Extracting a Cold Corporate Truth
The analysts who monitor our economy have a label for the companies that pump out oil and gas from the earth and dig out various other minerals and metals. Analysts have traditionally called these companies the “extractive industries.”
But drilling and mining may now need a more specific descriptor. These days, almost every corporate sector seems to qualify as an “extractive industry.” The CEOs in these sectors aren’t all, of course, extracting resources out of the earth. They’re doing their extracting out of the enterprises they run.
Top corporate execs today are essentially running their companies as their own personal ATMs. They manage their enterprises to maximize their own take-home.
No corporate exec may be better at this maximizing than the billionaire Larry Ellison, the long-time CEO and now executive chairman of the business software colossus Oracle — and the ninth richest man in the world.
Ellison has been treating Oracle as his own personal money-making machine for decades. Over the course of those years, the Wall Street Journal reminds us, he “has often rated as the nation’s highest-paid CEO.” In 2012, for instance, Ellison pulled down $96.2 million.
The tens of millions in stock incentives Oracle has showered down upon Ellison have seldom made any earthly sense. Stock incentives purport to “align” the interests of executives with the interests of the enterprises they run. But Ellison has for years already owned a quarter of Oracle’s shares. How much more “aligned” could he be expected to get?
Apologists for our current executive pay order also like to argue that we need lush windfalls to reward outstanding executive performance. Ellison, the Silicon Valley Business Journal calculated two years ago, has been one of the least efficient CEOs ever. For every $1 million in compensation he has pocketed, the Oracle share price has risen all of one dime.
In effect, execs like Ellison have “aligned” the corporate interest of their companies with their own personal financial portfolios. Oracle does what makes Ellison fantastically richer, even if doing what makes Ellison fantastically richer leaves Oracle as an enterprise less financially successful.
Last week brought what may be the ultimate example of this dynamic. Oracle has just announced a deal to purchase — for $9.3 billion — a business software company founded by a former Oracle employee personally bankrolled by Ellison. The sale will net Ellison, who owns just over 40 percent of the soon-to-be-acquired company, about $2.8 billion after taxes.
Ellison has pulled similarly brazen — and self-aggrandizing — stunts before. He has had Oracle lease aircraft from his own personal aviation company. Ellison, New York Times business journalist Robert Cryan points out, has also once had Oracle settle a legal case that involved a data-storage company Ellison controlled. The settlement cost Oracle over $500 million in potential payments.
Ellison has stumbled into the core truth of Corporate America as an extractive industry. The real money for power suits doesn’t come from making and selling the products and services consumers want. The real money comes from buying and selling and breaking up companies.
But corporate execs like Ellison, truth be told, remain amateurs at this lucrative game. The real professionals at it run private equity firms.
Private equity honchos have reduced greed grabs to a simple science: You borrow big bucks to buy up an enterprise. You then force the enterprise you buy to pay off your loan. To raise the funds to do the paying off, you have the company gut worker pensions or slash R&D or sell off divisions.
Then you take your newly lean-and-mean enterprise to Wall Street and sell it. You walk off with a windfall. The next step? You just go out and repeat this fleece cycle.
So what can the rest of do to shut down all this fleecing? Jeremy Corbyn, the current Labour Party leader in the UK, has one fresh approach. In an effort to create a more equitable “Workplace 2020,” Corbyn is proposing new rules on how business can play the takeover game.
What kind of rules? In the future, explains Corbyn, we must make sure that “any corporate buyer has the means to acquire a company without saddling it with debt.” New restrictions that prevent “companies being made to take on their new owner’s debts” could move us nicely toward that goal.
Let the extractors beware. We really can end their extracting.
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This has been reposted from the CAF.
