Greedy Management and the Decline of Equity Returns

by Mr. Cheap

About a year ago I read Stephen A. Jarislowsky’s “The Investment Zoo” and the idea behind this post was stolen from it, and has been bouncing around in my head long enough that I feel like it’s my own. If you feel like reading a far better presentation of it (along with a bunch of other killer ideas), check out the original source.

Supposedly up until 20 years ago or so, upper management (CEOs and whatnot) were paid about 40 times what the average worker earned. High income without being obscene. People would work their way up the corporate ladder, have a very affluent lifestyle, and typically do the work they loved to do (run a large business).

As athletes commanded increasingly insane salaries, top CEOs started saying that as the “superstars” of the business world they deserved similarly extravagant salaries. Boards and shareholders bought in to this idea, and competition pulled up compensation packages for upper management to the nose-bleed inducing heights they’ve reached.

A favourite way of hiding how much they’re raping their business is for upper management to issue themselves stock options. Presented under the guise of “rewarding the management for increasing shareholder value” this lets the company buy back shares (pretending this is a good thing for shareholders), issue these shares to themselves (without having to dilute outstanding shares) and over time steal a major portion of the company from the owners (they’re buying shares for themselves with money that belongs to the shareholders). Apparently Jack Welch and his cronies went from owning nothing of the company to 30% of GE when he retired.

People like to say that the expected nominal return from stocks is 10% over the long term. Whenever the market exceeds this and they say “the rules are different this time” a correction hits and brings us back down to Earth. Any time you hear that phrase or get stock tips from a shoe shine boy it’s time to sell.

I wonder if this time the rules ARE different, and we’re having part of our 10% return stolen from us by the people we’ve entrusted to grow it?

Be Sociable, Share!