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January 12, 2007

[SSJ: 4327] Re: Abe's success so far?

From: Richard Katz
Date: 2007/01/10

Sanford Jacoby says:

> I think few would quibble with the notion that
> shareholder primacy is constituted in its most
> advanced form in the United States.

I would more than quibble. I think shareholder primacy in the US is as much an ideology an the notion of company-for-employees in Japan. The whole issue of the widespread corporate scandals in the US is a case of corporate executives and Board members ripping off shareholders (from their own employees to teacher pension funds), in collaboration with accounting firms, big commerical banks (Citigroup and JPMorgan Chase had to pay billions to investors that it misled about Enron) to investment banks (which famously put "lipstick on pigs"). The current US Treasury Secretary, Hank Paulson, was CEO of Goldman Sachs when it was fined $120 million for misleading investors. Now, he is trying to roll back the Sarbanes-Oxley law (SOX) as well as the ability of shareholders to sue crooked execs.

How about the Board of Directors, with fiduciary duty to protect shareholders? Well, with the CEO and Chairman of the Board now usually the same person, too many boards are often composed of rather compliant types, thereby seeming to justify the skepticism about outside directors by Canon and Keidanren chief Fujio Mitarai. Keidranren is also trying to limit shareholder suits and other necessary reforms.

It gets worse in the US. We now have the options backdating scandal, in which executives falsely date stock option grants to earlier dates when the stock price was lower. This gives them more profits when they exercise the options--at the expense of other shareholdes. Nearly 200 companies have disclosed federal or internal inquiries into their stock option practices.Why would directors allow this? According to a study conducted by the Harvard Law School Program on Corporate Governance, during the past decade, as many as 1,400 outside directors at 460 companies may have received options that had their grant dates manipulated to show a lower purchase price. The study found that, while SOX reduced the amount of stock option backdating, it did not eliminate it. In one case, a CEO had had committed this fraud was allowed to retire with $175 million in his severance package.

CEOs and Wall Street complain about the cost of Sarbanes-Oxley (SOX), but it's far less than the compensation of a typical S&P 500 CEO. And the single scandal of Enron wiped out more shareholder value than all the cost of SOX compliance combined.

The current head of the Securities and Exchange Commission, Chris Cox, came to fame as a Congressman in the 1990s when he sponsored a succesful bill tolimit shareholders' ability to sue company executives.

Sanford Jacoby says:

> But doesn't the median household in the US own a
> lot of stock these days, thanks to 401s and all
> that? Not really. Equity -- directly owned or in
> pensions --presently constitutes only 4.8 % of the
> median household's wealth.

I think Sanford is looking at total assets, incuding a person's primary house or his business (e.g. a hairdresser's shop or pharmacy). And a median household has more of its assets in its primary home than in stocks. According to a recent Fed report, http://www.federalreserve.gov/pubs/oss/oss2/2004/bull0206.pdf, as of 2004 (latest available) financial assets constituted only 15% of the total assets of people in the 40-59% income quintile (averaging $43,000 a year in income), but 48% of those in the 60-79% quintile (averaging $68,000 in income). Of of those financial assets, 16% of the people in the 40-59% income quintile had direct ownership of stocks, 13% owned mutual funds, 53% had retirement accounts (of which a great deal is stock ownership), and another 30% had life insurance policies (and the life insurers are typically big stock investors). Among those in the 60-79% income range, 28% held stocks, 19% held mutual funds, and 70% had retirement funds.

So, while no one would say that weath distribution, let alone stock distribution, is equalized in the US, a fairly large portion of the American public depends on the stock market to help it fund things ranging from sending kids to college to retirement.

One of the big problems is that 34% of families had stock in only one company, typically their employer, who often contractually locked them in to that firm's stock. This is why thousands of Enron employees had their retirement nest eggs wiped out. After Studebaker went bankrupt in the early 1960s, Congress mandated that penion funds could have no more than 10% of their assets in only one firms. Congress has refused to make the same ruling about 401Ks.

Despite all the American tatemae, American firms are not run for the shareholders.

I think in America and Japan, companies are bureaucracies which seek to aggrandize themselves. In America, we have had in the past decade an increase in executive power at the expense of the company and its shareholders. In Japan, we have mindless empire-building and diversification by firms hoarding cash. In America, we have deals that aim at making executives rich, often at the expense of the firm itself.

I have never advocated that Japan adopt the American system,, particularly as it now stands. Hell, I don't even think America should adopt the American system. But America's myriad flaws should not be used as a pretext to block needed reforms in Japan.

Richard Katz
The Oriental Economist Report

Approved by ssjmod at January 12, 2007 03:25 PM