others — must take the lead because (a) they should and (b) all other courses have failed.

Urban park by urban park, campus by campus, the Occupiers are bearing sometimes inchoate witness to America’s capture by corporate interests. Now, men and women of conscience need to reoccupy the boardrooms of America’s corporations. The boardroom is where the takeover began, and it’s where capture can finally be undone and a government of, by, and for the people, not the corporations, restored to the land.

Endnotes

[1] Moyers, Bill, Our Politicians are Money Laundered in the Trafficking of Power and Policy, 3 November 2011.
(go back)

  1. OK, consider that stocks held in retirement plans, directly or through a defined benefit plan or defined contribution plan, must watch their rate of return languish while corporate managers devise executive compensation plans with their board’s approval, that skim off all the profits, leaving shareholders with barely tolerable rates of return. Courts reject derivative actions to restore stolen profits, using the rationale that boards and managers must know what they are doing. The rules of competition no longer protect owners, the stockholders, who have lost control over such key aspects of their wealth as the rate of pay of hired employees who act as if they were the true owners. Courts should permit shareholders to vote on every aspect of executive compensation. Let’s withdraw all existing executive plans and see what is really required to induce people to work. I’ll bet it is less than $35,000 per hour. Let the profits flow to shareholders who can decide best how to spend THEIR money .

    Comment by T Michael — January 5, 2012 @ 11:10 am

  2. [...] full article……via The Corporate Capture of the United States — The Harvard Law School Forum on Corporate Governance …. Share OptionsPrintTwitterEmailMoreFacebookLinkedInStumbleUponRedditDiggTumblrLike this:LikeBe the [...]

    Pingback by The Corporate Capture of the United States — The Harvard Law School Forum on Corporate Governance | Accounting and Small Business /Beverly Shares — January 5, 2012 @ 1:12 pm

  3. Robert Monks is obviously mad; I’m mad, aren’t you? Occupiers and Tea Partiers want to do something to bring the country back. Monks make an elegant plea that our largest institutional investors must take the lead.

    It would be great if they do but do they really care when it is other peoples money? All they need to do is meet their fiduciary duty. Under current legal interpretations that mostly means acting like the rest of fiduciaries. As long as they are in the middle of the pack, it doesn’t matter… and it isn’t them going off the cliff, it is the real shareowners whose investments they handle in trust.

    More likely, institutional investors will only wake up when retail investors do. It takes real people with their money at risk to challenge the system, not only of how the institutional investors are handling their money and voting their shares but through real experience on their own. If more than 5% of retail investors take the time to vote, maybe they’ll demand their funds take more care in their voting. And if retail shareowners start filing proxy access proposals, look out… real people, instead of lemmings, might start taking charge.

    “The privileges have been preserved and enhanced, but the obligations have withered.” This is not only true of corporations, it seems a widespread phenomenon in American society. Retail shareowners may not have a legal obligation to participate in corporate governance but we certainly have a moral obligation to do so.

    Comment by James McRitchie — January 5, 2012 @ 8:49 pm

  4. Wow! This is a very powerful and concise and comprehensive statement of what is wrong in this country. It is also a mirror for the problems occurring in other countries.

    Well said, Bob. Whether they know it or not, our populace is well-served by your battle to restore the rights and responsibilities of governance to the citizens of this country.

    Comment by Dennis Sheehy — January 6, 2012 @ 9:41 am

  5. Call me crazy, but I feel like a bunch of things are missed here. The claim that “not a single senior Wall Street executive has lost his job” is simply demonstrably false. Dick Fuld, Angelo Mozilo, a whole fleet of people from Fannie and Freddie, etc.

    One might also call Madoff to be an example of someone who has not only lost his job but gotten jail time.

    One might think that Harvard would have some interest in fact-checking advocates who write for one of their blogs.

    Nevermind the facts though, when you can have a perfectly good, if wrong, polemic.

    Comment by Soren Dayton — January 6, 2012 @ 10:18 pm

  6. So what?

    Old Fezziwig was taken over by the new vested interests.

    “…the largest institutional investors — the Bill and Melinda Gates Foundation, Harvard University, and others — must take the lead because (a) they should ”

    “because they should” Why? Because Bob says so, no other reason.

    Comment by joe — January 7, 2012 @ 8:12 am

  7. This is an interesting piece of rhetoric more suited to the Huffington Post than this forum. It lacks foundation and analysis.

    Comment by Lisa Palumbo — January 9, 2012 @ 11:40 am

  8. These problems exist, but why does it reek of anti-corporatism, when the only way to resolve the issue is nueter the government in such a drastic way that lobbying is no longer fruitful?

    Comment by Alex Peterson — March 18, 2012 @ 3:32 pm

  9. Bob is absolutely right about corporate capture, but wrong about the answer, because the “owners” of public companies are funds that are playing with other people’s money. As a result, we simply can’t expect them to act differently for the time being.

    The answers are in letting the public markets die, and helping private markets to grow, especially for enterprises whose owners have more skin in the game and hence can be regulated less lightly than limited liability corporations.

    I’ve addressed this at greater length elsewhere, including these comments addressed to Bab and to Larry Lessig:

    http://mises.org/community/blogs/tokyotom/archive/2011/12/11/limited-liability-redux-as-bob-monks-says-quot-corporate-governance-has-failed-and-it-s-time-to-move-on-quot-so-what-39-s-next-unleash-the-hounds.aspx

    http://blogs.law.harvard.edu/tokyotom/2012/05/07/note-to-larry-lessig-on-his-anti-corruption-pledge-limited-liability-corporations-are-the-taproot-of-both-growing-government-and-anonymous-rent-seeking/

    TT

    Comment by TokyoTom — February 23, 2013 @ 9:28 am

 

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