It was a week where it was reported that hedge fund manager James Simons made over $1.7 billion for 2006, the Dow Jones set a new record high and CEOs as a group continued to make more than at any time in history. Yet amid such unparalleled wealth, the U.S. Congress is only now getting around to finalizing a bill that would raise the federal hourly minimum wage from its current $5.15 to $7.25 —but not until 2009.
The increase was passed by the House and the Senate earlier this year and would take two years to be phased in. The final bill has not been placed on the President’s desk and there is no indication that he is looking for it. Those who are struggling to make their lives better, not by welfare but by work, single mothers and Wal-Mart employees —just three large groups who would benefit from this modest raise and long overdue visit to planet Earth by lawmakers— apparently have no voice worthy of being heeded. It has been more than 10 years since the act setting the federal minimum wage was changed. In that time, a generation of low-paid workers has come and gone. Many have died in the poverty to which their elected representatives consigned them by their inaction.
In his column today, The New York Times’s Paul Krugman echoes the worry we expressed here in March about a return to a distant era of economic division. Mr. Krugman writes:
Well, in at least one respect, everything old is new again. Income inequality — which began rising at the same time that modern conservatism began gaining political power — is now fully back to Gilded Age levels.
…
But it’s much too soon to declare the march toward a New Gilded Age over. If history is any guide, one of these days we’ll see the emergence of a New Progressive Era, maybe even a New New Deal. But it may be a long wait.
On a similar theme in March, we observed:
Capitalism has experienced these kinds of episodes in the past —the Gilded Age from 1865 to 1901 and the “malefactors of great wealth” that sparked the fury of Theodore Roosevelt and his promise of a “square deal” in a fledgling 20th century come to mind. The results produced considerable upheaval. One of the more turbulent periods was the aftermath of the Great Depression, when the hope of a “new deal” began to resonate with displaced workers who rode the rails in search of work. It is not encouraging that we are seeing a return to the milestone of 1929 in 2007.
It is becoming apparent that the snail’s pace in advancing the minimum wage is part of an accelerating backward march into a past of wealth inequality and economic polarization. Significant portions of the middle class are being carried out of sight by its momentum as well. When the leaders of capitalism and government permit this during times of unprecedented gain for themselves and those at the top, history teaches that they are treading upon a perilous course.
It has taken far too long for the legislative and executive branches of the U.S. government to enact a functioning bill to increase the minimum wage, which, in this time when a few are doing very well and so many others are not, is our choice for the Outrage of the Week.
Larger men give up their posts before bringing disgrace upon themselves or their organizations. Smaller men cling to them like life rafts.
When a CEO shows up at a board meeting with his lawyer and demands “fairness” after bringing embarrassment upon the institution he is supposed to be leading, it is time for somebody to leave the room and not return. Usually, it is not the board.
Embattled World Bank CEO Paul D. Wolfowitz makes the mistake that too many CEOs make. He fails to understand that it’s not about what’s good for him. It’s about what’s good for the institution he heads. Mr. Wolfowitz and his lawyer, Robert S. Bennett, may try to do an elaborate tap dance around the board over the issues that brought them to this impasse. But the central point, as we have noted here previously, is that the credibility and respect essential to the sound functioning of the office of the World Bank’s chief is no longer there.
The greater danger in Mr. Wolfowitz’s staying is that it will almost surely compromise the Bank’s own governance reputation and make it apparent to the world that the board is merely a rubber stamp for the dictates of the U.S. administration. The Bank’s efforts to bring governance reform to developing countries will be terribly undermined if it becomes apparent that its own governance system is a sham.
Making accusations that the board is treating him shabbily, just days after being called upon to resign by dozens of former World Bank officials, only confirms that Mr. Wolfowitz does not grasp the nature of the relationships and the esteem that are necessary to carry on with the job. One by one, important constituencies are withdrawing their support, and with each unheeded demand for his resignation Mr. Wolfowitz appears a lesser and lesser figure. In this he has much in common with another Bush appointee, embattled attorney general Alberto Gonzales. Both these men give the impression of being smaller than life figures occupying the huge offices they hold. Larger men give up their posts before bringing disgrace upon themselves or their organizations. Smaller men cling to them like life rafts.
Great institutions like the World Bank cannot be headed by little men. Nor can they be governed by those who are unable or unwilling to stem the erosion in the stature of the body they are entrusted to protect. The Wolfowitz girlfriend ordeal must be ended. If Mr. Wolfowitz does not step aside —and soon— the board must do the job for him.
He was appointed by his friend, the President, after detailing plans for the invasion of Iraq. His mission included tackling corruption and addressing issues of growing global poverty. And, in fact, he discovered a new tool for narrowing at least part of the wealth gap that plagues much of the world: direct the appointment of a woman with whom he was romantically involved in such a way as to maximize her salary without going through the customary formalities. Now, World Bank chair Paul D. Wolfowitz is faced with a revolt by staff and an embarrassment on a world scale.
He excuses his actions as a mistake in judgment. That might work for a teenager who has never been away from home. Mr. Wolfowitz, however, is a sophisticated man who has travelled in the company of kings and presidents. Perhaps he thought he was one. His infamous fiat to the bank’s vice-president of human resources:
“I now direct you to agree to a proposal which includes the following terms and conditions …You should accept immediately her offer to be detailed to an outside institution of her choosing while retaining bank salary and benefits.”
certainly is suggestive of such a regal self-image. But what is not plausible is that he did not know what he was doing was wrong. Of course, if he really wants to maintain that line, then the institution has an idiot on its hands as well as a scandal. The World Bank doesn’t need another Alberto Gonzales at its helm.
All that leaders who head important public and corporate institutions have is their moral franchise. Their reputation for ethics and integrity is both their shield and their sword. Once that is lost, their ability to lead by example is compromised beyond repair, and with it their ability to perform. The staff of the World Bank appear to understand this. The question is: Do the directors who make up its executive board? And does President Bush, who appointed Mr. Wolfowitz and appears to hold the keys to his fate?
We have chosen Mr. Wolfowitz’s failure to resign in the face of the humiliation he has brought upon this institution as a result of his ethical misadventure as our Outrage of the Week. He has made those who supported him look like fools. Let us hope they do not adopt also the trappings of clowns in failing to demand his resignation.
Perhaps a little slow out of the gate, but The Times has an editorial today on the most recent evidence of a widening gap in U.S. wealth. It follows similar lines as those voiced last week by Finlay ON Governance in our Outrage of the Week. The Times includes reference to record levels of CEO pay, which we, too, noted last week. The editorial rather obliquely calls this “the largess of top-tier compensation.”
In our post, we talked about the social turmoil previous periods of wealth disparity have caused. Here is an excerpt:
Capitalism has experienced these kinds of episodes in the past —the Gilded Age from 1865 to 1901 and the “malefactors of great wealth” that sparked the fury of Theodore Roosevelt and his promise of a “square deal” in a fledgling 20th century come to mind. The results produced considerable upheaval. One of the more turbulent periods was the aftermath of the Great Depression, when the promise of a “new deal” began to resonate with displaced workers who rode the rails in search of work. It is not encouraging that we are seeing a return to the milestone of 1929 in 2007.
The Times entitles its editorial “It Didn’t End Well Last Time.” Well said.
Capitalism can be a marvelous machine for advancing individual prosperity and social progress. But like any machine, it needs to be soundly governed and faithfully attended. When it runs amok or ceases to have the steady hand of conscientious stewardship and good judgment at the controls, when it falls into the clutches of the greedy and self-obsessed and works to the primary benefit of a select few, it sets itself on a perilous course of almost certain mishap and painful misadventure.
There was much that caught the eye of our high-priced panel of outrage experts this week, especially the ones with four legs and floppy ears. There was the kidnapping of British sailors by Iran; the tainted food poisoning of dogs and cats whom owners have entrusted to pricey brands like Iams and Eukanuba; and the repeated spin and rinse performance by Attorney General Alberto Gonzales over the firings of U.S. attorneys, which has to make you wonder if Alberto Culver might do better in the job. Then there was yet another hurtin’ song by Barry Diller who just wants to be able to pay himself $295 million for a year’s work and not have to see any comment about it in the press. Anything less, to Barry, is “almost criminal.” The Ontario Lottery and Gaming Corporation came in for big criticism by that province’s ombudsman over the payment of millions of dollars in lottery winnings to fraudulent retailers and for turning a “blind eye” to allegations of criminal activity for many years. Allegations of corruption in the handling of the RCMP’s pension fund and of stonewalling at the highest level of the force during an internal investigation, made before a committee of Canada’s House of Commons, were especially disturbing and have all the earmarks of a major scandal.
In the end, three significant betrayals of the great institution of capitalism stood out for this weekly slot at Finlay On Governance.
ITT
The first was the action of giant defense contractor ITT, which this week pleaded guilty to criminal charges of unlawfully selling classified information to foreign countries, including China. (ITT has a history of being accident prone when it comes to dealing with governments, as its involvement in ousting the Allende government in Chile reminds.)
You have to wonder what kind of breakdown of ethics and compliance oversight, especially at the level of the board, would have permitted this scandal. The company dragged its feet and fought the allegations for several years before its guilty plea this week. Its directors now preside over an admitted corporate felon. This is another illustration of a board that undervalued the importance of upholding a culture of ethics and integrity and failed to take steps necessary to ensure that the organization was properly alert to potential wrongdoing. ITT betrayed its investors, its employees and American military personnel in the process. It is an example of the dark side of capitalism —the willingness to profit at any cost —even treachery. The $100 million penalty ITT agreed to pay the government doesn’t begin to make restitution for the scale of the crime. There is no indication that the directors and senior officers who were responsible for overseeing ITT during the time of this offense plan to contribute to the penalty from the compensation they received.
Circuit City
The second is the announcement by Circuit City of its plan to fire 3,400 of its better paid full-time employees and offer to rehire them —after several months off the job and without income— as part-time, lower paid workers with no benefits. The company’s CEO received a salary and bonus payment of approximately $1.5 million last year and has been given a generous long-term compensation plan, including a $3 million award of stock. Circuit City is apparently taking its cue from Wal-Mart, that other model of enlightened corporate responsibility in America.
One of the more noble features of modern capitalism over the years, and especially in the period after World War II, has been that it allowed people to advance their lives by working hard at their jobs and moving up. It was under that social contract that the middle class was created, the suburbs were built and the vast infrastructure of schools, hospitals and social legislation to protect children, workers and consumers was developed. It was, in many ways, the idea of the great society forged by members of the greatest generation. Are we beginning to see the unraveling —even reversal— of that proposition to a situation where workers have to give up and give back in order just to survive? And how productive can an organization be that is filled with people who feel betrayed and have lost so much of what they worked hard to achieve? Did the company’s board even consider that question before embarking on what will surely be a public relations, if not larger business, disaster?
Companies are made productive and innovative by the quality and morale of their employees —not just a very well paid CEO at the top. When we begin to lose that ethic in our major corporations, capitalism —and society— will have lost one of their most important attributes of success. Which brings us to our third betrayal this week.
The Widening Wealth (and Responsibility) Gap
It was announced on Thursday that the top 1 percent of Americans received their largest share of national income since 1928, according to 2005 tax data.
As the Times noted:
The top 1 percent received 21.8 percent of all reported income in 2005, up significantly from 19.8 percent the year before and more than double their share of income in 1980. The peak was in 1928, when the top 1 percent reported 23.9 percent of all income.
So now, despite all the efforts to improve education and the advancements that have taken place in business, government, and the tax system over the past three-quarters of a century, in one important respect America is back to where it was before the Great Depression. We will leave it to others to explain how this happened. But if you look at the tax reduction policies of the Bush administration for upper incomes and the tremendous wealth explosion in CEO pay alone over the past decade, you will quickly see that the ground has been carefully laid for this reversal in social progress. There can be no doubt that many at the top will care not at all about this development. They would be content to ride the current wealth wave as far as they can and give absolutely no thought to the human —or broader social— consequences.
Capitalism has experienced these kinds of episodes in the past —the Gilded Age from 1865 to 1901 and the “malefactors of great wealth” that sparked the fury of Theodore Roosevelt and his promise of a “square deal” in a fledgling 20th century come to mind. The results produced considerable upheaval. One of the more turbulent periods was the aftermath of the Great Depression, when the hope of a “new deal” began to resonate with displaced workers who rode the rails in search of work. It is not encouraging that we are seeing a return to the milestone of 1929 in 2007.
Yet it seems that even with the benefit of history, there are few at the top who understand that capitalism needs its stewards as much as its zealots. It is a system that depends on its champions of integrity and public consent as much as it does on its contrivers of non-compete payments and backdated stock options. How long will this gap be tolerated? How much wider can it grow before serious divisions erupt in society? I have a feeling that neither the LBO kings at Blackstone and elsewhere nor the hedge fund titans and Wall Street wizards that dominate today’s financial landscape have given the slightest thought to that question or to the tide of resentment that is brewing against them. Neither had J. P. Morgan or any of the other giants of early 20th century capitalism back into whose spiritual embrace 21st American capitalism seems to be returning —vanishing middle class and all. So many of these grand figures of the past —and present— seem only in it for the moment and all that they can get at the time. They are the masters of the big transaction and the generators of an ever escalating succession of zeros on the end of the fee paying check. Their egos, their paydays, their mansions, their limousines and private jets —everything about these Caesars of financial triumph is big except the respectability of the legacy that many are leaving or their enduring contribution to the evolution and legitimacy of modern capitalism.
Capitalism can be a great machine for advancing individual prosperity and social progress. But like any machine, it needs to be soundly governed and faithfully attended. When it runs amok or ceases to have the steady hand of conscientious stewardship and good judgment at the controls, when it falls into the clutches of the greedy and self-obsessed and works to the primary benefit of a select few, it sets itself on a perilous course of almost certain mishap and painful misadventure.
Revelations this week demonstrate that there is not enough attention by the leaders of capitalism to its responsibilities, and to the ultimate destination of social progress for all that it must serve if it is to survive, which is why we have chosen these examples as the Outrage of the Week.
Last January it was the huge privacy breaches involving Winner stores and Talvest Mutual Funds. As we noted with considerable dismay at the time on these pages, Canada’s federal Privacy Commissioner waited weeks before going public with the information, leaving customers whose privacy had been compromised in the dark. Now, the problem involves Rogers Communications Inc., one of Canada’s largest telecommunications carriers. (more…)
