The defeat that the shareholders of GlaxoSmithKline recently inflicted on the company’s remuneration report suggests that an extraordinary era in business history is coming to an end. Fifteen years ago Gordon Gekko, the anti-hero of Oliver Stone’s film Wall Street, announced that “greed was good”. The phrase, and the character of Gekko, were drawn partly from Ivan Boesky, who once told an audience of students at the University of California, Berkeley: “Greed is all right. I want you to know that. You can be greedy and still feel good about yourself.” It is not recorded whether Boesky still felt good about himself when he was sent to prison for insider trading not long after.
But it was to be another 15 years before the moral of Boesky’s fall was more widely appreciated. If greed really is the dynamic of a capitalist economy, then that dynamic will lead to an explosion of speculation and corruption. The maxim that greed is good is easy to understand. The maxim that greed is good so long as it is pursued according to the highest ethical standards is more difficult to handle. Too hard for most people, as it turned out.
Boesky was associated with a shadowy group of traders who acted in the 1980s as corporate raiders. By acquiring stakes in companies and assembling huge quantities of low-grade debt – junk bonds – they could make credible threats of takeover against even the largest companies. The managers of General Motors, ICI, Mobil, were no longer accountable only to themselves. The results of this change were not entirely what might have been expected.
Large corporations were no longer national institutions, run by salaried executives. They were assets to be worked to create shareholder value. Executives were no longer business managers but deal-makers, and deal-makers expected to be paid on a different basis and an entirely different scale. The rewards of investment bankers had always been high. They had prospered from the principle that a very small percentage of a very large price amounts to a big lot. Trading assets had always produced large rewards. But, as companies restructured themselves, these rewards went not only to shipping and property dealers, but to managers who bought and sold parts of companies. Paul Judge, who led a buyout of some unwanted businesses from Cadbury Schweppes, made a profit of £45m in four years, and used part of the proceeds to endow a business school at Cambridge. This was a new experience for professional managers. As executives compared themselves with bankers and buyout beneficiaries they wondered why they who initiated this largesse should not be similarly rewarded.
Soon, they were. The key device was the share option. An option gives you the right to buy a share at a fixed price even if its value has subsequently risen. So an executive who holds options makes a profit if shares go up, but does not lose if shares go down.
The term “fat cats” was first applied to the bosses of privatised industries, who suddenly found themselves feted as chief executives of international companies, with larger salaries and options that became valuable immediately on flotation. Some people noticed that these jobs had not long before been done, and not necessarily less well, often by the same people, for low salaries. The rewards of these heads of privatised businesses were still modest by general private sector standards. But for someone who had joined a water board 20 years earlier, expecting only a secure job and a public service pension, it was like winning the pools.
The activities of American executives were on an altogether larger scale. Before his death in 1992, Steve Ross of Time Warner, the media conglomerate, had extracted around $1bn from the company. By the end of the decade, more than 10 per cent of the equity of listed US companies was under option to their senior managers. Only when the stock market bubble burst in 2000 did the real divergences of interest between shareholders, executives and the companies they managed become apparent.
The same pressures and trends emerged in the UK, but British companies never came close to these American extremes. Many American executives took hundreds of millions of dollars from their companies, but only a few British executives have taken home even tens of millions of pounds. For many US companies, executive remuneration is now a substantial fraction of the cash and profits of the business, but there are no large British companies for which this has yet been true. On this side of the Atlantic, the largest and most controversial pay-outs have been in companies such as GlaxoSmithKline and Reuters, which are as much American as British businesses, and whose executives naturally look enviously on the rewards of their US counterparts.
If you are heading for the door, you might as well pick up whatever money is left on the table. This seemed to be the maxim at Enron. Jean-Marie Messier – who used his position at France’s largest water company, Vivendi, to launch himself as an international media mogul with a glitzy Manhattan apartment – took large bonuses as his empire was collapsing. When shareholders are losing their investment and employees their jobs, large rewards to those who have brought about this state of affairs are particularly hard to swallow. But the real issue is not rewards for failure: it is the proper size and shape of rewards for success.
The shared belief of both critics and supporters of modern capitalism is that uninhibited greed is its mainspring. But building successful businesses requires talent and hard work. The people who have been good at it have been principally driven not by greed, but by power, status, prestige and love of business itself. These have been the motives of great entrepreneurs: men (they have mostly been men) who have created commercial empires from small beginnings – like John D Rockefeller and Bill Gates. And also of those who show consummate skill in managing the politics of corporate bureaucracy – like Alfred P Sloan of General Motors and Harry McGowan of ICI in a previous generation, or Jack Welch of General Electric in our own time.
Gates, it is true, engages in displays of vulgar materialism – it is said that you can choose the display of electronic Old Master paintings to be projected on the walls of his house, and that he can select the temperature of his bath from his limousine. But these very manifestations of excess demonstrate that his real love is not money but computers. It must be so: otherwise, a man with $50bn to spare would not still be working in an office in Redmond.
There are individuals obsessed with money: but they are sociopaths. Such people traditionally looked to politics – and in many poor countries they still do. But western democracies have mostly been successful in excluding them from government – indeed in the US you do not go into politics to become rich, you become rich in order to go into politics. Crime also attracts the greedy: but organised crime also requires dedication and hard work. The Godfather, like a legitimate businessman, was motivated more by power than money.
Only in the past two decades has it been suggested that abnormal greed, far from being a personality defect, is the principal quality required for success in business. The outcome has been damaging both to the businesses themselves and to the legitimacy of the market system. The paradox of the past decade is that, in its moment of triumph after the collapse of the Berlin Wall, capitalism undermined its legitimacy by presenting a repulsive account of its functioning – an account that is wholly false as a description of how successful business is really conducted.
The truth is that shareholders, employees, managers and customers of large companies have interests in their organic growth and development which, though not identical, are largely similar. This common interest has been jeopardised by the misdirected incentives offered to managers in the past decade. The grotesque examples of corruption revealed at Enron and WorldCom are less important than the ways in which established businesses have been damaged by the pursuit of short-term financial goals.
Britain’s two leading manufacturing companies at the beginning of the 1990s – ICI and GEC – were both wrecked by a process of meta fund management: the role of the corporate executive was to be buyer and seller of a portfolio of businesses, just as the investment manager sees himself as buyer and seller of a portfolio of stocks. Britain’s most admired business for decades – Marks & Spencer – spent the 1990s meeting City expectations of earnings growth faster than its underlying business could sustain. By squeezing suppliers and customers and spending less on its stores, the company simultaneously achieved in 1998 the highest margin on sales in its history and the collapse of its iconic reputation.
At the beginning of the 1990s, a retired chief executive sat in on my MBA class. At the end, he observed: “These kids regard top management posts as a prize rather than a responsibility.” His comment encapsulated the change that had swept across business in that era of excess.
From 1930 to 1980, the rise of the modern corporate economy was epitomised by corporations such as Unilever, Shell and ICI. They established a profession of management. Its practitioners expected to be well paid, but the notion that they needed enormous financial incentives to discharge their responsibilities was as absurd as we still think it is for a judge, a doctor or a prime minister. Our companies would be better run today if we could restore these attitudes.
John Kay’s new book, The Truth about Markets, is published by Allen Lane, The Penguin Press (£25)