Monday, April 26, 2010

You May Speak -- But Must I Listen?

According to the Los Angeles Times (3/9/10), the Supreme Court will rule next year on a case in which a religious protester who believes the U.S. is too tolerant of gays and lesbians attempted to crash the funeral of a straight soldier while holding protest signs -- and then followed up on his website with derogatory comments about the deceased. The soldier's father sued the Kansas preacher for invasion of privacy and intentional infliction of emotional distress.

The preacher based his defense on the claim of free speech. This defense was rejected by the jury, which awarded the plaintiff $10.9 million. After a judge reduced the award to $5 million, the U.S. 4th Circuit Court of Appeals vacated the verdict altogether, agreeing that the First Amendment carried the day.

The father appealed to the Supreme Court, arguing that he was a captive audience at his son's funeral (and the argument proceeds, presumably, that he could not therefore avoid being subjected to the preacher's "speech").

It's an interesting case, which raises a potent issue: does your right to speak imply that I must therefore listen? If I don't listen, does that risk diminishing the power of your right to speak? If I must listen, doesn't that violate my rights?

I have no idea how the Supreme Court will rule. But as an interesting note, not necessarily peripheral to the primary issue, Chief Justice John Roberts has gone on record as believing that a coerced presence (by virtue of tradition) of the Supreme Court justices at the annual State of the Union address by the President of the United States is inappropriate if the President uses the occasion to criticize the Court (see Ruth Marcus' column in the Inland Valley Daily Bulletin, 3/12/10). "Very troubling," he apparently said.

In other words, the President has the right to criticize, but members of the Court shouldn't have to listen.

If nobody has to listen, then how much is the right to free speech really worth? But if people must listen (in circumstances where they can't escape the environment in which the speech is taking place -- or where the speech is so ubiquitous (blanket TV ads?) that viewing it is practically unavoidable), isn't that a restriction on their liberty and freedom (loosely defined)?

OK, readers, how do you think the Supreme Court will rule...and why?

Sunday, April 18, 2010

Buy Stocks and Enter Coal Mines at Your Own Risk

I dislike repeating the same old themes. But when they slap you in the face, it's difficult to ignore.

By now, everyone who reads this blog is all too familiar with the fact that 25 miners lost their lives in an explosion at the Upper Big Branch location of the Massey Energy Company. They also know that the mine has a record of safety violations distinguished by frequency, potentially disastrous outcomes (e.g. lack of coal dust remediation and inadequate ventilation for build-up of methane gas), and the vigor with which the company appeals the citations.

The common wisdom seems to be that executive compensation should mirror performance. It is also the common wisdom that the CEO of any enterprise is ultimately responsible for what happens. Sure, nobody can know everything; operational details frequently escape the notice of top management. But the CEO sets the tone and establishes the philosophy that guides the work of all employees; indeed, that is one of the primary functions of the position. So the logical question to ask is: How much is the CEO of Massey Energy Company compensated for setting the tone and establishing the philosophy that "violations are unfortunately a normal part of the mining process"?

According to the New York Times (4/7/10), CEO Don L. Blankenship earned $11.2 million in 2008, about twice what he earned in 2006. Apparently he's been earning quite a large sum for many years, because he spent about $3 million in 2004 to influence the outcome of one political race in West Virginia -- a judicial office!

Here's another egregious example of CEO compensation -- an illustration of how badly the system works if you believe that executive pay should correspond to long-term financial stability and profit potential. According to the Los Angeles Times (4/16/10), Kerry Killinger, the CEO of Washington Mutual from 1990 to 2008, earned more than $100 million over a period of years, including $24 million in 2006 alone. What did he do to earn this reward? He bankrupted the institution, leaving the stockholders empty-handed when the company imploded in September of 2008.

The Los Angeles Times also reports (4/17/10) that Leslie Moonves, chief of CBS, earned $43.2 million in 2009. OK, I admit it -- CBS is not bankrupt, and to my knowledge no employees have been killed in industrial accidents. But if I were a shareholder (and I probably am, indirectly, through one or more mutual funds), I would be outraged. I know a lot of people who work hard and are highly motivated to produce excellent results for the employers -- for a lot less money.

Is there a lesson in all this? I'm not sure, but I think it might be: buy stocks and enter coal mines at your own risk.

Sunday, April 4, 2010

Stock Ownership: Theory vs. Reality

"Own a piece of the American Dream!" That, essentially, is the philosophical argument for including stocks in your portfolio. "Earn a good return on your investment!" That is the financial argument for including stocks in your portfolio.

While there may be some merit to both points, especially #2, I think the stockholder is being shortchanged in significant ways.

First, let's examine ownership. To own something normally implies a certain amount of control. If you own your car, you're the one who gets to drive it. But if you're an ordinary stockholder in an American corporation, your power to control -- or even influence -- anything about that company's behavior is essentially zero. (OK, that doesn't apply if you own a significant percentage of the shares; but very few people fall into that category.)

Do you want the company you "own" to lobby less -- or more? Do you want your company to operate in an environmentally sound manner? Establish operations (or not) in politically sensitive countries? Adopt employee-friendly personnel policies? Establish a reasonable level of executive compensation? Write a letter. Attend the annual shareholders' meeting. Good luck! Even large and organized groups of shareholders are typically stymied in such efforts.

All right,management by committee is a bad idea -- and totally unworkable if the committee has thousands of members. So we "owners" delegate our power to management. This would be prudent if management legitimately looked out for our best interests.

This brings us to point #2. A good case can be made that top level corporate managers look out mostly (gasp!) for themselves. Most of them even do it legally (i.e. without resorting to backdating of stock options).

Case in point: according to news reports, the CEO of WellPoint -- you know, that giant insurance company (with its subsidiary Anthem Blue Cross)) that doesn't exactly have a stellar reputation -- got a 51% pay hike last year. She earned $13.1 million, up from #8.7 million the previous year. Three other top executives at the company earned, cumulatively, $16.1 million. Goodbye hamburger, hello filet mignon!

Another case in point: according to the New York Times (4.1.10), the top 25 hedge fund managers earned, collectively, $25.3 billion in a single year. How did they do it? The guy who single-handedly earned $4 billion "bet on the country's survival" by surmising that the government would bail out the big banks.

Most people earn a simple living either by helping create a product or by providing a useful service. Hedge fund managers use other people's money to place bets, and it earns them a fortune. Hooray for capitalism!

I own a very small piece of the American Dream -- almost inevitably -- through mutual fund holdings in my retirement accounts. Philosophically, this gives me no grief at all. Being an executive myself, in a medium-sized non-profit agency, I'm familiar with compensation issues, and I don't begrudge hard-working people an acceptable salary. But I can't help wondering how much more I (and millions of other Americans) could be earning from our stock portfolios if the billions of dollars paid in executive compensation (based on rationale that is marginal at best) were distributed to the shareholders. That money must come from somewhere -- and in my view, it comes right out of the pockets of the "owners."