CNBC recently organized a town hall with an individual they dubbed “Our Nation’s CEO.” Readers who don’t watch much CNBC might be inclined to think CNBC bestowed this title upon one of the country’s great businessmen or innovators. Sadly, CNBC was referring not to a great entrepreneur but to President Barack Obama.
With the country’s confidence shattered, and the American Dream slipping away, our nation’s CEO, President Barack Obama goes face to face with his shareholders (you) from Wall Street to Main Street. — CNBC
Let us set aside specific policies enacted by President Obama as well as any concerns about his political and economic philosophy; neither is relevant at the moment. We shall instead focus on the fundamental differences between a CEO and a president, and in so doing we shall examine the difference between a political democracy and what could be called an economic or investor democracy.
Consider first the way in which the respective offices are obtained. Presidential hopefuls spend vast sums of money, possibly including “public financing” from taxpayers, in order to gain office. Admittedly, Obama opted out of public financing during his campaign but still managed to spend over $740 million dollars on his bid for the Oval Office. Indeed, presidential candidates spent a combined $1.7 billion campaigning for the 2008 election. In stark contrast, CEOs do not buy their offices in expensive popularity contests; they are, however, often demonized for making “too much” money once they gain their title.
Many would point out that CEOs use their business and personal contacts to get their jobs. This is certainly a valid argument. One cannot rationally claim that the best, most qualified candidate always gets the position as chief executive officer. However, the title, once gained, is easily stripped from the undeserving and unqualified. Recall the Disney shareholder meeting of 2004. Then CEO and chairman of the board Michael Eisner was ousted as chairman and, a year later, replaced as CEO. Why? Because 43 percent of shareholders voted not to reelect him!
Imagine if the president of the United States faced being replaced if 43 percent disapproved of his performance in any given year. At the time of writing, President Obama’s approval rating is a mere 44 percent according to a Gallup Poll. In fact, Presidents Truman, Nixon, Carter, Bush (41), and Bush (43) all, at one point, had approval ratings under 30 percent. Clearly, it is far easier to vote a bad CEO out of office than a bad president.
The relative ease with which CEOs are removed from office is hardly the most significant difference between a CEO and president. The well-known problem of the tyranny of the majority is present in both corporate/investor democracies and political democracies. What sets one apart from the other are the remedies available to the disgruntled minority.
In a political democracy, we are told we must always abide by the will of the majority. Citizens who hold desires or opinions that run contrary to the desires or opinions of the majority have but two options. They can somehow convince the majority that their desires are worthy and their opinions are correct, or they can leave the country. Neither option offers much hope for those unfortunate enough to find themselves in the minority.
In an investor democracy, those in the minority have far more control over their circumstances and those holding office. The minority shareholder need not convince scores of other shareholders that a particular company policy or executive should be changed. Any unhappy shareholder, who finds himself or herself in opposition to even the most trivial of corporate policies, can be freed from the imposition of the will of others by simply selling their shares. It is certainly easier and cheaper to free oneself from the tyranny of the majority by clicking “sell” than by packing up one’s belongings and seeking residence elsewhere.
Consider now the incentives of the holders of the respective offices. Politicians are concerned only with short-run consequences of policies and actions, because their term is arbitrarily limited. Term limits and office rotation are supported based upon the rationale that the less time a politician is in office, the less likely he or she is to act contrarily to the good of the public. But as early as the 1830s, politicians have used office rotation as a means of enriching powerful, or at least politically useful, figures in return for various favors.
In 2009, an astounding 44 percent of Congress members were millionaires, dozens of whom were investors in banks that received federal bailouts. Arbitrary term limits only serve to spread the wealth among the political elite and encourage an unhealthy focus on the short run at the expense of long-run consequences.
Though the era of rotten politicians playing share and share alike with their power and fortunes is long gone, politicians still seek to enrich themselves as well as those who helped put them in office. As it stands, politicians have very powerful incentives to give as much as they can to the special-interest groups that supported them. They do this with pork-barrel spending, stimulus packages, subsidies, taxes on competitors, bailouts, antitrust suits, and the like. CEOs too have short-run incentives that run contrary to their fiduciary obligations to shareholders, but these are largely mitigated.
The market has been able to develop sophisticated mechanisms by which executives are motivated to shift their focus away from immediate gains and towards future prosperity. In order to force CEOs and managers to consider not only the short-term benefits but also the long-run effects of a policy, compensation forms such as stock options, stock appreciation rights (SARs), and long-term incentive plans (LTIP) were developed. All increase the time horizon with which management is concerned, often extending it well beyond when the executive plans to leave the company. The office of the presidency confers no such long-term incentive, save perhaps the holder’s desire to preserve his “legacy.”
The ease with which investors can sever ties with a company enables a very important system to function in the investor world that could never function in the political realm (at least not to the benefit of the people). This critical system is the dollar vote. Everyone knows that the more shares an investor controls, the more influence he or she has over a corporation’s management. Those who control enough shares to be of significant influence over management are either very good at managing other people’s capital (mutual funds, hedge funds, etc.) or are very good at managing or growing their own capital (like Warren Buffet). At the very least, they appear to be very good in the short run but will lose money, and with it influence, in the long run if they aren’t as good as they seem.
This system of votes in proportion to dollars enables so-called corporate raiders like Carl Icahn to have a significant impact. Raiders such as Icahn are known for making billions by engaging in proxy fights and taking over companies they feel are poorly run. Thus scarce resources are better managed and put to better use than they would be otherwise.
Although the system by which one man, or a small group of wealthy and powerful investors, can take a corporation over and oust failing executives works exceedingly well in the market, it cannot work in politics. Most people intuitively understand that if in politics, as in business, one man could pool his own wealth and clout with that of others who support him to take over, the outcome would be disastrous. Yet that is precisely how American politics works. Instead of buying shares, politicians buy votes. The peculiar system of dollar votes works exceedingly well in business and dreadfully poorly in politics precisely because, in business, constituents (shareholders) are free to dissociate and sell their stake.
A president certainly has influence over the domestic and world economy; in certain areas, his role may seem very similar to that of a chief executive officer. But in spite of the title conferred upon him by CNBC, presidents are not, and never have been, CEOs. Among CEOs, we see something close to a meritocracy — a climate in which office holders are under constant pressure to perform their fiduciary duties well and in which they risk termination for even the slightest failure.
Among politicans we see a popularity contest in which office holders have guaranteed job security for 4-year spans and are virtually impossible to remove for poor performance. Even those who recognize the two offices as wholly dissimilar often fail to recognize the fundamental reason.
In the end, once we filter out all the superficial similarities and differences, the critical difference between a president of the United States and a corporation’s CEO is the nature of the relationship with those they are meant to serve. The relationship of a president with citizens is full of coercion and force; the relationship of a CEO with shareholders is revocable and voluntary.
