In capitalist countries, organizations conducting business can be proprietorships, owned by individuals or partnerships or corporations, owned by people in their individual capacity, or owned by investors through ownership of organizations incorporated under the laws of various jurisdictions. In socialist countries the government owns and appoints those who are employed to control the organizations.

Employ is the key word, as those who control and manage organizations are employed by the organizations on terms negotiated or simply accepted by the parties at the time of employment. In the case of senior executives of corporations, they are approved by a majority of the Board of Directors of the corporation, who have been elected by the owners of the corporation.

In privately owned companies the owners of the entity are likely to initially be the Directors of the company. Therefore, the actions of the company directly impact the owners of the business. In some larger privately owned companies non-owners of the company may be elected to the Board of Directors because the owners of the business believe they can contribute to the effectiveness of the enterprise.

It is the Board of Directors which decides if those employed as officers of the company should be invited to serve as Directors or be invited to attend meetings of the Board.

In companies which are publicly financed and traded a committee of the Board of Directors suggests, usually annually, to the Board of Directors, nominees for Board, which if approved by the Board are presented to the shareholders for a vote at the annual meeting of the shareholders.

This is the process of controlling publicly traded companies within a capitalistic system, and the following are some of the important issues relating to the decision-making of board members:

The composition of the Board is highly influenced by those on the Board.

The role of the Board in assessing and managing the performance of the officers of the company who are serving on the Board is impaired by Board members being required to measure their own performance.

The members of the Board are not necessarily significant owners of the stock of the company, and their continued receipt of benefits from serving on the Board is dependent on the good will of those whom they are obliged to assess, approve compensation and possibly replace.

Coming to the issue of compensation of those serving the interests of the company, the Board members of publicly traded companies are in a position to approve the compensation recommended by those who will be receiving the compensation, and who in many cases, are responsible for board members being on and remaining on the Board.

The conflict is exacerbated when a CEO’s compensation as recommended is seen by some observers as being highly excessive relative to that paid to the average company employee.

A similar concern can be when extraordinarily high amounts are paid to professional athletes or other entertainers. Of course, since all such payments are tax deductible by the company, the government or the public is actually paying for that which may be excessive, in addition to that which is necessary.

Therefore, is it ok for a CEO to receive in cash wage more than a hundred times that of an average worker in the same company, or for a professional athlete to be paid annually a high multiple of the $400,000 paid to the President of the United States?  The answer in a capitalist, for profit, country, could be “yes”, especially if the company payment is tax deductible.

Another possibility might be that income tax deductibility for companies be limited to cash payments of some measure or reasonableness, and all other performance rewards be in bonus profit percentages or shares of the company being benefited. Were this to be the case, those benefited by the individual’s performance would also be incurring an offsetting profit or equity dilution. But the government or public in such a case would not be paying for a benefit they were not getting.

I am unable to restrain myself from observing that a revenue royalty investor is spared concerns related to a royalty issuing company’s profitability or compensation policies by simply having an entitlement to an agreed percentage of defined company revenues during an agreed period.

 

Arthur Lipper, Chairman                 arthurlipper@gmail.com
British Far East Holdings Ltd.