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Why CEO’s Get Paid So Much

Last updated on August 30, 2020

Shareholder Rights?

There used to be a time when shareholders were proud to own stock in a company and invest in its growth. These days, no one cares.

Did my portfolio go up? Cool, back to Netflix. 

The government and financial services industry tell us the best way to be prepared for retirement is to invest aggressively into the stock market.

Huh?

The average American knows nothing about the stock market, how to evaluate a share price, what impacts the markets, monetary policy, etc. Why would our government encourage us to invest our life savings into an asset class they know we don’t understand?

Shareholders have voting rights. Voting rights mean a company’s investors can weigh in on corporate policies, executive pay, and other important matters. These days, however, investors don’t care about voting rights because they don’t know they have them. They aren’t real investors, they are just doing what the government and Wall Street told them to do!

And that’s not all.

The rise of index investing isn’t helping things. Index investors want to copy the performance of a certain market. So say you want to mirror the performance of the S&P 500 — you would buy the VFINX and the fund will buy every company listed in the S&P 500 on your behalf.

Index investors have also given up their voting rights. I wouldn’t care if it weren’t the fact so many people complain about how evil capitalism is.  But it’s okay to profit from it in your investment portfolio?

Related Reading: Why Occupy Wall Street Failed

What are Shareholder Rights?

Any investor in a publicly traded company is a shareholder.

Being a shareholder makes you part-owner of the company you bought stock in. What’s been lost in today’s investing-made-easy world is that the ownership entitles you not only to a share of the company’s profits, but also the right to exercise a degree of control over company operations.

For example, shareholders can vote on who to hire as CEO, who should sit on the board, corporate policies, CEO pay, and other decisions public companies make everyday.

If people are so upset with today’s state of capitalism, then why not participate and vote?

Related Reading: How to Be a Conscious Investor

Some Shareholders Have More Rights Than Others

Not all shareholders are average investors like you and me.

These days, it’s common for corporate executives to own large stock positions in the companies they run. The more stock you own in a company, the more weight your vote carries. Corporate executives can sway decisions by voting for what benefits them individually — even if that vote is not the best decision for the company as a whole.

Yikes.

We see this in action when it comes to CEO salaries or unqualified friends and family serving on corporate boards. This is how CEO’s get away with this:

shareholders rights

Related Reading: The Fastest Growing Religion in America

Founders Can Deny Shareholder Rights

Unsurprisingly, the founders of a company are also large shareholders.

To me, it is less disturbing when a founder has controlling power of a company through his shareholder voting rights than when a CEO or executive team does. By virtue of being the founder, he or she will have the company’s best interest at heart (usually). However, this is not the case with CEO’s and executive teams brought in from the outside.

That said, founders have stirred up their own trouble when it comes to shareholder voting rights.

In the rise of technology companies, many founders prefer raising money privately instead of taking their company public. One reason for this is shareholder voting rights. Founders want to maintain control of their company and because raising money from the public requires them to disclose every single detail — as well as give up voting power to shareholders — some of them opt out.

This strategy is called “No-Vote Shareholders” and essentially strips shareholders of their voting rights.  Evan Spiegel, the founder of Snapchat, was one of the first founders to implement this policy.

 

 

 

 

 

 

 

 

Despite the media coverage, people didn’t care.

And they didn’t care because most investors don’t know what they own, don’t exercise their rights, and only care that the value of their portfolio is going up. So much for a democracy.

Related Reading: Taxation is Theft – Here’s Why

The Death of Shareholder Rights

Index funds now control over half of the US stock market. That is insane, especially when you consider that three financial firms own over of 80% of that wealth.

Three!

The companies are Vanguard, BlackRock and State Street.

Americans used to vote with their dollars, align their portfolios to their values, and weren’t total hypocrites. These days, in a post-Occupy Wall Street world, we hand our cash over to supersized financial firms and relinquish our voting rights to the corporate elite. How is anyone surprised by our growing wealth disparity?

According to this Reuters article, these are just a few examples of how financial firms vote on your behalf:

Should we double the salary of the CEO of PG&E Corp? The guy on the hook for California’s wildfires?

Vanguard, BlackRock and State Street voted YES

Should we approve massive pay packages for Coty, Inc. executives, even though they made terrible acquisitions that brought down the value of the company?

Vanguard, BlackRock and State Street voted YES

Should we include a special $500,000 tuition fund for the Coty executives’ kids?

Vanguard, BlackRock and State Street voted YES.

Should we split the CEO and chairman roles at General Electric, since the company is a shit-show and the CEO is driving it into the ground?

Vanguard, BlackRock and State Street voted NO

People bitch and moan about how awful capitalism is, but then refuse to learn how it works. There is no reason Vanguard should vote on your behalf. And if you’re an index investor who also cares about climate change, then there is no reason you should personally profit from ExxonMobil.

Educate yourself and participate, or stop complaining.

Related Reading: Where Liberals Are Wrong

Financial Technology Fails to Inform Users of Shareholder Rights 

Technology can go either way.

When it comes to Google Maps, Twitter, and iPhones, we have clearly benefited. But when it comes to investing? I don’t think robo-advisors and trading apps (such as Robinhood) have helped us one bit. All they have done is made is faster and easier for us to give them money.

At a time when our country is looking for solutions to even the playing field, robo-advisors and investment apps have missed the opportunity to inform users of the role they play in the markets.

Millions of Americans invest their savings into an asset class they don’t understand and then wonder how this becomes our reality:

Have you used an robo-advisor or trading app?

All you do is create an account, answer a robot’s questions about your age, income, risk tolerance and POOF! you’re an investor. Almost every robo-advisor is funneling investors money into the same stocks (Netflix, Google, Facebook, Apple, etc.). In fact, investment flows into broad market index funds have risen from $531 billion in 2008 to $3.4 trillion in 2018.

That’s quite the Ponzi scheme, right?

Related Reading: 8 Reasons Why a 401k is Not Worth It

Summary

Complacency is the name of the game. The pride of owning stock in a company whose mission you support or whose financial statements sound promising has disappeared. The days of boycotting a company and divesting your shares because they mistreated employees are over.

No one has time for morals when they invest in index funds. In fact, the system is designed to have you fork over money for 30-40 years and never say a single word or ask a single question.

How does that not make you suspicious?

How much more clear can government make it that Wall Street is their priority? Retirement accounts reduce the power of hundreds of millions of people down to just a few CEO’s at a couple wealth management firms. Are you naive enough to think these CEO’s are voting with the public’s interest in mind?

The farther you are away from your investment, the less concern you have for how it works and operates.

And that’s exactly how Wall Street and their government cronies like it.

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