Do shareholders own the corporation?

Posted by Marc Hodak on June 20, 2012 under Executive compensation, Governance | Be the First to Comment

That is one of the main arguments being put forth in the continuing assault on corporations in the form of new proposals for binding Say on Pay.

The short answer is “No.”  Shareholders are not “owners” like Ma and Pa who own their store and have decision rights with respect to its management.  Shareholders have no legal say in the operations of their company unless one changes the law to give them that say.  Shareholders can’t set prices for the products their companies sell.  They can’t sign off on what the companies pay for supplies, including their supply of labor.  Who would give them such power, unless they wanted to destroy the corporation as we know it?  The question answers itself.

People making the argument that CEO pay is different from other kinds of costs invariably avoid the implication of that argument.  What they mean is that CEO pay “seems” too high (against all kinds of irrelevant standards that no one would really argue in an honest debate about the best interests of shareholders).  What they leave out is the possibility that paying a lesser amount can, at least in some situations, have an impact on the company far more costly than the reduction in pay they presumably desire.  In other words, the decisions by boards of what to pay their executives are strategically significant, with a profound impact on shareholder value.  The Say on Pay mob ignores the existence of that impact, and makes no allowance for even well-functioning boards doing a job that can’t possibly be done as well by outside “owners.”  (Please spare us the idiotic response of CEOs not possibly being worth what they are paid by their “owners.”  You try to buy a $5 million home for $1 million, and see the response you’d get from the owners.)

There is no doubt some fat in the pay of some executives.  But once you change the law to give shareholders an axe to wield at that kind of corporate fat, you can’t take it back just because there is a lot of blood when they try to use it.