Corporate Priorities in the Post-Enron Era
by Jeremy Koulish
August 15, 2007
Ford Motor Company is struggling through a period of great turmoil. Due to changing market dynamics and increased global competition, Ford suffered losses of $12.6 billion last year, the largest of any Fortune 500 company.
To rehabilitate its bottom line, Ford hired Alan Mulally as its new President & CEO starting September 1st, 2006. But given its financial woes, the company rewarded the incoming Chief Executive much too lavishly.
In addition to a cash hiring bonus of $7.5 million, Mr. Mulally received $11 million as restitution for forfeited stock options at Boeing. He was also awarded a $666,667 salary and stock and option grants of an additional $19.6 million. For the cherry on top, Mr. Mulally has taken advantage of perks like personal use of the company jet, relocation reimbursements, temporary housing, free tax preparation and even a 401(k) contribution. His total earnings for four months of leadership came to $39,128,1001.
Such generous perks undermine the reason for Mr. Mulally’s hiring. He was brought in to oversee a cost-cutting strategy that involves layoffs and decreased production. Originally employing 99,500 people in North America in December 2005, Ford plans to lay off around 40-45% of those workers and close nine factories by the end of next year.2 Towns such as Maumee, Ohio will be left economically devastated by the departure of their largest employer3; thus, Mr. Mulally’s “success” has hastened the erosion of communities his company has helped to thrive for the past century.
Now how does it look when employee layoffs follow Mr Mulally’s hiring perks? While it is tempting to scapegoat Ford’s Board of Directors, they are legally obligated to maximize shareholder value at the expense of all other priorities, and the ethical problem of mass layoffs must not stand in the way of this goal. And a massive payday for their incoming CEO is the rule rather than the exception. In the company’s own words, “these terms were necessary, competitive, and appropriate to attract an executive of Mr. Mulally’s talent and experience.”4 Thus, is more usefully seen as an instructive example of how much of
Sadly, instances of such unethical behavior are all too easy to find in this post-Enron era. Granted, tightened SEC regulation has limited the market instability caused by the accounting magic of Enron and others.5 Yet today, examples of other forms of malfeasance seem endless: using government connections to secure lucrative no-bid contracts,6 forcing call center workers in India to fake Midwestern accents7, handing out Medicaid applications to new employees8, paying an incoming CEO $39 million while laying off 40,000 workers. One cannot help but feel that the concept of getting ahead by playing by the rules has disappeared from mainstream corporate ideology.
With selfishness running rampant, tax structures have followed suit. In 1957, at the midpoint of the Eisenhower administration, Americans earning the equivalent of $5.2 million paid 51.6% of their incomes in federal income tax. Today, those making a similar amount pay a paltry 26.7%.9 Factoring in government policies that have steadily eroded the social safety net, it is clear why the richest 1% of Americans have accumulated six times more wealth since 1983 than the poorest 90%.10
But does inequality really matter? After all, many pro-market cheerleaders would have us believe that placing checks and balances on the financial activities of
Thankfully, some viable solutions are already on the table. As a first step, the US House recently passed “Say on Pay” legislation that grants shareholders a nonbinding vote on executive compensation, and other introduced legislation would restrict the tax deductibility of a CEO salary to 25 times the earnings of that company’s lowest-paid worker. Various proposals have suggested restructuring the corporate tax framework to reward socially responsible policies rather than the use of loopholes.
Then there is the ultimate solution: raise taxes on the extremely wealthy and treat capital gains as income. Not only would this fundamental reform restore the federal budget to a solvent level and open up funds for regulatory and social welfare programs, it would help restore the trust and sense of shared responsibility that characterize any truly healthy society.
If this were the case, perhaps Ford would have chosen to take that $39 million and hire back some 1,324 of its laid-off employees.13
Sources
1 Obtained from an Associated Press study of executive pay for leading US companies, released June 11, 2007
2 Ford’s 2006 Annual Report, page 13
3 Julie M. McKinnon, “Small Towns in Area Feel Sting of Job Losses”,
4 Ford’s Definitive Proxy Statement, Schedule 14A, released 4/5/07. p.42
5 Greg Farrell, “Sarbanes-Oxley Law Has Been a Pretty Clean Sweep”,
6 Michael Dobbs, “Halliburton’s Deals Greater than Thought”, Washington Post, August 28th, 2003
7 From the author’s own experience
8 Susan Chambers Memo to the Wal-Mart Board of Directors, New York Times, 10/26/05
9 Sam Pizzigati, “What If? Imagining a More Equal
10 Edward N. Wolff, Recent Trends in Households Wealth in the United States, The Levy Economics Institute of Bard College, Working Paper No. 502, June 2007
11 John A. Byrne and Lindsey Gerdes, “The Man Who Invented Management: Why Peter Drucker’s Ideas Still Matter”, Business Week, November 28, 2005
12 Calculated by the authors of Executive Excess: The Staggering Social Cost of U.S. Business Leadership, Institute for Policy Studies, August 2007
13 Ibid. Average hourly wage for US manufacturing workers was obtained from the Bureau of Labor Statistics and used in calculating this figure
