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Supermanagers, inequality, and finance

This work is licensed under the Creative Commons | © Karen Ho. ISSN 2049-1115 (Online). DOI: http://dx.doi.org/10.14318/hau5.1.022

BOOK SYMPOSIUM

Supermanagers, inequality, and finance

Karen HO, University of Minnesota

Comment on Piketty, Thomas. 2014. Capital in the twenty-first century. Translated by Arthur Goldhammer. Cambridge, MA: The Belknap Press of Harvard University.

What makes Thomas Piketty’s (2014) work compelling is not only that he uses the tools of mainstream economics, especially the management of “big data” on centuries of tax records, to depict increasing socio-economic inequality, but also that he recognizes the vital moral and social questions underlying the production of inequality. What kinds of societies are being constructed and reproduced, and who is understood as “deserving” and “meritocratic”?

In this regard, the United States stands as one very instructive case. As Piketty argues, in the United States inequality has recently grown to be “quantitatively as extreme as in old Europe in the first decade of the twentieth century” (2014: 293). Yet, he emphasizes the differences between contemporary hyperinequality in the United States and nineteenthand early twentieth-century European (and American) inequality, as he argues that we have ushered in an entirely new way of achieving our shocking levels of inequality.

Today, Piketty insists that “what primarily characterizes the United States … is a record level of inequality of income from labor (probably higher than in any other society at any time in the past, anywhere in the world, including societies in which skill disparities were extremely large)” (2014: 265). More precisely, the prototype of inequality is no longer the “passive” recipient of interest from inherited fortunes (i.e., income made possible from already accumulated capital and wealth) but rather the top manager who actively (and perhaps meritocratically) accumulates [482]through income from labor (though Piketty acknowledges that these two modes of accumulation are not mutually exclusive).

Now, while there are certainly compelling reasons for drawing this distinction, it is also necessary to question it, because it is through understanding the contemporary collapse of this distinction between capital and labor, wrought in large part by finance, that Piketty’s argument can be further honed and strengthened. (It is also important to question the notion of aristocratic passivity—certainly the colonialism and enslavement that generated global and national wealth inequalities helped to produce the contours of modern inequality). Further context is necessary to understand Piketty’s argument about today’s rising wealth and inequality.

Piketty identifies a particular subclass of executives/employees at the upper echelons of large firms whose “extremely high remunerations at the summit of the wage hierarchy” are a central factor in rising wage inequality, as they comprise the majority of the top centile, which has captured “60 percent of the total increase of US national income” from 1977–2007 (2014: 297–98). Specifically, by examining tax returns and corporate compensation records, Piketty found that 60 to 70 percent of the top .1 percent of incomes in 2000–2010 belonged to these top managers, whom he dubs “supermanagers.” By comparison, athletes, actors, and artists of all kinds make up less than 5 percent of this group. In this sense, responsibility for the new US inequality lies not with easily identifiable “superstars” but with these somewhat less-publicized supermanagers (302).

He first attempts to explain why supermanagers are so highly compensated in the course of shedding doubt on mainstream economist arguments and rationales. Extreme divergences of income, he argues, are not well-explained by dominant scholarly accounts that credit the increased skill, efficiency, and “marginal productivity” of managers as rationales for their skyrocketing incomes. Piketty goes so far as to say that even justifications of managerial compensation based on firms’ increased earnings are misplaced and overdramatized. First, these managers often get paid the most when “external” factors allow for increased earnings and thus usually get “paid for luck” (335). Second, it is an understatement to say that there are few objective means of determining a single executive’s contribution to the success of a firm. Finally, he undercuts the hackneyed rationale that education, skill, and technology account for the income differences in the United States by showing that countries with similar technological and educational training do not produce such pronounced inequality. Those within the top decile, he notes, have similar educational pedigrees to members of the top centile, and since US inequality equals or surpasses that of poor and emerging countries with even starker educational and skill hierarchies, it makes little sense to state that inequality of compensation in the United States simply mirrors inequality in skill: “Is it really the case that inequality of individual skills and productivities is greater in the United States today than in … apartheid (or postapartheid) South Africa” (2014: 330)?

Unconvinced by these generalizing and normative economics-driven explanations, Piketty then offers his own. He concludes that the central and “most convincing” reason for the “explosion of the very top US incomes” is, simply put, that executives are in charge of their own compensation and they are empowered by the larger society and a set of corporate governance norms that sanction their pay practices and believe in their protestations of meritocracy. Piketty writes that “at [483]the very highest levels salaries are set by the executives themselves,” and it is therefore “inevitable that this process yields decisions that are largely arbitrary and dependent on hierarchical relationships and on the relative bargaining power of the individuals involved” (2014: 330–32).

On the one hand, Piketty’s assertions are an important intervention against the applicability of economistic theories such as marginal productivity, where the problematic assumption is that “the invisible hand” of the market properly assigns compensation according to contribution. He forthrightly states what many economists rarely admit: “In practice, the invisible hand does not exist, any more than ‘pure and perfect’ competition does, and the market is always embodied in specific institutions such as corporate hierarchies and compensation committees” (2014: 331–32). On the other hand, his solution reproduces, in part, individualistic, behavioral discourses, in that he sees individual supermanagers as “incentivized”— through naturalized greed combined with conflict-of-interest, “executives-withtheir-hands-in-the-till” instrumentalism—to pay themselves more and more (332).

He then turns to focus on the cultural justification for the massive shift in socioeconomic values and practices, arguing, very effectively, that supermanager selfproclamations that they are the pinnacle manifestations of a “hypermeritocratic society”—the very embodiments of productivity, morality, and merit—not only have “very little factual basis” but also intertwine violent inequality with claims to moral righteousness and social justice. Piketty importantly recognizes that US “meritocratic extremism” is “much harder on the losers, because it seeks to justify domination on the grounds of justice, virtue, and merit, to say nothing of the insufficient productivity of those at the bottom,” and in so doing, combines the worst of two worlds—rampant inequality of wage and wealth with the justificatory pretense of virtue and virtuosity (2014: 416–17).

But the corresponding and perhaps more fundamental question is what enables these blatant self-justifications to fall on sympathetic ears? Piketty identifies the manifestation of this shift and describes how the shift is rationalized, but avoids the shift itself and its conditions of possibility. He does not approach the central problematic head on and ask what does the rise of the supermanagers signal about the very changes in capital accumulation and practice that made this rise possible? What Piketty is missing, I contend, is that the compensation of supermanagers is the direct result of seismic changes in the very nature and purpose of the corporation toward financial values, models, and practices. The exorbitant incomes now prevalent at the top levels of management actually serve as an index of the massive financialization of the US economy. Their paychecks, in a sense, are the spoils of financial excess, made possible through framing and governing corporations as if they were financial assets to be mined for the good of the supermanagers themselves.

In my view, the reason Piketty does not delve further into the problem of the supermanagers and what fundamentally accounts for their rise is that he reproduces the binary between capital and labor and discounts the importance of finance and financialization. His treatment of finance is an important piece of the puzzle. To his credit, Piketty certainly notices the growing influence of finance in the US economy, particularly the fact that some of the highest incomes of the supermanagers derive from the financial industry. (And, he seems to recognize, in general, that supermanager income is transferred from the poorest 90 percent, an aspect of appropriation [484]that is culturally characteristic of US financial dominance). Yet, almost in the same breath, he proceeds to downplay the relevance of this finding, reasoning that “nevertheless, 80 percent of the top income groups are not in finance, and the increase in the proportion of high-earning Americans is explained primarily by the skyrocketing pay packages of top managers of large firms in the nonfinancial as well as financial sectors” (2014: 303). He takes at face value the fact that since the majority of top incomes belong to supermanagers in nonfinancial corporations, this means that “traditional” managerial labor within productive and manufacturing enterprises still accounts for the lion’s share of supercompensation. Simultaneously, Piketty assumes that finance is important to the narrative of inequality and supermanagers only in the largest fortunes, (the top centile of the top 1 percent) as it is in those cases that financial assets, “almost all of it in the form of dividends,” begin to occupy a greater share of income (281). His interest in finance is piqued mainly at the .01 percent level.

Piketty’s distinction between labor and capital, I argue, prevents him from seeing how supermanager incomes actually blur the boundaries between capital and labor, as well as how it is precisely finance that bridges, and has helped to collapse, this distinction. In what follows, I show that finance not only crosses the boundaries between the nonfinancial and financial sectors but has also instigated the conversion of capital into labor. Specifically, I make the case that it is precisely the conversion work of finance (financial actors, models, values, and practices) that has helped to source the exorbitant salaries of supermanagers, unlocking institutional assets (capital) and turning them into income from labor.

Here, it is crucial to grasp the overwhelming influence of finance in both financial and nonfinancial sectors. In fact, in order to demonstrate the increasing financialization of the US economy, sociologist Greta Krippner documents a rampant increase in how nonfinancial firms “derive revenues from financial investments as opposed to more traditional productive activities” (2011: 34). Specifically, she demonstrates that the “ratio of portfolio income to corporate cash flow among nonfinancial firms” increased five fold by the late 1980s and then again in the late 1990s and after the millennium. Moreover, the ratio of financial to nonfinancial profits in the US economy writ large is now “approximately three to five times the levels typical of the 1950s and 1960s” (35, 40). The growing influence of finance has, in a sense, made nonfinancial firms into financial firms. General Electric, for example, continues to be framed as a nonfinancial firm, and yet for a number of years, the majority of its profits have derived from GE Capital. The US economy has undergone a large-scale transformation in that the nonfinancial sectors have become aligned with finance, and financial activity has burst its historically constructed boundaries—all this generated by the concerted and coordinated conversion of productive assets into financial wealth.

Because Piketty holds onto this categorical distinction between financial and nonfinancial firms, he downplays the power of finance by neatly segregating it within its own narrow “sector.” Drawing on evidence amassed by Krippner and others that for all firms “profit making in recent years has occurred increasingly through financial channels,” I contend the opposite, which is that the distinction between financial and nonfinancial firms is immaterial for assessing and analyzing financial values and practices in corporations, and correspondingly, accumulation across all industries (Krippner 2011: 51). Given that “the trajectory of the US economy” writ large is “aptly characterized in terms of a process of financialization” (51), I make [485]the additional argument that it is precisely finance that has made possible such exorbitant profits for supermanagers in both financial and nonfinancial sectors. Their seemingly boundless compensation, as documented by Piketty, does not materialize abstractly, as the phrase making money out of money seems to suggest. In fact, the source of this exorbitant income is the conversion of already accumulated capital in corporations into liquid income through financial transactions and advice.

Take the curious case of “stock buybacks,” the esoteric yet normative practice among the great majority of Fortune 500 public corporations to use more than half of their earnings—$2.4 trillion to be exact—to purchase their own stock in the open market, which results in an immediate, yet often short-lived, boost of the companies’ stock prices (Lazonick 2014: 48). Now, given that the bulk of supermanagers’ compensation schemes derives from stock options and stock awards, engaging in stock buybacks “on a colossal and systemic scale” enacts a direct transfer of wealth from corporate earnings (which historically were reinvested in the enterprise or shared with employees in the form of less radically unequal pay scales) into the pockets of supermanagers (53). This is clearly an extraction of wealth: as economist William Lazonick argues, “the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity” (48). The result is that the pay of corporate executives climbs ever higher, even as “overall U.S. economic performance has faltered,” and “trillions of dollars that could have been spent on innovation and job creation … over the past three decades have instead been used to buy back shares for what is effectively stock-price manipulation” (48, 50).

What Piketty, as well as many social critics, have not fully accounted for is that over the past thirty years, finance has aligned most, if not all, public corporations to its values, models, and practices and has used corporations as sites of financial extraction. Two massive changes helped to make this possible. First, the practice of compensating executives from the spoils of finance has actively steered supermanagers away from the pre-1980s understanding of corporations as long-term social institutions and toward the idea that corporations are financial entities whose productive capabilities and fruits of labor can continually be redistributed toward and siphoned off through supermanager-led financial transactions. Second, galvanized by an ideological origin myth to “return” control to the “true capitalists” (shareholders and investors), the corporation itself has been restructured into a site primarily for the maximization and extraction of wealth in the name of the shareholder, whose very ownership of and claims to the corporation also had to be constructed and perpetuated.1

[486]Supermanagers in traditionally nonfinancial settings and their counterparts in the financial industry often work either in concert with one another, or in a disciplinary relationship where the latter pressure the former to act as agents for shareholders and investors, i.e., finance. In other words, it is not so much that a class of supermanagers has emerged and used its hierarchical positionality to command exorbitant pay for itself but rather that corporate institutions themselves have been transformed into sites for potential and continual financial extraction that supermanagers can now direct. The “labor” of corporate and financial supermanagers packages the corporation’s “capital” (its accumulated worker productivities, its organizational capacities, its cash flow) and converts it into a source of income for the supermanagers in both nonfinancial and financial firms. “Wages,” moreover, a term that evokes traditional salaries as well as the capital/labor dichotomy, is not an apt term to describe the compensation for supermanager labor, because the labor of supermanagers directly converts capital to financial income. They are paid in capital, not in prearranged wages in exchange for labor.

Perhaps the clearest distillation of this new landscape is in the private equity (PE) sector of the financial services industry, where the central products are corporations themselves and the key labor (the sector’s “value added”) involves amassing enough wealthy investor funding in order to buy, repackage, and sell a collection of corporations every five years or so.2 There is perhaps no better sign of the end of the public corporation as we knew it than its transformation into a short-term investment. In this context, corporations that are pursued and bought by private equity funds are actually referred to as “portfolio companies,” signaling their transformation into investor assets.

Once a company falls under PE control, its CEOs and supermanagers serve at the pleasure of the PE partners and are highly compensated only if they achieve cost-cutting and earnings targets. They don’t always; two-thirds of CEOs get replaced sometime during the short-term period the PE firm holds onto the company (Appelbaum and Batt 2014: 57). This private equity “financial model” necessitates a fundamental rethinking of the very nature of corporations and capital accumulation, as this new structure is built on the understanding that the new “portfolio company” exists only as a repository of private equity value.

The case study of Harry & David, the once-thriving mail-order fruit and gift retailer founded in Medford, Oregon, is instructive here. It was acquired by two private equity funds in 2004 for “$253 million, with $82.6 million in equity and $170 million in debt” (Appelbaum and Batt 2014: 69–70). A year into the ownership, the PE owners piled on even more debt by issuing themselves dividends totaling $101.6 million. Such financial engineering ensured that no matter the result, the PE firm had already guaranteed itself a 23 percent return on this part of its portfolio. The new owners thus forced the company to service even more debt and prevented it from using its own cash flow for any other constituency or improvements by [487]extracting a dividend payment. Not surprisingly, in March 2011, Harry & David declared bankruptcy, as it was unable to pay its new debt load of $200 million. And, yet, the story does not end there: the very declaration of bankruptcy was used to trigger a taxpayer subsidy. The federal Pension Benefit Guaranty Corporation “assumed responsibility for the retirement benefits” of Harry & David’s 2,513 employees and retirees. Ultimately, the PE owners, who had held onto a diluted stake of Harry & David, were able to realize their “investment” by selling it to 1-800-Flowers (Appelbaum and Batt 2014: 69–70; Njus 2014).

As private equity demonstrates, taking money out of portfolio companies (bleeding out the company) and “distributing” it to investors is part and parcel of the structure of capitalist accumulation that finance has produced and upon which it depends. And, of course, the fact that financial supermanagers can normatively extract such returns explains why they in particular are overrepresented in the exorbitant compensation category. They are not only on the highest rung of the hierarchy of payouts and claimants for liquidated companies but they also help to structure the deals and transactions that help to culturally enact this kind of incentive structure.

Finance, therefore, has not only made possible the construction of a class of supermanagers dispersed throughout financial and nonfinancial institutions, but has helped to transform corporations into financial assets ready for such mining. The supermanagers may understand their compensation to be grounded in their talent and smartness and good returns, but in reality their incomes are dependent on the capture of capital; in this vital sense, today’s rising inequality is perhaps not as distinct from the rentier incomes of the Ancien Régime as Piketty assumes.

References

Appelbaum, Eileen, and Rosemary Batt. 2014. Private equity at work: When Wall Street manages Main Street. New York: Russell Sage Foundation.

Ho, Karen. 2009. Liquidated: An ethnography of Wall Street. Durham, NC: Duke University Press.

Krippner, Greta. 2011. Capitalizing on crisis: The political origins of the rise of finance. Cambridge, MA: Harvard University Press.

Lazonick, William. 2014. “Profits without prosperity.” Harvard Business Review 92 (9): 46–55.

Njus, Elliot. 2014. “Medford-based Harry&David sold to 1-800-Flowers.com for $142.5 million.” The Oregonian/Oregon Live. http://www.oregonlive.com/business/index.ssf/2014/09/medford-based_harry_david_sold.html.

Piketty, Thomas. 2014. Capital in the twenty-first century. Translated by Arthur Goldhammer. Cambridge, MA: The Belknap Press of Harvard University.

[488]Stout, Lynn. 2012. The shareholder value myth: How putting shareholders first harms investors, corporations, and the public. San Francisco, CA: Berrett-Koehler Publishers.

 

Karen Ho
Department of Anthropology
University of Minnesota
395 Hubert H. Humphrey Center
301 19th Avenue South Minneapolis, MN 55409
USA
karenho@umn.edu

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1. Legal scholar Lynn Stout (2012) has demonstrated that the very notion that corporations exist to maximize shareholder value, while widely proclaimed and assumed, is nowhere stated in corporate charter, and is problematized by the robust claims of multiple other constituents of the institution. I have demonstrated that the shareholder value revolution was also based on enacting an ahistorical “origin myth,” which reimagined that all companies were created by shareholder capital and controlled by shareholders. This is historically inaccurate, as shareholders typically do not invest in the productive capabilities of the corporation; by buying already outstanding shares in the financial markets, they opted for liquidity, not control (Ho 2009).

2. Although private equity (PE) firms and funds are not homogenous and are not all in the business of extraction and liquidation, the point I underscore here is that PE, in general, privileges a short-term temporality and continually packages corporate institutions for sale.