The Association of U S West Retirees



The more they gain, execs lose public trust
By Charles M Denny
Minneapolis Star Tribune
Monday, June 4, 2007

A continuing series of articles in the business section of the Star Tribune highlights the annual pay packages of our local corporate executives.  Compensation, including gains on stock options, of $10 million or more is not uncommon.

At the same time, the paper has reported on numerous layoffs at local companies (including at the Star Tribune itself), and such events as the recent termination of higher-paid employees at Circuit City who were replaced by those willing to accept lower pay.

The issues are not local; they are national in scope.  I believe that if these practices continue unchecked, the electorate's support of the political/economic concept of democratic capitalism will be severely tested.

Our nation's great wealth was the product of free-market capitalism operating within, and ultimately governed by, the political system of democracy.  America's social equilibrium has been achieved through an unwritten contract that tolerates the accumulation of great wealth by some as long as those at the bottom see a steady improvement in their incomes.

According to a recent report by the Center for Labor Market Studies at Northeastern University, productivity of workers in the nonfarm sector of our economy rose 18 percent between 2000 and 2006.  Yet their inflation-adjusted weekly wages rose only 1 percent.  Our social contract is dangerously close to being broken.

There is a growing and worrisome societal issue of great income disparities in our nation.  Executive incomes have been rapidly rising while lower-paid workers have experience little, if any, gain.  According to the Economic Policy Institute, between 2000 and 2005 median CEO pay rose 84 percent to an inflation-adjusted $6.05 million.  During the same period, median worker income fell 0.3 percent to $38,223.

Another metric, the ratio of average CEO compensation to average worker pay, rose from a multiple of 42 in 1980 to 411 in 2005.

These trends have added to a startling concentration of our national income and financial wealth:  In 2005, the top 1 percent of U.S. income earners received more than 20 percent of all income, and the wealthiest 1 percent of all U.S. citizens controlled 40 percent of the nation's financial wealth.

The Gini index, named after its author, an early-20th-century Italian statistician, is used to measure the distribution of income within a country.  It is a number between 0 and 1.  Perfect income equality is 0 and perfect income inequality is 1 (i.e., one person has all the income, while everyone else has zero.)  The United States has the second-highest Gini index in the industrialized world, surpassed only by Switzerland.

For comparison purposes with its peers, the U.S. Gini is 0.801, the United Kingdom's is 0.697, Germany's is 0.671, France's is 0.565 and Japan's is 0.547.

Public opinion is turning against business leaders.  Poll after poll reflects growing public distrust in executives.  The Harris Poll showed a drop in public confidence in major business leaders from 28 percent approval in 2000 to 13 percent today.  Only organized labor, Congress and lawyers received lower rankings.

(As a former CEO, I feel the sting of public disdain.  When my grandchildren ask me what I did at work, I tell them I was the company librarian.)

Being a CEO is not about making money.  It is about building a strong, high-quality, industry-leading, world-class company.  It is about using one's position of leadership to set positive examples for those who are asked to follow our lead.  It is about using our precious position of power for the public good, of creating a society that we are proud to pass to our children, and to their children.

In the final analysis, company directors and CEOs must determine the role of their corporations in our society.  As I believe the most important factor in the long-term success of any business is the health of the society in which it works and lives, I would suggest the following roles for business:

  The creation of wealth -- national, not personal.  Wealthy nations afford their citizens higher standards of living and greater choices in their lives.

  The fair distribution of the fruits of the enterprise to its stakeholders (employees, management, shareholders and the communities from which a business draws its workforce or economic sustenance).

  An active role in the support of those institutions -- social, political and economic -- that promote the health of a just society.

The public's loss of confidence in the business community and the widening gap between the wealthy and the average American is likely to beget long-term cultural and political consequences injurious not only to those few who have most benefited from our economic system but to all Americans who had placed their trust in our economic way of life.

Caveat actor!

Charles M. Denny of Minneapolis is a former chairman and CEO of ADC Telecommunications Inc.