DOLE AND THE UNDESERVING RICH

Both the stock market and corporate layoffs are soaring, and the two phenomena are unhappily related. When AT&T announced it was axing 40,000 employees, its share price rose. Worse still, when the government announced that over 700,000 new jobs had been created in February, the stock market crashed, allegedly in direct response to the good news on the job front. So, bad news for workers — layoffs — is good news for shareholders, while good news for workers — more jobs — is bad news for shareholders: hardly an economy in which the interests of workers and those of capital owners are coincident.

The situation appears even worse, the challenge continues, when the interests of the average working person are compared with those of his superiors in the executive suite. Layoffs drive up share prices; higher share prices increase the value of stock options and raise executive compensation; therefore, the road to riches for a chief executive offcer is to lay off as many workers as he possibly can without crippling his business in the near term. This offends even a school-child’s sense of fair play: Why should executives be rewarded for sacrificing tens of thousands of workers below them?

More resources, contend the new corporate critics, ln,bM. Stelzer is director of rg,ulatory polic), studies at the American Enterprise Istitute. must be devoted to retaining and retraining ordinary workers, and some control is needed over the huge bonuses and salaries that corporate executives have taken to granting themselves, widening the gap between shop- floor pay and executive compensation to an extent both unjust and against the long-term interests of those who want to preserve the legitimacy of market capitalism.

The initial response of conservative economists to this challenge has been orthodox and unsurprising. It is the obligation of America’s businesses to maximize profits, they say. To do that, businesses must produce goods that consumers want, at prices consumers find attractive. They must deploy their work forces in the most effcient possible way, thereby maximizing worker productivity and incomes.

Unfortunately, these economists have found themselves increasingly questioned by the Right as well as the Left. Labor secretary Robert Reich is no longer alone in suggesting that corporations should sacrifice some of their growing profits to the cause of job stability, either by retaining long- term employees scheduled for the chop or by committing themselves to schemes that will ease a worker’s transition from one job to the next. This notion appeals to many social conservatives as well, because they see a link between job stability and the maintenance of a stable, civil society.

No matter that the facts fail to support most of the whining about the supposedly parlous economic condition of most American households. There is a sufficient sense of unease in the country — or, just as important, politicians think there is — to worry America’s captains of industry, who must now grope for ways to legitimize the policies of their companies and their own compensation.

No doubt they appreciate the irony in the fuss over executive compensation. Stock options were supposed to end injustice, not create new inequities. Only a few years ago, stock options were touted as a way to make executive compensation fairer by linking it to the performance of the company’s share price. No one anticipated that share prices would surge, as they have in the past year or so, or that much of the increase would be due more to Federal Reserve Board chairman Alan Greenspan’s decision to lower interest rates than to any executive’s managerial skills. And few considered that the price of a company’s stock might jump not only because its managers showed enormous skill at expanding its market (as happened at Coca-Cola), but because managers slashed the firm’s work force (as at AT&T).

Of course, top executives do not determine their own pay. That is the job of the “compensation committee” of the board, and that committee is generally made up of outside directors who are independent of the CEO — though not so independent as to deny many CEOs the wherewithal to join the country club in which the directors are also members. But independent enough, indeed, to fire the chief executive if the company persistently fails to perform well, as recent upheavals at IBM, American Express, General Motors, and Morrison- Knudsen attest. Boards “are increasingly willing to push the CEO overboard when a truly serious situation develops that imperils the life of the company, ” according to former SEC commissioner A.A. Sommer, Jr. But it does take a truly “serious situation” to galvanize most boards into action, creating the need, in Sommer’s words, for “some means of making them [boards] activist before the illness becomes acute.”

True, some compensation committees are in the hip pocket of the CEO. But far fewer than was once the case. With institutional investors such as the California Public Employees Retirement System owning more than half of the stock of publicly held companies and becoming more vocal, board members must be more careful than ever not to subject themselves to charges of cronyism or of failure to discharge their fiduciary obligations to shareholders.

Still, one cannot ignore the possibility that executive salaries are not being set by an accurate measure of executives” marginal output — that’s jargon for their individual contribution to the value of whatever their firms produce. Nor can one ignore the fact that these arguments have already spilled over into the political sphere. Bill Clinton has so far restricted himself to doing what he does best — make speeches. He exhorts companies to take the long view, to invest in worker training, to consider the effect of plant-relocation decisions on communities. But he also is allowing Reich to test the waters by proposing tax plans to encourage corporations to invest more in worker training — this despite vigorous opposition from White House chief of staff Leon Panetta, among others.

And where does this leave Bob Dole? He instinctively opposes tampering with market forces. But his allies in the business community have so far shrunk from a full-throated defense of their policies and pay packets. And his Republican colleagues will be urging him to appeal to the disaffected blue- collar workers who abandoned the Democratic party to help elect Ronald Reagan in 1980 and 1984 and who, by defecting to Ross Perot in 1992, helped defeat George Bush.

What’s a poor candidate to do?

First, he can lay out the facts. Workers” pay is not suddenly lagging behind workers” productivity: The president’s very own Council of Economic Advisers says that workers’ wages have “tracked productivity in recent years.” Nor is it the case that the secure world of work has suddenly become a jungle in which the survival rate is plummeting: Reich’s Labor Department recently found that “there has been little change in overall job stability. . . . The length of time workers have been with their current employer has changed little in recent years.”

Neither is it true that workers” share of the income pie has declined while the share going to capital has soared: When John E Kennedy took the oath of office in the golden year (as memory now has it) 1961, 69.6 percent of national income went to employees as wage and non-wage compensation, while profits claimed 11.5 percent. Last year, those figures were 72.6 percent and 10 percent respectively.

Most important of all, there are plenty of jobs: The unemployment rate is low, and the number of new jobs becoming available, from resurgent California to grumpy New Hampshire, dwarfs those disappearing in response to changes in the economy.

But facts alone won’t carry the day — not in the heat of a presidential campaign. Fortunately, Dole has an opportunity to be innovative without offending conservative principle. He can demonstrate his support for limited government and still offer solutions for some of the problems that are eroding confidence in the ability of the market system to distribute rewards in an acceptably equitable manner. His program might be captured in two words: empowerment and disclosure.

The Senate majority leader can propose legislation that increases the power of the owners of a business — the shareholders — relative to that of the managers. This will reduce the ability of entrenched executives to value their own services in an excessively generous fashion. Perhaps executive compensation above a certain level should require explicit shareholder approval. Perhaps, as Columbia University’s Mark Roe has suggested, rules and conventions that discourage mutual funds” and some other institutional investors” acquiring and voting large blocs of stock should be modified, so as to give representatives of small investors the power to check the excesses of greedy corporate executives. Perhaps the Securities and Exchange Commission should be directed to prevent corporate managers from using their companies” resources on behalf of one or another candidate in a battle for seats on the board, thereby enhancing the prospects of those candidates who are not in the managers’ pockets.

And perhaps, as former SEC commissioner Sommer has suggested, the law controlling corporate governance can somehow be changed to permit shareholders to nominate candidates for corporate boards and actually get a real hearing. These and other measures would increase the ability of the owners of corporations to prevent undeserving managers from appropriating to themselves an excessive share of profits — in a sense, enabling shareholders to distinguish between the deserving and the undeserving rich.

Such measures might also go part of the way toward preventing corporate managers from undermining the long-run reputation of their firm with its workers and with the legislative and regulatory communities by abusing their offices. Take, for example, health care. Press reports indicate that the chief executives of many companies are forcing their non-executive employees into rather restrictive managed-care plans. These are painful, but perhaps necessary measures to reduce costs. But at the same time, these companies often craft separate and very generous health-care plans to a few top executives, thereby crossing the line that separates insensitivity from stupidity. One corporate offcer defended this practice, according to the New York Times with the argument that top executives are responsible for bringing in the revenue and making the profits.” Presumably, the rest of the work force carries no such weighty responsibilities.

Significantly, the corporation involved does not separately report in its prospectus the value of its executive health-care plan to the small cadre of of 1cers that deems itself worthy of these benefits. Which brings us to the question of disclosure, and to the words of Justice Brandeis, “Sunshine is the best disinfectant.”

Presidential candidate Dole would not be violating-indeed, would be applying with new force — his conservative principles were he to propose a substantial increase in the amount of information corporations must reveal in their prospectuses and in other communications with their shareholders. That such increased disclosure requirements would indeed increase the amount of information out there in a market already glutted with newsletters, capable analysts with large research staffs, and powerfully motivated investors is not at all certain. But little harm, and some good, might well come from a requirement that the value of executive stock options be revealed with great clarity in proxy statements, and earnings reports made more realistic by mandating that the estimated current value of such options be charged as an expense against current earnings, the latter a reform that the Financial Accounting Standards Board has been proposing, over the vigorous opposition of corporate America.

These steps to improve the process by which executive compensation is determined would show that a market-oriented conservative candidate such as Bob Dole can devise solutions to real problems by making markets work better, rather than by imposing government controls on the outcome of wage negotiations between companies and their executives.

And because corporate governance and executive pay have become intertwined with the fairness issue, Dole’s embrace of these measures would allow him to respond to questions of the sort that Pat Buchanan and Robert Reich have raised with more than his standard answer, “We have two committees looking at the problem.” He could show that conservatism can be “caring” by making the market work better, rather than by replacing its outcomes with a new web of the rules and regulations that conservatives rightly abhor and that ordinary citizens — those given less to ideological and more to pragmatic solutions — have rightly come to distrust.

Irvin M. Stelzer is director of regulatory policy studies at the American Enterprise Institite.