WEBVTT - Steven Clifford Says You Don't Need a Compensation Consultant 0:00:02.279 --> 0:00:06.840 This is Masters in Business with Barry Ridholts on Boomberg Radio. 0:00:09.320 --> 0:00:13.080 This week on the podcast, I have Stephen Clifford. He 0:00:13.360 --> 0:00:16.959 is the author of the CEO pay Machine. If you 0:00:17.120 --> 0:00:23.560 have ever wondered why executives in public companies in America 0:00:24.239 --> 0:00:27.040 are paid more than just about anybody else and not 0:00:27.200 --> 0:00:31.200 a little more. Not twenty five times like it used 0:00:31.240 --> 0:00:35.720 to be in the before, or fifty times, which is 0:00:35.840 --> 0:00:38.760 more or less what it is in other countries, but 0:00:39.040 --> 0:00:43.599 five hundred times with the average worker gets Uh. This 0:00:43.680 --> 0:00:47.400 is going to be quite a fascinating conversation. Uh. This 0:00:47.520 --> 0:00:51.920 is not the usual screed from the far left of 0:00:51.960 --> 0:00:56.920 the political spectrum. Clifford is a former CEO. He's been 0:00:56.960 --> 0:01:02.760 a board member on numerous companies. This is somebody within 0:01:03.600 --> 0:01:09.960 the corporate corporate firmament who has just recognized how completely 0:01:10.120 --> 0:01:16.720 absurd executive compensation has become. Uh. He criticizes his fellow 0:01:16.760 --> 0:01:22.320 board members, He criticizes the so called independent outside advisors. 0:01:22.360 --> 0:01:27.240 He has lots of things to say about the consultants, 0:01:28.000 --> 0:01:31.960 calls them some pretty uh nasty names, says they're completely 0:01:32.040 --> 0:01:37.199 compromised and don't work for shareholders. And he discusses the 0:01:37.280 --> 0:01:42.960 impact of of just the gross excess pay not only 0:01:43.000 --> 0:01:47.920 on shareholders, which he says is unfair, but the impact 0:01:48.080 --> 0:01:52.800 on companies themselves. The more highly paid an executive is 0:01:52.920 --> 0:01:56.440 very often the worst the company has done, as well 0:01:56.480 --> 0:02:01.920 as the economy and society at large. Excessive executive compensation 0:02:02.000 --> 0:02:06.760 has ramifications. Listen, what's ten or twenty million dollars to 0:02:06.840 --> 0:02:09.680 a multibillion dollar company doesn't sound like a lot? Well, 0:02:09.720 --> 0:02:14.200 it turns out there are reverberations from that throughout the company, 0:02:14.240 --> 0:02:18.720 the economy, and society at large, and their substantial and significant. 0:02:18.800 --> 0:02:24.079 And not only that, but Clifford suggests that it has 0:02:24.120 --> 0:02:28.760 a very significant negative impact on future economic growth. So, 0:02:28.880 --> 0:02:33.440 with no further ado, here is my conversation with CEO 0:02:33.560 --> 0:02:39.040 and board member and now expert on executive compensation, Stephen Clifford. 0:02:43.280 --> 0:02:46.960 My special guest today is Stephen Clifford. He is the 0:02:47.000 --> 0:02:51.919 former CEO of King Broadcasting Company and National Mobile Television. 0:02:52.200 --> 0:02:55.359 He has served on the boards of directors of dozens 0:02:55.360 --> 0:02:59.880 of public and private corporations, and he was special depth 0:03:00.040 --> 0:03:02.680 the Controller of the City of New York during the 0:03:02.720 --> 0:03:07.839 city's fiscal crisis in the nineties seventies. He is the 0:03:07.919 --> 0:03:13.080 author of the ceo pay Machine, how it trashes America, 0:03:13.600 --> 0:03:16.840 and how to stop it. Stephen Clifford, Welcome to Bloomberg. 0:03:17.080 --> 0:03:21.440 Honored to be here. So you're a surprising person to 0:03:21.720 --> 0:03:26.720 write a book about executive compensation, to write a critical 0:03:26.720 --> 0:03:30.760 book about executive compensation. You were the CEO of multiple companies. 0:03:30.800 --> 0:03:36.920 You've sat on numerous boards, You've advised on executive compensation 0:03:37.600 --> 0:03:40.720 to the companies you worked with. How did this come about? 0:03:41.200 --> 0:03:44.880 It came about because I was working on boards. Uh, 0:03:44.920 --> 0:03:47.800 these are smaller companies, these aren't Fortune five hundred boards. 0:03:48.880 --> 0:03:52.920 But we were using the same system that the consultants 0:03:53.680 --> 0:03:57.840 UH put in it all companies. And as I was 0:03:58.120 --> 0:04:01.080 sitting there and serving on the comp Committee, I said 0:04:01.080 --> 0:04:04.640 to myself, Yeah, this system doesn't make any sense. This 0:04:04.680 --> 0:04:09.040 is a crazy system. And so too um. I said 0:04:09.080 --> 0:04:11.840 that to some members of the comp Committee and they said, oh, no, no, 0:04:11.960 --> 0:04:14.000 you don't understand. This is just how comp has done 0:04:14.040 --> 0:04:16.839 in this country. This is consultants have it all worked out, 0:04:16.839 --> 0:04:20.000 this is how it's done. Trust us. So I started, 0:04:20.040 --> 0:04:22.960 So I started doing some research on my own to 0:04:23.080 --> 0:04:26.680 bring my fellow comp Committee members around. And the more 0:04:26.720 --> 0:04:29.719 I got into it, the more I realized it wasn't 0:04:29.839 --> 0:04:35.560 just a stupid system that gave the CEO the wrong 0:04:35.680 --> 0:04:41.159 signals and uh lad the CEO to do wrong things, 0:04:41.279 --> 0:04:46.000 wrong incentives, perverse incentives. But it was also terrible for 0:04:46.040 --> 0:04:48.599 the for the country, it was bad for the economy. 0:04:49.480 --> 0:04:53.320 And so I started doing even more research. And everything 0:04:54.000 --> 0:04:57.040 I did told me this system is insane and it's 0:04:57.120 --> 0:04:59.800 hurting a lot of people. Let's let's put some flesh 0:04:59.839 --> 0:05:03.320 on of bones and and and this data comes from 0:05:03.360 --> 0:05:09.320 from your book. Since CEO pay in America has grown 0:05:09.920 --> 0:05:13.719 ninety times faster than the pay of the typical worker. 0:05:14.200 --> 0:05:18.680 Go back to eight the average large company chief executive 0:05:18.800 --> 0:05:23.360 was paid about twenty six times more than the salary 0:05:23.360 --> 0:05:27.640 of the average worker. Today it's somewhere between three hundred 0:05:27.680 --> 0:05:31.120 times and seven hundred times. How on earth did that 0:05:31.160 --> 0:05:36.240 come about? It came about because the pay consultants started 0:05:36.360 --> 0:05:44.120 in roughly the or so, and as they started to 0:05:44.160 --> 0:05:47.960 get clients, they realized that they had data on what 0:05:48.279 --> 0:05:52.680 other CEOs were paid. Now, until this time, CEO pay 0:05:52.760 --> 0:05:56.279 had been established really on the basis of internal equity. 0:05:56.279 --> 0:05:59.680 How the CEOs pay uh compared with everybody else in 0:05:59.720 --> 0:06:02.520 the cup Penny and that's why that ratio twenty five 0:06:02.600 --> 0:06:08.000 state stable from through the late late seventies. But they 0:06:08.040 --> 0:06:09.520 came in, they had this data and it was a 0:06:09.560 --> 0:06:12.279 great sales tool. So they said, now you got it 0:06:12.320 --> 0:06:16.039 all wrong. CEO pay should depend on what other CEOs make, 0:06:16.760 --> 0:06:20.039 and so U what we'll do is we'll establish a 0:06:20.160 --> 0:06:23.120 peer group and we'll tell you what other CEOs and 0:06:23.160 --> 0:06:25.800 these comparable companies making. Now let me interrupt you here 0:06:25.839 --> 0:06:30.600 and ask why should what other CEOs make be relevant 0:06:30.600 --> 0:06:33.720 to what we're gonna pay our CEO in our It 0:06:33.800 --> 0:06:37.400 should have no relevance whatsoever. So how is that sales 0:06:37.480 --> 0:06:41.480 job affected? Well, the sales job is effective because when 0:06:41.560 --> 0:06:43.960 you go through all the steps here, what it does 0:06:44.080 --> 0:06:47.479 is it greatly increases the CEOs pay. So of course 0:06:47.520 --> 0:06:49.920 they want to hire these consultants. CEOs want to hire 0:06:49.920 --> 0:06:53.360 the consultants. The boards kind of want to hire the 0:06:53.400 --> 0:06:56.240 consultants because the boards don't really they're happy when the 0:06:56.279 --> 0:06:59.880 CEO gets paid more. Uh why is that why the 0:07:00.000 --> 0:07:02.400 they're all golfing buddies or why do they really Well, 0:07:02.480 --> 0:07:06.080 let's start with every most boards. The majority of people 0:07:06.839 --> 0:07:10.840 on the board, our CEO s or x CEOs themselves Uh, 0:07:10.920 --> 0:07:13.160 so there's a little bit of tribalism. Is a little 0:07:13.200 --> 0:07:17.920 bit of tribalism. Uh. Secondly, they like to be able 0:07:17.920 --> 0:07:21.160 to hide behind the consultants and say, hey, we we 0:07:21.160 --> 0:07:23.560 we hired experts. You know, we had we had the 0:07:23.560 --> 0:07:26.480 best people in and they went through all the data 0:07:26.480 --> 0:07:31.200 and this is an objective measure. Now, the interesting thing 0:07:31.240 --> 0:07:34.360 about this is the way they get paid has nothing 0:07:34.400 --> 0:07:37.440 to do with the market. These are people that they 0:07:37.480 --> 0:07:40.240 love the free market of the market. For the labor 0:07:40.320 --> 0:07:43.480 market for chief executive exactly, there is no in fact, 0:07:43.520 --> 0:07:46.640 there isn't much of a labor market for chief executives. 0:07:47.160 --> 0:07:50.160 U When you look at chief executives. To be an 0:07:50.160 --> 0:07:53.640 effective chief executive, you have to know a tremendous amount 0:07:53.640 --> 0:07:56.520 about a single company. You have to know it's finances, 0:07:56.560 --> 0:08:02.160 it's marketing, it's competition, it's personnel, etcetera, etcetera, etcetera. Most 0:08:02.160 --> 0:08:05.560 of that knowledge is not worth much outside that company, right, 0:08:06.000 --> 0:08:14.200 so you see you companies rarely rarely go outside higher 0:08:14.240 --> 0:08:20.920 Another CEO of fortuneos were internal promotions. Really that's amazing. 0:08:21.200 --> 0:08:24.640 And so in other words, the skill set that an 0:08:24.640 --> 0:08:28.840 executive has probably isn't all that transferable to a different 0:08:28.880 --> 0:08:31.560 company unless it's in the exact same and that they 0:08:31.600 --> 0:08:35.040 are not Lebron James. Lebron James can take his skills 0:08:35.040 --> 0:08:39.000 to any NBA tail and improve it. Uh CEOs camp 0:08:39.440 --> 0:08:44.240 and you know there're only two of the fortune CEOs 0:08:45.280 --> 0:08:49.959 were previously CEOs of a public company. That's interesting. CEO 0:08:50.080 --> 0:08:54.000 is jumping between one large company and another happens about 0:08:54.120 --> 0:08:58.160 once a year, and when they do, they usually failed. 0:08:58.160 --> 0:09:01.240 The failure rate is quite high. You know, your reference 0:09:01.320 --> 0:09:06.000 to external equity reminds me very much of what took 0:09:06.040 --> 0:09:12.760 place during the real estate boom. Everybody the appraisers used parables. 0:09:12.800 --> 0:09:15.600 So what starts to happen in a rising market? It 0:09:15.679 --> 0:09:20.560 becomes the self fulfilling spiral and everything goes up because 0:09:20.559 --> 0:09:23.160 other houses are going up. Is the same thing taking place. 0:09:23.960 --> 0:09:27.679 That's exactly right, except it's a built inspiral. It's not 0:09:27.800 --> 0:09:31.200 just that it starts. What happens is you start with 0:09:31.240 --> 0:09:35.240 your peer group. Okay, I told you they assemble the companies. Well, surprise, surprise, 0:09:36.160 --> 0:09:40.160 companies choose peer groups that have highly paid CEOs. It's 0:09:40.160 --> 0:09:43.200 not an objective data say, it's not an objective data set. 0:09:43.600 --> 0:09:47.000 The book is filled with some fascinating data points. This 0:09:47.080 --> 0:09:50.240 one really stood out to me. Between two thousand and 0:09:50.280 --> 0:09:54.680 eleven and two thousand and fourteen, there were four CEOs 0:09:54.720 --> 0:09:57.760 who earned more than a hundred million dollars a year. 0:09:58.520 --> 0:10:03.200 These companies could have paid d CEOs less and gotten 0:10:03.240 --> 0:10:06.480 the exact same performance from them. How do we end 0:10:06.559 --> 0:10:09.640 up in a situation where people are making hundreds of 0:10:09.679 --> 0:10:14.480 millions of dollars on the backs of shareholds. Well, you 0:10:14.559 --> 0:10:18.680 have what I have termed the pay machine. And each 0:10:18.760 --> 0:10:22.040 year the companies crank up this machine. And as I 0:10:22.320 --> 0:10:25.520 as I mentioned, it starts with a peer group of 0:10:24.880 --> 0:10:29.840 of of highly selected other CEOs making a lot of money. 0:10:29.960 --> 0:10:34.600 Then the company quote benchmarks their CEO. So where does 0:10:34.640 --> 0:10:38.520 your CEO rank? Well, we're a good company, So everybody 0:10:38.720 --> 0:10:41.840 benchmarks their CEO at the seventy five percent diial of 0:10:41.880 --> 0:10:48.240 this group just random Well, no, we're better than those companies, 0:10:48.360 --> 0:10:51.760 so our CEO should be make what's the basis of 0:10:51.800 --> 0:10:55.280 assuming you're in the top quartile of what I assume 0:10:55.400 --> 0:10:58.760 is a fairly competitive market, simply corporate pride. There is 0:10:58.800 --> 0:11:03.600 no simply corporate pride. We're good, okay, there's there's never 0:11:03.720 --> 0:11:07.640 any performance They don't have to perform at seventy percentile 0:11:07.720 --> 0:11:10.760 at all. It's just corporate pride. One would think there 0:11:10.760 --> 0:11:14.400 would be some correlation between, Hey, if we're declaring ourselves 0:11:14.440 --> 0:11:17.240 in top quartile, then we should be top quartile and 0:11:17.280 --> 0:11:21.120 profit growth top quartile and revenue gains top portoial and 0:11:21.240 --> 0:11:24.760 market share gains. Yet those seems things never seem to 0:11:24.760 --> 0:11:26.640 come up. They don't come up at all. They don't 0:11:26.640 --> 0:11:29.360 come up at all. It's just corporate pride. So so 0:11:29.520 --> 0:11:34.360 this to me looks like a wealth transference scheme from shareholders, 0:11:34.880 --> 0:11:40.079 two managers and insiders. It I wouldn't I wouldn't use 0:11:40.080 --> 0:11:44.479 the word scheme because that's as if it were deliberately 0:11:45.200 --> 0:11:49.760 and conspiratorially designed. What happened is the consultants came in 0:11:49.920 --> 0:11:53.520 and step by step this machine was built and different 0:11:53.600 --> 0:11:57.400 different things we're ad and it's a very complicated system. Now, 0:11:57.760 --> 0:12:00.440 on the face of it, most of these apps in 0:12:00.480 --> 0:12:04.400 here by themselves seem to make sense when you put 0:12:04.440 --> 0:12:08.079 them all together. They guarantee with mathematical certainty that the 0:12:08.200 --> 0:12:12.920 CEOs pay will escalate and I regardless of performance, regardless 0:12:12.920 --> 0:12:16.560 of performance. So I to me, this is more something 0:12:16.600 --> 0:12:22.400 that evolved, but it evolved with two rules. One, the 0:12:22.480 --> 0:12:26.040 individual part of the machine had to have a certain 0:12:26.120 --> 0:12:29.840 surface logic, and to it had to increase the CEOs pay. 0:12:29.960 --> 0:12:33.679 And so each of those were selected for an evolution. 0:12:33.760 --> 0:12:37.120 So now you have a machine that guarantees that CEO 0:12:37.200 --> 0:12:42.120 pay will rise eight nine times faster than the average 0:12:42.120 --> 0:12:46.320 workers pay. That's amazing. I really like this quote from 0:12:46.360 --> 0:12:50.880 your book about stock price and profits quote, the price 0:12:50.960 --> 0:12:54.400 of your stock will tell you whether to maximize today's 0:12:54.520 --> 0:12:59.880 or tomorrow's profits. Explain that, well, that comes from Jensen, 0:13:00.200 --> 0:13:04.120 who you know, is that the father of the shareholder 0:13:04.200 --> 0:13:07.640 value school and the terrible idea which has been pretty 0:13:07.679 --> 0:13:12.079 thoroughly debunked over recent years. It has been debunked, but 0:13:12.640 --> 0:13:15.920 this is still the basis of CEO pay to really 0:13:16.000 --> 0:13:17.480 so so for those of you who may not be 0:13:17.559 --> 0:13:20.520 familiar with share how holder value, it's an idea that 0:13:20.640 --> 0:13:24.000 really got its biggest push from Milton Friedman and the 0:13:24.080 --> 0:13:29.160 Chicago School of Economics, which essentially says that instead of 0:13:29.160 --> 0:13:36.080 worrying about various constituencies clients, suppliers, employees, etcetera, um a 0:13:36.160 --> 0:13:41.280 corporation sole job is to maximize profit. Maximized shareholder value. 0:13:41.720 --> 0:13:46.280 Fair fair statement. Absolutely absolutely, and I think and that 0:13:46.280 --> 0:13:49.720 that school said, Okay, stock price is the only thing 0:13:49.800 --> 0:13:54.000 that counts, So every decision you make should be made 0:13:54.200 --> 0:13:58.240 by what will maximize the stock price. So you know 0:13:58.360 --> 0:14:02.079 you may have to trade today its profits for tomorrow's profits. Well, 0:14:02.120 --> 0:14:04.520 how much should you do that? Well, look to the 0:14:04.520 --> 0:14:06.880 stock of your look to the price of your stock. 0:14:06.960 --> 0:14:09.280 That will tell you how to do it. So so 0:14:10.200 --> 0:14:14.559 the idea is not necessarily thinking long term, but it's 0:14:14.640 --> 0:14:19.040 whatever you can do to raise profits, raise stock prices today. Well, 0:14:19.080 --> 0:14:23.640 the the theory behind that is that the market looks 0:14:23.680 --> 0:14:27.880 long term. So your your your stock price today. And 0:14:27.920 --> 0:14:31.400 in the Chicago school, everything is completely rational. Every actor 0:14:31.480 --> 0:14:35.640 is completely rational. So your stock price today is the 0:14:35.920 --> 0:14:41.880 discounted value of dividends plus the stock price ten years out, 0:14:41.920 --> 0:14:45.200 et cetera. And it's all perfect. And so the market 0:14:45.240 --> 0:14:48.640 looks long term. So that's why you can That's why 0:14:48.760 --> 0:14:51.280 you don't have to really look long term, because the 0:14:51.320 --> 0:14:54.120 market will do that. For that sounds so backwards. The 0:14:54.160 --> 0:14:59.320 way I had always learned what public companies should do 0:15:00.120 --> 0:15:03.280 is focus on long term health of the company and 0:15:03.320 --> 0:15:06.080 the stock price to take care of itself. That's right. 0:15:06.160 --> 0:15:09.960 This stood it on its head. This said that today's 0:15:10.000 --> 0:15:12.600 stock price tells you how good you are long term, 0:15:12.600 --> 0:15:16.200 and you could see why executives who are compensated with 0:15:16.280 --> 0:15:21.320 stock options. I love that concept. Well, the worst the 0:15:21.360 --> 0:15:28.000 worst thing about this is what how it focuses and 0:15:28.120 --> 0:15:34.720 misallocates company investment. Give us an example in between in 0:15:34.760 --> 0:15:40.240 the last ten years, S and P five have spent 0:15:40.440 --> 0:15:44.120 three point seven trillion dollars buying back their own stock. 0:15:44.680 --> 0:15:48.680 Now they buy back their own stock, fire it, retire, 0:15:48.840 --> 0:15:52.640 but they buy it back to keep the price high. Uh, 0:15:52.760 --> 0:15:55.760 they're not buying it back because it's undervalued. They're buying 0:15:55.760 --> 0:15:58.120 it it's already high. They're buying it back to keep 0:15:58.200 --> 0:16:01.160 the price high. Uh. What do they spend on R 0:16:01.240 --> 0:16:04.000 and D over that same period? Well, I can tell 0:16:04.040 --> 0:16:07.600 you they cut R and D by over that same period. 0:16:07.880 --> 0:16:11.360 They cut plant and equipment by over that same period. 0:16:11.520 --> 0:16:14.880 And I'm going to use something stealing from your book 0:16:15.600 --> 0:16:17.760 because I thought it was so stunning when I talk 0:16:17.800 --> 0:16:21.480 about three point seven trillion, trillion is a hard number 0:16:21.480 --> 0:16:24.640 to get your head around. Reading your book, you had 0:16:24.680 --> 0:16:30.920 an example that a trillion seconds is thirty two thousand 0:16:31.080 --> 0:16:35.920 years and that to me, that that tells you how 0:16:36.000 --> 0:16:38.840 much a trillion is and you've got three point seven 0:16:38.920 --> 0:16:43.360 trillion dollars that could be It could have been invested 0:16:43.600 --> 0:16:50.800 in product development, R and D, new technology, UH, job training, 0:16:50.920 --> 0:16:54.360 all these things for for long term health. And instead 0:16:54.360 --> 0:16:57.200 of doing that, they bought back their own stock. I mean, 0:16:57.320 --> 0:17:00.120 this is eating This is America's eating the seed or 0:17:00.120 --> 0:17:03.080 an American industry is eating its own seed corn. Let's 0:17:03.120 --> 0:17:07.720 talk a little bit about how this impacts uh inequality 0:17:07.920 --> 0:17:13.760 in the country, not just for employees, but across across 0:17:13.840 --> 0:17:16.560 the whole board of society. And I want to start 0:17:16.640 --> 0:17:19.880 with some again more data from the book you reference 0:17:19.960 --> 0:17:25.919 that this is a fairly uniquely American phenomena. In Japan today, 0:17:26.119 --> 0:17:30.760 the average ratio between CEO pay and worker pay is 0:17:30.840 --> 0:17:34.200 sixteen to one. It's a little higher. In Denmark, it's 0:17:34.240 --> 0:17:37.000 forty eight to one. It's about eighty five to one 0:17:37.000 --> 0:17:39.200 in the UK. How is it more than five hundred 0:17:39.280 --> 0:17:42.720 to one in the US. It's so incongruous with the 0:17:42.840 --> 0:17:46.520 less rest of the corporate world. Well, there are two explanations. 0:17:46.720 --> 0:17:52.520 One is that US CEOs are thirty times more valuable 0:17:52.960 --> 0:17:56.800 and productive than Japanese CEOs. That would be one. That's 0:17:56.840 --> 0:18:00.200 a little bit of a stretch. Another explanation is something's 0:18:00.200 --> 0:18:03.520 gone terribly wrong here. That seems more likely. Let's look 0:18:03.560 --> 0:18:08.080 at how this impacts, uh, the overall economy. You actually 0:18:08.240 --> 0:18:11.720 say that this isn't just a function of within the 0:18:11.840 --> 0:18:18.320 corporation there's pain equality. You suggest this effects work of morale. 0:18:18.440 --> 0:18:22.160 You suggest this effects research and development, This affects how 0:18:22.320 --> 0:18:27.480 we actually build a society. Expound on that. Well, it 0:18:27.640 --> 0:18:30.639 clearly hurts the companies. I mean we've talked, we have 0:18:30.760 --> 0:18:32.800 talked about how they've cut R and D and cut 0:18:32.880 --> 0:18:37.360 investment to keep their socker price high. UH A bigger guy, 0:18:37.400 --> 0:18:39.920 and they of course waste tens of million dollars on 0:18:40.040 --> 0:18:42.399 the CEO pay. But that's how the bush back is, Oh, 0:18:42.480 --> 0:18:45.280 that's company does billions of dollars. Who cares? I mean, 0:18:45.400 --> 0:18:47.440 so they so they waste that. That's a small part 0:18:47.520 --> 0:18:49.800 of the cost. A bigger part of the cost is 0:18:49.880 --> 0:18:53.680 the effect on company morale. I mean, when CEO is 0:18:53.720 --> 0:18:56.520 making five times what you make and he comes out 0:18:56.560 --> 0:18:59.160 and he says, there's no I in team, and we're 0:18:59.240 --> 0:19:01.800 all in this to other, it's pretty tough for you 0:19:01.920 --> 0:19:04.600 to swallow. And I mean this has been proven by 0:19:05.160 --> 0:19:09.360 study after study that the more the gap, the worse simmerale. 0:19:09.960 --> 0:19:14.040 How significant is the correlation between companies that spend billions 0:19:14.080 --> 0:19:17.359 on share buy backs and the reduction of things like 0:19:17.680 --> 0:19:21.120 R and D and plant investment, etcetera. Well, it's it's 0:19:21.119 --> 0:19:23.240 a one to one correlation. The more you spend, the 0:19:23.359 --> 0:19:26.200 more you spend on share buy backs, the less you 0:19:26.320 --> 0:19:29.320 have to put into R and D or put into 0:19:30.000 --> 0:19:32.600 RhE finite pie and and you've got you got so 0:19:32.720 --> 0:19:35.880 much money. And the more they're using fift of their 0:19:35.920 --> 0:19:38.640 net income is used to buy back chairs. The share 0:19:38.720 --> 0:19:41.480 buy backs are twice what they pay on dividends. The 0:19:41.600 --> 0:19:43.240 data point I thought you were going to go to 0:19:43.400 --> 0:19:46.520 from the book was that when you look at a 0:19:46.600 --> 0:19:48.920 company like Dell, I don't mean the E M C 0:19:49.160 --> 0:19:52.879 version of Dell today, but Dell, the direct built to 0:19:53.080 --> 0:19:57.960 order PC maker, over the course of that company's history, 0:19:58.560 --> 0:20:02.040 they spent more on stock buybacks than they ever made 0:20:02.160 --> 0:20:06.000 in profits the entire company's history, which, if you think 0:20:06.040 --> 0:20:11.200 about it should be impossible. It should be impossible, and 0:20:11.600 --> 0:20:14.320 somebody should have woken up and sure, did that stalk 0:20:14.480 --> 0:20:18.359 very well? It eventually had some real difficulties to it, 0:20:18.440 --> 0:20:21.760 and it wasn't necessarily apple. But let's let's bring this 0:20:21.920 --> 0:20:25.960 back um to income inequality. There's a data point I 0:20:26.119 --> 0:20:30.960 have to reference again. Since c. Ninety eight CEO pay 0:20:31.160 --> 0:20:35.800 Rose tan X, the median salary in America rose from 0:20:35.920 --> 0:20:39.600 forty eight thousand to fifty three thousand over the same 0:20:40.040 --> 0:20:44.080 time period. This is obviously inflation adjusted. That's a less 0:20:44.160 --> 0:20:47.000 than half a percent a year. What is this due 0:20:47.040 --> 0:20:51.800 to uh an economy? Well, it is very bad. This level, 0:20:51.960 --> 0:20:55.040 the level of inequality we income inequality we have in 0:20:55.119 --> 0:20:58.560 this country is very bad for economic growth. Why is that? Well, 0:20:58.680 --> 0:21:01.080 to start with, have any percent of our g d 0:21:01.240 --> 0:21:04.879 P is consumer spending? When the consumers don't get much money, 0:21:05.240 --> 0:21:07.800 it's hard to spend it. It's the thing I have 0:21:07.880 --> 0:21:11.080 to pay my workers exactly. And now the money when 0:21:11.160 --> 0:21:13.520 the money goes to the one tenth of one percent, 0:21:13.920 --> 0:21:16.879 as it has, let me stop here and say that 0:21:17.680 --> 0:21:22.879 about since nineteen of all the gains and growth of 0:21:22.960 --> 0:21:27.600 the economy have gone to the one tenth of one percent. 0:21:28.520 --> 0:21:31.520 Now that's a hundred and twenty four thousand households. So 0:21:31.640 --> 0:21:35.680 the reason the average American hasn't gotten a raise. All 0:21:35.720 --> 0:21:38.600 the money has gone to a very small percentage of people. 0:21:38.800 --> 0:21:41.040 They don't spend that. I mean, how many yachts can 0:21:41.080 --> 0:21:43.560 you buy? You know, after you have your fourth, you're 0:21:43.600 --> 0:21:45.840 not going to buy your pretty much done right, the 0:21:45.920 --> 0:21:50.159 power boat, a sailboat. Number one, you don't get the 0:21:50.240 --> 0:21:55.879 consumer spending Number two. Inequality imposes uh, a lot of 0:21:56.000 --> 0:22:00.800 hidden costs us healthcare as you're in come goes down 0:22:00.880 --> 0:22:04.800 to your ability to pay for your healthcare goes down. Uh. 0:22:05.119 --> 0:22:08.320 It imposed. It makes the country less healthy overall. Is 0:22:08.359 --> 0:22:13.000 that what you're implying it does? Incarceration rises, crime rises. 0:22:13.680 --> 0:22:17.679 We've seen crime falling over the same period when CEO, 0:22:17.880 --> 0:22:20.680 although we's even as crime is fallen, we've seen incarceration 0:22:20.720 --> 0:22:23.680 continue to rise. I could go to a study, but 0:22:23.760 --> 0:22:26.720 the company it's I think it's too complex to explain 0:22:27.080 --> 0:22:29.800 the study that says, well, crime would have fallen a 0:22:29.920 --> 0:22:32.240 lot more if there has been less in equal that 0:22:32.280 --> 0:22:35.280 makes sense. Let's talk a little bit about the impact 0:22:35.520 --> 0:22:40.680 of corporate board members and what they have done to 0:22:40.840 --> 0:22:44.800 pretty much rubber stamp this again. Another data point from 0:22:44.840 --> 0:22:48.040 the book that that I find is so fantastic. Board 0:22:48.080 --> 0:22:52.119 members at the company qual Calm quote from two thousand 0:22:52.200 --> 0:22:56.080 and nine through two thousand and fourteen authorized the repurchase 0:22:56.240 --> 0:22:59.720 of two hundred and thirty eight million shares at the 0:23:00.119 --> 0:23:05.159 cost of thirteen point six billion dollars, and at the 0:23:05.240 --> 0:23:11.680 same time, total shares outstanding increased two How on earth 0:23:11.760 --> 0:23:14.240 can that happen? Well, they were printing new shares to 0:23:14.320 --> 0:23:17.600 give to their executives, but two hundred and thirty six 0:23:17.720 --> 0:23:21.000 million shares was not enough to reduce the share count. 0:23:21.760 --> 0:23:25.880 The facts speak for themselves. That's astonishing. So another words, 0:23:26.480 --> 0:23:30.520 based on these prices, they gave away fourteen billion dollars 0:23:30.600 --> 0:23:34.560 and options to their That that is what the mathematics 0:23:34.640 --> 0:23:37.959 would say. So what is a board member who has 0:23:38.040 --> 0:23:42.320 a fiduciary obligation to a company? How do they process 0:23:42.920 --> 0:23:45.880 that information? What leads them to say yes, I think 0:23:45.960 --> 0:23:48.600 that's a good idea. What leads them to say that? 0:23:48.800 --> 0:23:53.000 As they say, first do they get stock of Well, 0:23:53.119 --> 0:23:56.760 they get stock depends on the company, but they tend 0:23:56.800 --> 0:24:00.159 to get stock. They get a fee overall and get 0:24:00.200 --> 0:24:02.240 a gig like that. That sounds like it's a great 0:24:02.280 --> 0:24:07.440 gig overall at good companies. That science of QualComp you'll 0:24:07.440 --> 0:24:10.359 be getting three or four thousand dollars a year in 0:24:10.480 --> 0:24:17.120 stock and cash for attending six meetings. Very nice side gig. 0:24:17.560 --> 0:24:21.400 And the way you justify it as you say, well, 0:24:21.680 --> 0:24:24.320 I'm not on the compensation committee, but these are my 0:24:24.720 --> 0:24:27.000 fellow members, and they've studied it and they have the 0:24:27.040 --> 0:24:33.600 good consultants, and so whatever the compensation committee proposes almost 0:24:33.800 --> 0:24:37.400 gets rubber stamped because you don't want to question your 0:24:37.880 --> 0:24:40.199 board members. And by the way, if you bring up 0:24:40.200 --> 0:24:44.280 a lot of questions about CEO pay and the other 0:24:44.400 --> 0:24:47.119 board members, uh, you're not gonna be asked on too 0:24:47.200 --> 0:24:49.320 many other boards. And as we've said, they're they're a 0:24:49.400 --> 0:24:54.320 nice gig. Uh. And then you can justify it by saying, well, look, 0:24:56.200 --> 0:24:59.040 it's what the real problem is. What all these other 0:24:59.119 --> 0:25:02.480 companies are doing. They're paying their CEO so much that 0:25:02.720 --> 0:25:06.600 we have to follow. We've got no option. We're forced 0:25:06.640 --> 0:25:09.440 to follow them. It's not our fault because if we don't, 0:25:09.960 --> 0:25:12.200 they're just gonna hold their breath till they turn blue 0:25:12.240 --> 0:25:15.280 and not come to work. Well, the the what they 0:25:15.320 --> 0:25:17.280 say is, oh, if we don't pay them, they'll go 0:25:17.480 --> 0:25:20.360 someplace else, which is nonsense. They won't go someplace else. 0:25:20.400 --> 0:25:23.720 They got no place to go that that that's astonishing. 0:25:24.240 --> 0:25:27.320 So I'm curious what sort of pushback have you gotten 0:25:28.000 --> 0:25:32.240 on the book from your fellow board members or or executives. 0:25:32.320 --> 0:25:36.120 I have gotten zero from uh from them, because why 0:25:36.240 --> 0:25:41.280 would they want to make noise about this? Uh? They 0:25:41.440 --> 0:25:47.800 have no effective They just do it. They just ignore it, 0:25:48.160 --> 0:25:51.159 go away. Here's a quote that I love. This is 0:25:51.280 --> 0:25:54.240 this is terrific. A good corporate board is like a 0:25:54.400 --> 0:26:00.640 club where you work on interesting problems with intelligent, congenial companions. Travel, 0:26:00.920 --> 0:26:04.680 good restaurants, amenities are all provided free of charge. Best 0:26:04.760 --> 0:26:08.840 of all, instead of paying club dues, the club pays you. 0:26:09.520 --> 0:26:11.720 So that sounds like a sweet gig. It is a 0:26:11.800 --> 0:26:16.119 sweet gig. When I was when I was coming close 0:26:16.200 --> 0:26:19.000 to retirement, I've decided that there was a very good 0:26:19.080 --> 0:26:21.080 gig and lined up a lot of board spots. And 0:26:21.160 --> 0:26:23.920 it's been I've I've enjoyed it. It's been wonderful. I've 0:26:23.920 --> 0:26:27.359 been well paid. Uh I, And yet you're biting the 0:26:27.440 --> 0:26:30.240 hand that feeds you. I believe that corporate boards have 0:26:30.359 --> 0:26:34.920