I have previously posted about the book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer by Dean Baler. In that post, I had just begun to read the book, and it looked very promising. It is generally an excellent book about the rents extracted from the economy by the rich,
I am reading Chapter 6 Out of Control at the Top: CEO Pay in the Private and Public Sectors which is also generally good, until I came to this startling excerpt.
A study that has attracted considerable attention, Cronqvist and Fahlenbrach (2012), is an analysis of CEO pay at companies that transition from public ownership to ownership by private equity. The rationale for focusing on these companies is that with private equity ownership there isno separation between ownership and control, and so if the problem of CEO pay is one of a corporate board that does not act in the interest of shareholders, then a takeover by private equity should remove this obstacle. The private equity company stands directly to gain by minimizing CEO pay, insofar as the pay is consistent with maintaining the performance of the CEO. From this perspective, if CEOs of publicly held companies are drawing rents, then they should see sharp cuts when private equity owners take over. But Cronqvist and Fahlenbrach found little reduction in non-performance-based pay, such as straight salary and benefits, and a large rise in incentive pay. This outcome is often taken as evidence against the claim that CEO pay involves a substantial rent component.
While Cronqvist and Fahlenbrach have performed an interesting analysis of the issue, their findings are far from conclusive on the question of rents in CEO pay. A major problem with using companies held by private equity as a comparison is that, almost by definition, the private equity firm is expecting the company it takes over to undergo major transitions. This is the point of the takeover. The private equity firm hopes that by restructuring the company, it can increase profitability. Its plan is to bring its takeover back on the market and resell it as a public company in three to 10 years.
The astounding naivete of this section was beyond belief to me. Compare the above description with an excerpt from another previous post Private equity bosses took $200m out of Toys R Us and crashed the company, lifetime employees got $0 in severance.
Private equity’s favorite shell game is to take over profitable businesses, sell off their assets, con banks into loaning them hundreds of millions of dollars, cash out in the form of bonuses and dividends, then let the businesses fail and default on their debts.
Does this real-life example sound anything like what Dean Baker is talking about in his book? So, finding that CEO pay does not go down after a company is taken private, does not at all prove that high CEO pay is worth it. The CEO’s of companies taken private are fiercer rent extractors than CEOs of publicly traded companies.
If a respected economist like Dean Baker writes a book about how the system is rigged, and yet can be this astoundingly blind to what vulture capitalists really do, then you have to go into reading this book with a large bag of salt. I wish he could rewrite this chapter because it destroys much of the authority of the rest of the book.
This is just another example of the reader having to know what parts of a book are credible and which parts fall far short.