Why Fat Cats Are Bad for Business: Abnormal Greed Used to Be Thought a Personality Defect; Only Recently Has It Been Touted as the Wellspring of Capitalism. Are We Going Back to the Old Attitudes?
Kay, John, New Statesman (1996)
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 Wail 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 [pounds sterling]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 the y 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 fated 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 nor 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 some one 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. …