Yahoo, Google, LinkedIn, Viacom, and the Rise of Bernie Sanders

That Bernie Sanders and Donald Trump have rocked the political world conveys to me that many voters, including me, think most establishment politicians, on both sides of the isle, are perhaps the lowest common denominator of society today: their ultimate destination to be the eighth circle in Dante's Inferno.

Many Sanders backers are young and suffused with attendant idealisms, or often college students existing in the bubble of academia and have yet to be blown about by the cold air of employment and voracious income taxing authorities.

In his New Hampshire primary victory speech his excoriations left few corners untouched. The top three American drug companies made profits of $45 billion which he labelled an "obscenity" he pledged to somehow correct. While I was unable to verify that particular "obscenity", four companies, JNJ, BMY, MRK, and PFE do have 300,000 employees, many of which are high paying jobs. Through tens of billions in R&D expenditures, they have developed countless life-saving and life-enhancing drugs that many in that night's audience probably depended on.

That the mathematics of his fantasy proposals to fork out trillions of dollars overhauling everything from education, creating single-payer healthcare, and the criminal justice system don't balance no matter how high marginal tax rates isn't the discussion point here.

Notwithstanding, there are swaths of our great but imperfect capitalist system in need of some major rehabilitation.

Bernie's continuous populist rants condemning Wall Street and income inequality crosses class borders, and should resonate with many, party affiliation notwithstanding. But rather than ad hoc condemnations and spraying a sawed-off shotgun at the issues, it is important with the sober hindsight of history to delineate some facts.

Bernie narrates hysterical philippics about the 2008 financial meltdown and the resulting bailouts of the largest banks. (C, JPM, BAC, WFC, GS, MS) Love them or hate them, they repaid ALL of the loan dollars (over $100 billion) with 10% interest; an aberrant moneymaker for Washington. Was the preferable policy to let the financial system collapse and have worldwide chaos? I don't think so, but there are valid arguments to disagree. Conversely, the General Motors and Chrysler rescue bled US citizens for $11.2 and $1.3 billion respectively. The auto bailouts allegedly prevented the loss 1.5 million jobs. That cost taxpayers about $840 per job saved. Was that the right thing to do?

The philosophical divide for me is not whether Bank of America and then recently acquired Merrill Lynch should have received $45 billion in loans to stave off certain collapse. (Thee Treasury made a $4.57 billion profit) In late 2008, despite all the job losses and dislocations reverberating through America, the top executives and investment bankers found a way to pay themselves hundreds of millions in "bonuses". Rome is burning, trillions are lost in stock market valuations, and the officers on these ships steal the gold that was provided by me and you, the taxpayer. Bank of America is but the analogue for what every big bank and, then, investment bank did.

Only a rigged system could allow such flagrant abuse. The very bankers whose decisions to overleverage their balance sheets, and structure worthless sub-prime mortgage-backed securities that brought the American housing market to a halt, were allowed to sign their bonus checks. Somehow no dust got on their suits. With taxpayer dollars now at risk, that Washington did not step in and prevent these abominations puzzles me today. That some executives from banks and rating agencies are not spending winters in an 8x10 cell perplexes me even more. Irony or not, It has been a leftist regime that has failed to prosecute much wrongdoing.

Dodd-Frank, a 2010 piece of legislation that in general I do not agree with, did make some positive strides towards assuring capital adequacy at banks, somewhat addressing the "too big to fail" issue. Banks now undergo annual stress tests assessing financial health and cannot return capital (think dividends and buybacks) to shareholders without government approval.

Despite the heavy fallout from 2008, Dodd-Frank fell woefully short in controlling boardroom abuses on the issue of executive pay. The new rules require a shareholder vote to approve CEO pay. The wrinkle is the results are non-binding upon directors; the foxes are still policing themselves.

Crazy, nutty, otherworldly CEO compensation continues unfettered and is the poster child for income inequality and is one of the most divisive topics in America today.
The recently publicized $54 million 2015 pay package for Viacom (VIAB) CEO Philippe Dauman seems especially inappropriate in light of a 40% share decline for the year. The stock is lower today than when he took the CEO reins a decade ago. Marissa Mayer, the leader at (YHOO) Yahoo, received 2014 remuneration of over $42 million. Somehow another $36.6 million found its way into her coffers her first six months of service in 2012. Under Ms. Mayer's tenure, Yahoo revenues have declined steadily and operating income through 2014 atrophied by 70% from 2012 levels. A little arithmetic reveals that if you remove the value of long-held Yahoo stakes in Alibaba (BABA) and Yahoo Japan, the market assigns a negative value to the flagship internet business. The 2014 highest paid derby winner at $156 million was Discovery Communications, Mr. David Zaslov. Those shares retreated around 20% for the year. A regression analysis for these three would reveal an inverse correlation between pay and performance.

2015 champ is Google's (GOOG) CEO Sundar Pichai, who was greeted with a $199 million payday. Highly successful overseeing development of Chrome, G-mail, Google Maps, and Android, it can't be denied Mr. Pichai is a major reason for Google's soaring stock valuation. But does that justify the $200 million reward for the freshly minted (Aug. 2015) CEO? Google's recently hired Chief Financial Officer, Ruth Porat, received an unbelievable $70 million. Her seminal idea was to break up Google into Alphabet, thus providing "transparency" for shareholders. Google could have done that on their previous financial statements. Overpaid by orders of magnitude, a trained monkey could do her job.

As I once heard and have often emphasized, executives are receiving entrepreneurial pay for managerial behavior. These men and women are not company founders, not the visionaries and inventors who incubated a child into adulthood.

Bank of America (BAC) CEO Brian Moynihan and Citibank chief Michael Corbat received 2015 raises of 23 and 27 percent respectively. Both stocks declined in 2015. Did tellers and loan officers receive commensurate raises? J.P. Morgan's Jaime Dimon wrangled $27 million from his board, a 35 percent expansion from 2014.

LinkedIn goes about it a different way. Total stock compensation reached $510 million in 2015, and it will issue an estimated $630 million this year. Since the public offering in 2010, such dilutive awards have increased share count from 46 to 130 million. Stockholders don't have a chance.

Way back in 1986 the highest awarded pay was $11.5 million to then-Chrysler CEO Lee Iacocca. Using 1984 as the base of 100, in the ensuing three decades, the CPI has increased about 137%. A little arithmetic calculates Mr. Iacocca would have received around $27 million in 2015 dollars or about 13% of Googles Sundar Pichai. Comparing inflation-adjusted top 10 lists from the 1986 list to the 2014 list (2015 not out yet) yields the similar discrepancies. CEO pay has outpaced inflation nearly 8 to 1. Why?

CEO's can't just autocratically award themselves these ludicrous sums. There is a complicit board of directors which, if not handpicked, is then at a minimum approved by the CEO. The composition of most boards' of directors of S&P 100 companies goes something like this: CEO's of other big companies retired CEO's or other executives of other big companies, and other. This "other" category includes a lot of talented, highly educated and successful people whose success was likely in fields that don't pay a lot of money. Retired college professors, museum directors, politicians, military generals are examples. It's even better if diversity can be sprinkled in.

Being on the board of an S&P 100 company may pay $250,000 to $500,000 (or more) annually in cash, plus health insurance, and, at least, one board retreat with spouses for maybe 10 or 15 meetings per year; not terribly stressful work. Goldman Sachs pays $593,900, Oracle pays$ 588,500, Medtronic doles out $617,500, while Celgene offers $829,700. A lot of these people may serve on multiple boards. Serving on a board or two is the difference between a ho-hum retirement and being able to put your grandkids easily through college and comfortably travel the globe.

Needless to say, an S&P 500 directorship is a highly selective fraternity; not anything you want to screw up by voicing a differing opinion. As Warren Buffett has quipped, when choosing board members, "They do not look for Dobermans. They look for Cocker Spaniels, and then they make sure their tails are wagging." On expressing dissent inside the boardroom, Uncle Warren again, "If you keep belching at the dinner table, you'll be eating in the kitchen."

There are few assemblages more tainted than a board of directors of a large public corporation. It is a putrid web of interlocking directorates. It is incest without the consanguinity with the same result; inbreeding has decayed this main mechanism for theoretical checks and balances for sound corporate governance.

Take a look at CEO severance pay as final evidence of the decomposition of our system. Jack Welch of General Electric (GE) $417 million, Lee Raymond Exxon (XOM) $321 million, William McGuire United Health (UNH) $286 million.........see the full list and get more nauseated. These are mere managers, caretakers of shareholder assets. Yes, most are smart and talented but as Glen Close in Dangerous Liaisons noted: "you don't applaud the tenor for clearing his throat." Many have simply survived the Machiavellian cloak and dagger world of the corporate ladder and are the last man standing.

I have catalogued but a few examples how a tiny corporate aristocracy has hijacked a big part of our economy for the benefit of a very few. It is a transfer of wealth of billions that rightfully belong to shareholders.
Bernie Sanders and anyone with a moral compass should be outraged by these excesses, but more importantly, it is the "legal corruption" where Sanders strikes the lyrical chord. In our time of slow economic growth, stagnant wages, and a widening wealth gap, the socialistic message is a siren song for many.

So while I am in agreement with many of Mr. Sanders' complaints, the chasm between us is how to fix them. Bernie, always spewing vitriol, wants to throw a tax at every perceived injustice. Taxation, as a punishment, is a policy to shrink our economy. Wall Street is good, and banks are good. Sometimes the people that work at them are bad. Banks provide financing for homes and are the conduits for capital for businesses to grow which cause job growth and is the virtuous cycle of capitalism. There is a balance of the right regulations to encourage economic growth and yet safeguard our economy.
About our "money-gorged" chief executives; never in our history have so few, done so little, for so much.