Delving into the compensation of Viacom executive Tom Freston, who received a $16 million bonus last year while Viacom’s stock fell 18%, [Wm. F. Buckley] writes:
“Mr. Freston is based in New York. But from time to time, business requires him to be in Los Angeles ? where, as it happens, he also has a home. On those nights does he take hotel rooms? Ample hotel rooms, understand. No. He just charges the company what he thinks is appropriate to pay him for using his own home. In 2004, this amounted to $43,000. He is evidently a man with simpler habits than the Los Angeles-based Mr. Moonves’s. He does the same kind of thing, he has his own home in New York, but what he charged the company for the nights he spent in New York was $105,000.”
And the money quote:
“That money was taken, directly, from company shareholders. But the loss, viewed on a larger scale, is a loss to the community of people who believe in the capitalist free-market system. Because extortions of that size tell us, really, that the market system is not working ? in respect of executive remuneration. What is going on is phony. It is shoddy, it is contemptible, and it is philosophically blasphemous.”
Bingo. What’s incredible is that the examples WFB cites are far from extraordinary. Because of my job, I’ve had a front row seat to these ongoing outrages for many years, and some of what I see is stunning. One very small company I follow announced a “stock buyback” of 2 million shares; the buyback took place, with the company buying 400,000 shares from the public and 1.6 million shares from the personal account of the CEO, who then put the proceeds of that sale into his own wallet. The same company also announced a “cash dividend” to be paid to all stockholders. The largest stockholder? You guessed it–the CEO, who owned about 50% of the stock and thus received the majority of the dividend straight from the company’s coffers. All this, despite a stock price that had declined about 95% from its high of the past few years.
It’s not just outrage about this abuse or that egregious action, it’s a systemic critique.
One of the essential facets of capitalism is trust. Capital markets, the counter-party system and free trade cannot exist in an ethical vacuum; there must be an underlying pillar of public trust for the system to function effectively and to be sustainable. Trust is hard-won and easily lost; it springs from an underlying atmosphere of ethics, common sense, and proportion regarding issues such as executive compensation and corporate conduct. Without trust, a nation’s economic system falters, its citizens become cynical and jaded, and its enemies gain fuel.
Capitalism, as has long been known, is too important to be left to the capitalists.
It speaks volumes that the most important enforcement activity has come from New York State Attorney General Eliot Spitzer, a Democrat. While he’s motivated partially by political ambition, Spitzer recognizes the threat to our financial system and is acting appropriately–in the absence of a vigorous SEC, NASD, and Justice Department, and to the chagrin of Wall Street’s laissez-faire pollyannas.
There are values external to the market that are essential for the market to function. And it’s not just M?nterfering who’s right to call attention to this fact.