Tag Archives | political economy

What Would Alexander Hamilton and Wilma Soss Think About the P&G Proxy Fight?

With activist investor Nelson Peltz of Trian Partners making an intense and expensive play for a seat on the board of troubled Proctor & Gamble, the past six months have witnessed the largest proxy battle, and perhaps the oddest one, in U.S. history. In October, it appeared to be over, as the relieved P&G management declared Peltz to be the loser based on its preliminary count of proxy votes.

The drama, however, took an unusual turn in November when Peltz announced that an independent vote count revealed that he indeed had won a seat on the board, albeit by the thinnest of thin margins. Whether Peltz truly succeeded in winning the battle will undoubtedly be hotly contested by P&G. But whatever happens, it is worthwhile at this juncture to put the Peltz play in some historical perspective. What would Founding Father Alexander Hamilton and pioneer “corporate gadfly” Wilma Soss think about the P&G proxy fight? Continue Reading →

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Is Wall Street Capitalism Really “The Model”?

DavidEllerman

David P. Ellerman

Guest post from David P. Ellerman who works in the fields of economics and political economy, social theory and philosophy, mathematical logic, and quantum mechanics. His undergraduate degree was in philosophy at M.I.T. (’65), and he has Masters degrees in Philosophy of Science (’67) and in Economics (’68), and a doctorate in Mathematics (’71) all from Boston University. He has been in and out of teaching in economics, mathematics, accounting, computer science, and operations research departments in various universities (1970-90), founded and managed a consulting firm in East Europe (1990-2), and worked in the World Bank from 1992 to 2003 where he was an economic advisor to the Chief Economist (Joseph Stiglitz). He is currently a visiting scholar at the University of California/Riverside and a Fellow of the Center on Global Justice at University of California/San Diego.

He has published numerous articles in various fields and five books. The published and draft papers and book manuscripts, including Is Wall Street Capitalism Really “The Model,  are available on his website, David Ellerman. See also his working papers here on the SSRN site. Continue Reading →

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European Corporate Governance: Readings & Perspectives

This new reader, edited by Thomas Clarke and Jean-Francois Chanlat offers up one of the first critiques of the subprime financial crisis within a framework that compares Anglo-American governance features with those of Europe.

At the heart of the collapse was the growth of the derivatives market that was supposed to hedge against losses. Settlements grew from $106 trillion in 2002 to $531 trillion by 2008. In the introduction, Clarke and Chanlat provide an excellent overview of how the crisis unfolded, both in the US and in Europe. They then turn to the contributions of the governance framework: re-regulation, ratings agencies, risk management, incentivization and to more specifics within the framework of financial institutions.

Convergence is in progress but there is tension between the parallel universes. The Anglo-American is characterized by liquid markets, high transparency and where the market for corporate control provides the major discipline… until markets fail. Europe and Asia are characterized by controlling shareowners, weak markets, less transparency and more monitoring by banks.

Many are now questioning convergence and what appears to be a basic philosophy behind the American model… growing inequality. “In the last few years alone, $400 billion of pretax income flowed from the bottom 95% of earners to the top 5%, a loss of $3,660 per household on average in the bottom 95%.”

With the highest level of inequality and poverty among its peers and the lowest job satisfaction rate in two decades, why follow the US? What about the rights of workers and citizens to a more sustainable system? Can the EU transform its economies so that they can sustainably continue to provide a high standard of living? Those are just a few of the topics addressed in the reader through an examination of various dimensions and examples.

Most of the essays are excellent. I especially enjoyed Robert Boyer’s, “From Shareholder Value to CEO Power: The Paradox of the 1990s.” Boyer looks at why CEO remuneration continues to skyrocket in an era of shareholder value. Labor long ago lost power in the US and managers have used the pressure of institutional investors to their own benefit.

Boyer reviews the rise of concern over CEO pay, various options that have been used and their limitations. A series of long-run transformations has occurred in the bargaining positions of workers, consumers, financial markets, the international economy and nation states. The 1960 were characterized by an alliance between workers and managers.

By the 1980s internationalization eroded worker power and by the 1990s we entered a period of hidden alliances between managers and financiers. Managers used the demands institutional investors to redesign their own compensation. Part of that alliance involved a shift away from defined benefit plans to 401(k) type plans and a huge inflow of savings into the stock market with workers at risk.

As support for a political hypothesis of increased managerial power, Boyer analyzes the micro-structure evidence concerning insider trading, diffusion of stock options, lower CEO pay sensitivity of large firms, surge in M&A activity, windfall profits, asymmetrical power on compensation committees, distortion of profit statements, innovation in hiding compensation and the financialization of CEO compensation in a corporate culture that has shifted from engineering to financial management.

He then looks at the larger political arena where economic power is converted into political power. Here he discusses the context of rising inequality and growth of the super-rich with evidence that concentration of wealth is enhanced by stock market bubbles and a tax system that tilts in favor of the rich.

How do we extricate ourselves from this situation? Boyer’s analysis provides some hints. A shift towards a stakeholder conception “would reduce the probability of managerial greed and erroneous strategic decisions.”  More public control of accounting practices is needed “to prevent an alliance between CEOs and auditors, at the expense of rank-and-file shareholders.” Last, we need to recognize that monetary policy has been “at the heart of erroneous business strategies and unjustified wealth from CEOs.”

The volume should give readers pause concerning the desirability of convergence on an Anglo-American model and provides well-informed analysis of European models that may lead to a more sustainable path.

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