Executive Compensation

EconBuff Podcast #16 with Jim Owens

Dr. Jim Owens talks with me about the executive compensation. Dr. Owens gives his thoughts on the nature of stylized facts concerning the ratio of CEO compensation to that of typical workers. We discuss the potential of competition and productivity to explain the levels of CEO pay. We explore the nature of the job executives do, and Dr. Owens explains the type of demands placed on executives. Dr. Owens argues corporate governance is better and increasingly improving. Finally, we explore how Dr. Owens views the future of corporate governance given ESG funds and other socially conscious business practices driven by new executives coming from younger generations.

Transcript

Stitzel: Hello, and welcome to the EconBuff Podcast. I'm your host, Lee Stitzel. With me today is Dr. James Owens, Professor of Finance, and the Hodges Professor of Corporate Governance at West Texas A&M. Jim, welcome.

Owens: Thank you.

Stitzel: So, Dr. Owens is the longest tenured professor at West Texas A&M, and has taught here since 1978.

Owens: [Laughs]

Stitzel: He also teaches banking executives at The Pacific Coast Banking School. So Jim, our topic today is that of executive compensation. I think it's a good time to talk about that. It's [a] very hot topic both, sort of, politically and just something that people are talking about. So, I think that's very interesting. I see a couple of concerns. One is that CEO pay sometimes isn't considered closely related to the outcomes of the businesses themselves. Hopefully we'll get to talk about that a little bit. The other thing is some stylized facts, and these are the ones that I've pulled. If you have some other ones that you'd like to share, [then] we'd love to hear them. One is that CEOs oft make 300 times the pay of typical workers. And since the mid 1970s, CEO pay for largely public-traded American corporations has gone up five-fold. So, our topic today then is executive compensation. One economist --- and I'm going to lean heavily on his work today --- is that of Tyler Cowen. He actually argues that executive compensation is so high because of competition. He specifically says there's very few potential high-level executives. They're very important to their companies, and that this is driving their pay up. How do you view that claim?

Owens: Well, I would make two observations. First is the fact that if you look globally, you will find an enormous number of extremely competent executive CEOs who are paid dramatically less, both in absolute terms and relative to their workers, than U.S. Now partially, that is a function of how we choose to pay our executives, and partially it's an issue we'll address, probably, in some detail. But more than 80% of their compensation is performance based, and much of that is in the form of stock awards.

Stitzel: Hmm mmm.

Owens: We've been currently, until this morning, on a 12-year bull market. My guess would be that if I assess this executive compensation level six months from now, [then] it will be dramatically lower.

Stitzel: Right.

Owens: As of today, it is lower.

Stitzel: So.

Owens: So, you have to look at the issue of where it comes from; and that is in most countries they are not directly awarded shares of stock, and that makes a substantial difference. The other issue --- and it's a relevant issue --- [is that] we are required, of course, in The United States by SEC requirements to have three main committees on the Board. You have to have an Audit Committee. You have to have a Compensation Committee and a Nominating Committee. They all must be composed of independent directors. The Compensation Committee is the one in charge of setting the compensation pay. Now again, these are independent directors. They are not employed by the firm. The CEO cannot be on that committee, because it's setting his pay. The issue becomes that most of them are not terribly well informed about…

Stitzel: Is that right?

Owens:…other CEOs. So, what they do is, [is that] they hire outside (what are referred to as) compensation firms, who basically do this --- they go out and find a peer group. They then assess the average, or the reasonable, CEO compensation of those peers. And then in turn, they report back to the Compensation Committee and say this would be our recommendation. Now, you have to appreciate, that from a Compensation Committee point of view, one of those directors by saying: I agree with this outside firm. I have absolved myself of responsibility. I've managed to dodge --- as they say dodge --- the bullet. I'm just doing what the experts tell me.

Stitzel: Right.

Owens: I'm agreeing with their numbers. The experts by definition are always encouraged to step your CEO slightly above the other.

Stitzel: Right.

Owens: So, it's an upward spiral. And so I'm not sure that I would agree with Cowen's thing that they are necessarily more talented. I think that in many respects they happen to be in the right place at the right time.

Stitzel: Sure.

Owens: So, there is that issue. There is also the issue [of] those extremely high numbers --- 300 times that median. Now you have to understand how they play with that. You can knock off your foreign workers.

Stitzel: O.K.

Owens: You can knock off your part-time workers.

Stitzel: Sure.

Owens: So what you do then, is you try to raise the median to lower that number.

Stitzel: Right.

Owens: Now some industries, by the nature, they can't get away with that. For example, if you were to look at some of the telecommunications companies, they are notoriously one of the worst in terms of the pay ratio (the ratio between CEO pay and general employees). The reason is [that] you've got so many people who are employed 40 hours a week, but they're doing pedestrian jobs. They're hourly workers. They work for a salary. You can't knock them out of the average. So it lowers the median, which makes those numbers go sky high. To some extent, they're an aberration. There's only a few of those. Average CEO pay in the U.S. is around $12 million dollars a year, including stock awards. Under IRS rules, only the first $1 million dollars is tax deductible. So most of them have a $1 million dollar salary.

Stitzel: Mmm.

Owens: Then there could be some bonuses paid based on short-term performance. But, the bulk of it 80% is in stock awards --- either what they call stock appreciation rewards or outright options.

Stitzel: Right.

Owens: So, in a sense, the Board is awarding (for lack of a better term) funny money. It's not real. You can't reach out and touch it.

Stitzel: Yeah. Already taxed that right.

Owens: To them they're just allocating a million shares of stock.

Stitzel: Yeah. So, let's talk about that, because I think that's a very interesting topic. So, for our listeners at home, give us some of the reasoning for that. One is, sort of, the tax implications --- which I think are very important --- because we hear a lot of rhetoric, probably, in the public about: oh, let's have these marginal tax rates. Well, you're just going to move that $1 million dollar cut off around.

Owens: Yeah.

Stitzel: Right? If I start taxing above $600,000…

Owens: Then just move that.

Stitzel: They'll just move it from a $1 million down to $600,000. But there are some good things, probably, from assigning a big portion of your compensation to incentives, that [in turn] align you with the performance of the company. So can you talk about the principal-agent problem a little bit, as it pertains to executives?

Owens: The principal-agent problem that is at risk there is: you would like to align the interest of the CEO with those of the common shareholders.

Stitzel: Right.

Owens: Therefore, the premise has always been --- and this goes back to Michael Jensen and [William H.] Meckling when they first did the agency theory argument --- that the executives need to have skin in the game. They need to own shares. And in a way to do that was to award them these stock options or stock awards, either way. The motivation being to drive the price higher, therefore to increase their own compensation, and at the same time try the price higher for the shareholders. That is slowly, and I think appropriately, beginning to change to where now more firms are saying: I will give you a bonus, but you have to buy stock. You own stock in this firm. You actually own it.

Stitzel: So, do you view that as being even more skin in the game then?

Owens: Yes.

Stitzel: Than if you have to buy it?

Owens: Because now it's your money.

Stitzel: Right.

Owens: Now you have effectively, if assuming they pursue that, you have a one stock mutual fund. You are invested in the success of this company…

Stitzel: Right.

Owens:…in a big way because it's your real live cash money. Whereas, if it's just a (what they call a) stock appreciation reward, [then] if the stock goes up, I will give you the difference between the starting point when I awarded it, and the point at which I measure your performance. Usually, it's done over three to five years. If that were to occur, I don't really have anything invested. In effect, what happens is I'm willing to take high risk to get that price high in that three-to-five-year span…

Stitzel: Right.

Owens:…and then cash out.

Stitzel: Yeah.

Owens: If I have my own real money invested, [then] I'm a little less inclined to take high risk...

Stitzel: right

Owens:…because now I'm risking my actual future. And so, I think we're going to see more and more companies move in that direction, partially because of the public reaction about these excessively high pay ratios. You have to recognize also, coming out of Dodd-Frank, the pay ratio requirement that you have to publicize it. It has no teeth. It's purely embarrassing. That's --- and the problem is.

Stitzel: There's no teeth, and there's no punishment…

Owens: Nobody cares.

Stitzel:…if I don't make that information available.

Owens: It's just out there. And very few people look at it. Right now, 84% of the stock in The United States is held by the 10% richest individuals.

Stitzel: Uh huh.

Owens: So, the other 16% goes to the other 90% of individuals.

Stitzel: Well, and how many people aren't in the stock market at all?

Owens: Over 50% percent…

Stitzel: Right.

Owens:…who do not own anything through a 401k, an IRA, [or] anything.

Stitzel: So, there's 50% of people that have nothing.

Owens: Have nothing.

Stitzel: And then, what'd you say, there's 10%. So, there's 40% that then have the last…

Owens: That has the last 90%.

Stitzel: Yeah.

Owens: And you've got to go --- I don't know that very many people really read them.

Stitzel: Read?

Owens: Read the pay ratios.

Stitzel: Right.

Owens: They look at them, I suppose, because some news/hysterical newscaster, as soon as they become public at the end of the year --- when _______@11:42? whoever puts them out --- then it makes a fantastic opening statement. Five minutes later they're on another topic.

Stitzel: Right.

Owens: And I don't know. Most know that most people could remember.

Stitzel: So, it's kind of interesting then. We started off this podcast saying [that] this is something that people are worried about, and they care about. And then you're saying: well yeah, but maybe only for a few minutes. They care about it when they see that article come across in Forbes or ____@12:04??.

Owens: Exactly. And then we under Dodd-Frank we also had the Say On Pay.

Stitzel: So tell us what that is.

Owens: The shareholders --- you have to do it every three years. You are required to allow the shareholders to vote on their perception of the appropriateness of CEO compensation. It's non-binding.

Stitzel: Hmm mmm.

Owens: Means nothing.

Stitzel: Sure.

Owens: It's just jaw boning. It is just for publicity. On top of that, you have to recognize that over 80% of the shares of stock in The United States are owned by funds, O.K.? So relatively little is actually owned by Joe Blow, the normal investor.

Stitzel: Well…

Owens: Those people own funds.

Stitzel: So, most people don't want to own stocks directly. We want to diversify their…

Owens: Diversify into the funds. When you look at the votes in Say On Pay --- the votes are primarily from the funds, because they own most of the stock.

Stitzel: Right.

Owens: Over 90% approve.

Stitzel: So what's up with that? So, as coming from my perspective, right, I feel like if I'm owning individual stock…

Owen: Hmm mmm.

Stitzel:…me personally, and then I'm going up, and then I'm thinking about, you know, how do I vote or not. I feel relatively uninformed. Do you view the people that are doing that for the funds --- are they well informed? Or [do] they feel like they're keeping an eye? Because my intuition would be [that] those guys care about those stocks performing well. They care about who they're holding. They care about how that executive is performing. It seems like they have incentive to, kind of, keep those guys and gals that are at top of those big companies in check.

Owens: They would except the vast majority of them vote according to two agencies ---ISS (Institutional Shareholder Services) and Glass Lewis. They make their living on advising funds, regarding the individual stocks within those funds; again, the argument being for a great many of the funds. For example, BlackRock right now, as an activist investor fund, has over $100 billion dollars invested in a variety of firms. They don't perceive. They don't take the time to investigate them all.

Stitzel: O.K.

Owens: So, they just go to ISS or Glass Lewis and say: what do you think? Well, if they say: I think the CEO's compensated in comparison to others in the industry at a reasonable level, [then] they just vote Say On Pay. They just [say]: yeah, it looks good to me.

Stitzel: So, it circles back to that that committee that you're talking about…

Owens: Absolutely.

Stitzel:…that determines executive compensation. So, it's a little hard for me to judge. It seems like you think that this is a problem, or at least, sort of, sub-optimal. Is that a fair interpretation?

Owens: That's a fair interpretation.

Stitzel: So it seems like, kind of, one of those problems [where] we have so much information, and there's so much out there; [whereas], that can be hard to expect Joe Blow to vote on his stocks. Could even be hard to expect a mutual fund. But then, you know, from the perspective of those two companies, they seem to have well aligned incentives. But then, at the end of the day, you're talking about two companies that are shaping, basically, everyone's view…

Owens: Everyone’s view.

Stitzel:…of executive compensation.

Owens: And the difficulty then becomes, [that] if you are the head of one of those large funds ---particularly one of the large activist funds, but almost any mutual fund --- the more the CEO makes, [then] the more you can justify your high salary.

Stitzel: I'm sorry. Run that back. O.K., who is that that can do that?

Owens: If you are the Chair or the CEO of a mutual fund…

Stitzel: O.K.

Owens:…or even one of these activist funds...

Stitzel: Hmm mmm.

Owens:…and you say: I think that CEO at company X is receiving a reasonable sum, therefore shouldn't I receive as much?

Stitzel: Hmm mmm.

Owens: It's in my best self-interest to approve higher CEO pay, because it would result in my earning higher…

Stitzel: Right.

Owens:…pay. It’s just, in effect, in comparison to them…

Stitzel: Sure.

Owens:…I should be earning equal amounts.

Stitzel: This is why.

Owens: It's just --- it's an upward spiral.

Stitzel: Yeah. So, this is why. This is why baseball players like it when other baseball players make a lot of money.

Owens: Exactly.

Stitzel: Because then their raise is coming.

Owens: Absolutely. And then that's why when I go into free agency, I'm/I am looking to: oh by the way, you paid XYZ so much money, and I had a better batting record last year.

Stitzel: What? And of course, the problem there is [that] the players only have power in as much as they can negotiate…

Owens: Right.

Stitzel:…whereas, these executives, that we're talking about at the mutual funds, have some of that feedback that causes some of the problem. Because we/I don't really think we think that there's, sort of, no intrinsic --- there's none of the principal agent --- kind of problems that are happening with ballplayer pay. We can, sort of, maybe judge America for how much they like to spend on sports. Maybe. Maybe not. But those athletes, I think, are a very good corollary. And Cowen in his book Big Business --- which I do recommend to the listeners that's a book worth checking out for sure --- he does make that, sort of, corollary there. And [Cowen] argues: well, your top players --- your guys who make a difference --- those are those guys are getting paid, and they're driving that pay scale up. Do you see, from a talent perspective, that same kind of story for executives, right? It's hard for you and me to begrudge Lebron James making a lot of money, because he's phenomenally talented, and he's so much more talented.

Owens: Right.

Stitzel: Then, and so you don't even blame maybe a guy who doesn't pan out. You don't blame him for getting paid a lot, because the team was willing to take a chance that he was going to be the next Lebron. Is that a good corollary for CEO talent? For those of us that work our normal everyday jobs, we look at those CEOs. And I think it's genuinely hard to tell. Are these, like, tremendously hard-working intelligent talented individuals? Or, as you said earlier, are they just good executives that are in the right place at the right time?

Owens: I firmly believe a lot of this [rests upon being in the] right place [at the] right time. One [is that] they are hard working. I will give you that. There are some industries where the risk is abnormally high, and basic economics is high risk/high return.

Stitzel: Right.

Owens: Health care would be one, you know, particularly with all this going on right now with the Coronavirus. But health care --- you bear two primary risks as a CEO. The first risk, of course, is liability if something goes wrong, and it backs back up to the firm, and therefore to the CEO. So, you always have a risk there that you could be gone in an instant due to an error, not necessarily of your making, but it was on your watch, right? The most common one would be Theranos --- the lady who had the blood testing company which turned out not to work. And now she will never be a major CEO in another firm. I mean, that's high risk. You're done. The other issue there…

Stitzel: So if I can pause you there.

Owens: O.K.

Stitzel: That has a certain appeal, right? Because if you're the person at the top making the big bucks, [then] the buck stops with you.

Owens: Absolutely.

Stitzel: She didn't make any mistake in the production process herself, and yet like you said, it happened on her watch.

Owens: It's happened on her watch. And right now if you say her name, you don't say the word CEO anywhere…

Stitzel: Right.

Owens:…with that name.

Stitzel: Right.

Owens: I mean, so there is that risk. There is also the risk that a lot of these industries are under enormous levels of consolidation. Health care, in particular as a function of which --- if you get bought out, [then] you're gone. I mean, we don't need two CEOs. And it's very hard to find another spot. And that gets to the issue of how much time and energy you have invested in the company before you become the CEO. And the problem is [that] if you are then bought out, [then] you are at an age where you can't start over again. So, many of the CEOs argue [that] number one: I need to make a lot of money so I can salt it away in that event. And it's where the idea of the golden parachutes comes from.

Stitzel: So, I really want to talk about the golden parachutes. I'm glad you brought that up.

Owens: O.K.

Stitzel: Before we get to that, I do kind of want to go all the way back to the beginning. So I open this up saying: executive compensation is so high because of competition. The argument there is [that] the pool of executives is small, and the demand for them [is] relatively high. So that's a straightforward supply and demand version of that story. It makes a lot of intuitive sense, if that's true. But you literally just said the opposite. There are a lot of executives out there who could do the job, and there are not many landing spots. That would imply that we have relatively low pay. That would push pay down.

Owens: It should.

Stitzel: Right. And so…

Owen: Over supply.

Stitzel:…so I think one of the things that we…

Yeah. Over supply.

…then--- so one of the things is, you know --- how do we view top level executives? You know, are there some of those men and women that are a cut above? They're the Lebron James? And so they're driving that up. But then, your average executive (potential CEO) is going to be somebody that --- there's going to be a lot of them that are going to be very similar level production --- which is why we would see a big difference between the pay of top, top athletes and, sort of, just good ball players.

Owens: I think that is a fair thing, and I think it. I don't see a shortage of potential CEOs. Now, I'm not sure that most of the people who say: I wish I had the money are willing to live the lifestyle.

Stitzel: So…

Owen: Because it is...

Stitzel: Can you talk about that lifestyle a little bit?

Owen:…it's 24/7. You're always at risk. Every word you say is parsed numerous times. I don't know how many people happened to see it last week --- the tragedy at Boeing with the 737 MAX. Dennis Muilenberg was forced to stepdown as CEO. He was replaced by a gentleman by the name of David Calhoun. Now David Calhoun had been on the Board of Boeing for 10 years. Last week he had an interview with The New York Times reporter, and basically threw the former CEO under the plane.

Stitzel: [Chuckles]

Owens: His argument was that: I don't know what I think. The words were: I don't know what happened to Dennis. I think he was chasing the gold at the end of the rainbow. In other words, I wanted profits and high salaries more than I wanted safety. Now Calhoun's been on the Board seat Boeing for 10 years, so therefore partially he is responsible.

Stitzel: I was going to say, isn't he culpable?

Owens: He's part of the problem, not the solution. But he became CEO. He then throws Muilenberg under the plane. He now has a massive morale problem at Boeing, because he effectively just accused all the Boeing employees who were working under the former CEO of being part of that chase the gold. And the only response that he could get from the employees --- and this morning he is backing and filling frantically.

Stitzel: Is that right?

Owens: But their response was wow! Really? Because you've just accused us of doing that. For a CEO, that is bald-faced incompetence. I mean, most good CEOs come up through the organization. They know the culture. This man been in the Board for 10 years [and] still didn't know the culture. And so, you have to look at that and say: that's the best we could find? I mean, you found somebody who deliberately reduced morale at a time when it needs to be 180 degrees opposite. The FAA this morning has announced without any question [that] you have to replace the wiring and the tail of the 737 MAX. It's not a big problem, but it's expensive. You've now got a whole group of employees who you've just accused of creating the problem, and you were on the Board. So, it's just --- it's bad leadership. My guess would be [that] they need to find another CEO.

Stitzel: So, they need to make another switch.

Owens: They need to switch soon, because I don't think this guy can be effective at this point. Now that goes to the issue. There are always insiders in an organization who, I think, have the potential. Now whether they have the political skills to come through the chaos, [or] whether they have truly the desire for the lifestyle [is to be seen]. And it is harsh traveling. Your family goes below number two in in sequence of importance.

Stitzel: Right.

Owens: It's a harsh life. No, it's not easy. Everybody goes: oh well, they get to play in private planes. They make tons of money. Yeah, but most of them never see it. They're so busy working…

Stitzel: Right.

Owens:…they don't see it.

Stitzel: Right.

Owens: And everything you say is parsed. Every word is gone over. And you've got ---which means, and the unfortunate part is --- from our perspective, it makes them all sound neutral. I mean, can you just tell me the truth? Well, I am in the most politically acceptable way, that I don't think will get me…

Stitzel: Yeah.

Owens:…in trouble.

Stitzel: He's not trying to tell you the truth. He's trying to boost the morale of his employees.

Owens: Exactly. And there's all kinds of these issues that drive/that shrink the pool of potential CEOs. I don't think it's talent. I think it's all the other factors.

Stitzel: Say that again.

Owens: I don't think it's raw talent. I think it's the other factors: the effect on your home life [and] the effect on your personal life.

Stitzel: Gotcha. Takes a certain type.

Owens: It just takes a certain mentality to live like that. And again, it's harsher in The U.S. because certainly with multimedia --- everything you do is instantly sent around. For example, this morning they just backed --- Elliot Management and activist fund just backed --- off the CEO of Twitter, right? Jack Dorsey.

Stitzel: Right.

Owens: They wanted him out. Well, they've now agreed that if he'll buy back $2 billion dollars worth of stock, Elliot will let him live.

Stitzel: So, can we talk really briefly, for those of us not familiar, what an activist [is]?

Owens: An activist investor is any individual --- or in these days’ funds --- who takes a position in stock. I mean, literally, I could do it with 10 shares of stock. I have the right to propose to the Board that I think changes should be made. And there are a few of them that are very well known. Obviously, Carl Icahn is among the most famous --- but Elliott Management, BlackRock, Vanguard, [and] even Berkshire Hathaway [are also well known]. These people will all take positions in stock, and then they will suggest to the Board: I think if you did XYZ change in management [and] change in strategy, [then] we could be more successful. For example, eBay is under a lot of pressure right now to sell off its Classified Units. It's been pressed. Already sold off PayPal. It sold off StubHub. And now they're being pressured to sell off the Classified Units that --- it's not making money. Go back to being what eBay was --- an auction site. And be the best auction site in the world. Quit trying to spread yourself out. But it gets into those kinds of issues for the activists. How do I create value? Now, most of them have time frames --- three to five years maximum.

Stitzel: Even the activists?

Owens: Even the activists.

Stitzel: So that lines up…

Owens: You want in. I want out.

Stitzel:..with the CEO timeline.

Owens: Absolutely.

Stitzel: It's a short timeline.

Owens: Yeah. But the CEO has got to find a way to respond.

Stitzel: So, this is something. I did want to approach, at some point, is this timeline thing. I think we do sometimes think these companies are too short-sighted. I'm, sort of, of the opinion that the way that we see the world evolving, and some of these longer bets not paying out, that maybe that's overblown a little bit. It's maybe in a time period where the economy moves about a little slower, especially in terms of technology, then we don't have that kind. That might be a bad thing. That might be the kind of thing to be worried about. O.K., they're looking so short-term because they care about stock price, and really, it's the long-term health of the company. But we see several different things. One is: some of these companies that seem to get to the top and stay on top longer, right? So, sort of, that classic technology company like a Google [or] Amazon -- those kinds of firms. So, they seem to have found the balance between short term and long term. That's maybe just the definition of a successful company. I don't know. And but, we're living in an environment where you could make the mistake either way --- too short or too long. Do you --- how do you view that?

Owens: I think with the advent of technology, and communication speed, [and] social media --- there are a lot of people wish we were back in the 60s. Back in the 60s, inflation was a couple percent.

Stitzel: Right.

Owens: You know, high interest rates for a home loan were 4-5%. You could make 3-5% on your savings if things move slowly. I grew up in that era, so I remember how slowly they moved. Today, truly I would like somebody to tell me in detail what my phone will look like five years from now.

Stitzel: Yeah. Not possible.

Owens: And I don't think anybody can do it.

Stitzel: it's either going to be directly in your brain [but never do this O.K. Revelation 13-14], or it's going to be a hologram, right?

Owens: I just --- none of us know. Will you plug it. Will it be science fiction like The Matrix? Do you plug it into a socket in my head [but never do this O.K. Revelation 13-14]. I don't know.

Stitzel: There are companies working on that.

Owens: Therefore, for example, the Samsung's flip phone with the foldable screen.

Stitzel: Yeah.

Owens: O.K., a year ago we were all laughing. It cracked. Now they're selling them.

Stitzel: Is that right?

Owens: They're selling them for $1,100 bucks. But so, I'm not about to buy one.

Stitzel: Dude, Apple sells their phones for $1,100 bucks.

Owens: Yeah. But it's one of those things where, true, five years ago would you have said that I'll spend a $1,000 on a telephone and I'll give up my camera?

Stitzel: No way.

Owens: I mean, we all had 35mm SLR cameras…

Stitzel: Right.

Owens:…that we thought it was incredible when they went digital, [and] had to quit putting that stupid film cartridge in there and hauling it down to the drugstore to get it developed.

Stitzel: Absolutely.

Owens: We thought this is incredible. I have no idea what they'll look like five years…

Stitzel: Yeah.

Owens:…from now. So, to ask a company to be thinking 10-15 years out --- who knows what the technology will be? So, I think short-termism is overblown.

Stitzel: O.K. So yeah, you're on the same page with me.

Owens: They have to think short term, because things are changing so fast. If you were developing a product for a decade from now --- believe me you're going to miss the market, because you have no idea what it's going to look like with the technology. We don't know what AI is going to do to us yet. We know artificial intelligence is coming. We don't even know for sure what 5G is going to look like when it's in full blown.

Stitzel: Yeah.

Owens: We just don't know. I mean, it may well be that will change the way we all interact. For example, here at the school, if I (and I) was one of the very first to go online --- you back up 10 years and tell me [that] I'd have people teaching all their classes online, I would have laughed at you. No way. We're --- it's going to be me in the classroom. We'll just be making eye contact. Now my eye contact comes through my screen --- through Skype, or WebEx, or whatever. It's totally different.

Stitzel: Well, and that's the reason I have a job here is because you and my previous guest…

Owens: Hmm mmm.

Stitzel:…Nick Gerlich [WTAMU Hickman Professor of Marketing] with these online programs…

Owens: Yeah.

Stitzel:…had a lot of success doing that. We're a pioneer here at West Texas A&M…

Owens: We were.

Stitzel:…in that. And I'm pleased to be part of that --- especially the graduate program.

Owens: I don't know if Nick told you a sideline on that. He and I actually [programmed]/coded in HTML.

Stitzel: He didn't say that.

Owens: Absolutely. Nick and I taught ourselves to code HTML [and] to put the first classes online. We did it through Notepad --- Word Notepad. You would code the little slash marks in HTML, just the way the editors do now. And then you'd send it through and say: well, nope that didn't work. And you talk about thieves. We would steal from anybody…

Stitzel: [Chuckles]

Owens:…to try to find a piece of code that would work.

Stitzel: So let me ask you this as a bit of an aside here. So, we have LMSs [also known as] Learning Management Systems…

Owens: Yeah.

Stitzel:…that's this, you know, the sort of, website that we run all of our online programs. Those are big, big companies that do that. I think there's only a couple…

Owens: Yeah.

Stitzel:…of viable options on that front --- Blackboard and Angel.

Owens: Yes.

Stitzel: Something else. So, are you talking about before?

Owens: This is way before.

Stitzel: So, you're talking about…

Owens: Oh yeah.

Stitzel:…[that] you're right in the original elements?

Owens: We were in the original ones, and we ran everything through Netscape Navigator, which most people never even heard of today.

Stitzel: @33:59 ??

Owens: That's all we had. We actually had at WT our own shell. We [had] our on LMS.

Stitzel: So, this was in ‘97?

Owens: Yeah.

Stitzel: Or roughly about?

Owens: Yeah. Back in…

Stitzel: That's what. That's what, so….

Owens: Yeah, it was a fascinating time.

Stitzel: O.K. so that's ’97. We're here. We're here in 2020, and it's just a completely different ball game.

Owens: And now we're looking at the Coronavirus and The University of Washington went entirely online today.

Stitzel: Yeah. I was watching that.

Owens: And I would not be surprised to see it happen here. Just out of…

Stitzel: This semester or?

Owens: It wouldn't surprise me.

Stitzel: I mean, you could see the value, right?

Owens: I mean, just out of an abundance of caution.

Stitzel: So, I'm going to go in front of my class tomorrow and say: listen, don't be a hero. You don't have to come to class if you're running a fever we'll make it work.

Owens: We’re going to make it work.

Stitzel: Don't kill your classmates with the Coronavirus. And you're saying the next step after me telling my students to wash their hands is going to be…

Owens: Right.

Stitzel:…let's just put it online for a couple weeks.

Owens: Let's just put it online until we're sure this is not going to get us.

Stitzel: And so, what's wild about that is the environment changed so quick on that front. And now, we're in a situation where one, that would be viable, right? And two, I saw projections, and I can't speak to the validity of them, per se. I, sort of, saw it in passing [while] scrolling through the news that there are projections that about a third of 93 million people in The U.S. are projected to get Coronavirus, because we won't take the kind of steps. And yet, I could imagine this kind of thing, like you're talking about, being an enormous step towards fighting…

Owens: Hmm mmm.

Stitzel:…something like this. Could you imagine all the schools [and] all the universities being able to say: you know, go home, download this app, [and] do your homework.

Owens: Absolutely.

Stitzel: I'll sit in my office and record to this camera right here? And we'll just go on.

Owens: We'll just continue on.

Stitzel: There --- I know that Japan, in efforts to try to keep the Olympics on this summer, has canceled their grade schools. And so, I don't know what measures they're taking to, sort of, keep the children educated. But imagine having suppose that you lost the entire second half of your sixth-grade year. That's a big developmental loss.

Owens: It is.

Stitzel: But if we can be learning from home, maybe it’s…

Owens: Maybe we can…

Stitzel:…can mitigate that loss.

Owens:…get through this.

Stitzel: Yeah. Absolutely.

Owens: And there's an analogy between that, and what we were just talking about with the CEOs, O.K.? The analogy is who's doing that? Who’s doing that.

Stitzel: You're saying who's having to make the hard choices there?

Owens: Who's going to be doing the work to put it online? It's you and me. Is the CEO --- with all due respect to the President of the University --- is the CEO doing that? And the answer is no.

Stitzel: No.

Owens: The answer is no. One, like many people as you get a little bit older, the packaging on things is frustrating. I actually own a plastic bubble cutter, so I can get things out of there…

Stitzel: Sure.

Owens:…without cutting my hands and shreds. It's electric powered, for god's sake.

Stitzel: It's crazy that even exists.

Owens: It should not happen. I cannot imagine being an elderly person with nothing but a knife and a pair of scissors trying to get into.

Stitzel: Just asking for it.

Owens: My common thing has always been what I would like to see happen is [to] walk into the Board meeting, hand it to the CEO, and say: tell all your minions to shut up, and sit down, [and] open that.

Stitzel: Really?

Owens: And if you did it, I'll bet you'd never package it that way again.

Stitzel: Yeah.

Owens: Because he can't get in.

Stitzel: Right.

Owens: So, somebody below him dreamed that up.

Stitzel: Yeah.

Owens: And that, I think, is something people don't recognize about CEOs is that, in fact, most of them cannot do the work that they manage.

Stitzel: So let's talk about that a little bit, because one of the things that Cowen argues is that CEO skill sets have really broadened; and that has made the pool smaller, and that's made the returns to the CEO higher.

Owens: Yeah.

Stitzel: Because we're seeing much more financialization, you have to understand a broader range of industries. You can't just know your individual business --- that you have to understand much more in terms of regulations. You've talked a lot about public relations. That's a huge skill set…

Owens: Hmm mmm.

Stitzel:…that we want in our CEOs you have to deal with globalization. Now it's not just enough to know about The U.S. I have to know what's going on in China and India and Europe and everything. So, Cowen argues these people have become generalists. We've asked them for more a broader range of things that they still be good at. You're saying that has come, in part, at the sacrifice of them knowing exactly what our company does? They're more on that, maybe more on that, financial and public relations-regulations globalized side? How do you see that fitting into the puzzle that we've laid out so far?

Owens: I think basically that you are quite correct in what we're requiring of them. And certainly, it's a valuable skill. Nobody would argue that they should not be well paid for those kinds of skills. The issue is however, they're not really running the company --- they're representing it. They're making/the decisions they make are --- they're not who do we source from China, [but are], I think, we should begin to source from China. And then, it's because somebody's recommended, [then] we can do it cheaper, better, [and] faster until the Coronavirus blew our supply chains apart. But the issue there is [that] they're thinking in exceedingly broad terms. And that is --- I don't know that's an unusual skill but it's --- an unusual demand, because it's so easy to get wrong. And that is a problem. But in terms of --- well let me rephrase it. Let me put it back to WT. I've been here through, I think, six presidents now. I think five or six. And with all due respect there, they were all delightful gentlemen in their own ways each one of them. Honestly Lee, Mondays this afternoon at 1:30 p.m., teaching governance will not change.

Stitzel: Right.

Owens: It hasn't changed in 42 years with seven presidents.

Stitzel: Yeah.

Owens: My job doesn't change. Now, the demands I make on them have changed. It has very little to do with the classroom. It has to do with promoting the school. Has to do with trying to get us to see things globally. For example, that we now try to attract students for diversity reasons from other countries. The skill requirements have changed; whereas, when I first came here, you would see them walking around campus. And many of them taught a class, and that is very rare anymore. That is not a normal thing. The same is true of CEOs. A small company CEO walks around on the floor and knows everybody. Knows how the product's built. As the firm gets larger, that separation becomes greater and greater. Number one is because they/we require skillsets. Number two --- that's what creates the risk. That's where you can make the mistake. You no longer --- for example at Boeing, they no longer knew what was happening on the floor. The emails that were flying back and forth between the employees at Boeing laughing at the FAA [and] laughing at the management of getting away with things is an indication that somebody should have been walking on that floor. You should have gone down and talked to the engineer. How are things going? You know, you're putting all these screws in the motor. How's it coming? But nobody ever does.

Stitzel: They're running that company from spreadsheets.

Owens: They're running it from paper. And from --- for many years I helped a good friend of mine at Key Bank, in what they call problem loans. In other words, they're going bankrupt. And I was an expert witness if we had to go to trial. And other than that, I would try to value what I think it was worth. And we try to find buyers. My friend Dick Hooper, who was the head of that department at Key, made the observation with extreme conviction --- and I came to agree with him --- [that] we would never have made this loan, if that lender had gotten out of his chair, and walked out to where he was lending it. If you had just gone to the place and walked around, you wouldn't have loaned it.

Stitzel: And that's not even an executive. That's somebody…

Owens: That's just some poor guy doing his job. He's delivering on paper. That's what we're asking the CEO. That's where the risk occurs. You've got paper, and you've got reports for minions. But minions don't want to make you unhappy, so they say positive things. You're always right. You're always handsome. Your hair looks good, etc. How do you get the data you need to avoid that company getting in trouble, and you being held responsible because it's on your watch? And you're going: I had no idea that that was happening. I'm certain that Muilenberg at Boeing did not know the shortcuts they were taking on the MCAS system that they had gone down to. They made it. The problem is: there was only one flight sensor, and you could have an option to have a second one. Should never been an option. Any engineer will tell you: always have redundancy. Always have redundancy. They didn't put redundancy. But I doubt Muilenberg ever knew that. If he had, I'm sure he would have said: what are we talking? $100 bucks? Put the other flight sensor on. But he didn't know that, and as a consequence, Boeing got in trouble. Stock price fell. He lost his job. We, and none of us --- I mean all of not. I don't say none of us. A great many of us are going to be very hesitant to climb on that 737 MAX, all because of a cheap flight sensor that, really, somebody low in the organization chose not to put on to save a few bucks. But I bet the CEO would have done it, but he didn't know. And that's one of the reasons you pay them well, because…

Stitzel: Yeah.

Owens:…that's a risk they take every day.

Stitzel: So let's tie a couple of things there. Because you brought up one of the things that I do want to talk about a little bit which is: CEOs help large firms more than they help small firms. And so, at the top of the size of firms…

Owens: Hmm mmm.

Stitzel:…it's more and more important that you have a CEO that returns to that get larger. Sort of, like a basic leverage idea, right? And then you talked about very early on: how it is that they're getting compensated based on your stock options. And then you said, I think you said, we're seeing/we saw what? An almost 1900 drop in the Dow today, or at least it was last we checked; it's been…

Owens: It’s been a few _______@45:12??

Stitzel: It might have fallen even further. And so there, you expect like that'll be reflected…

Owens: Hmm mmm.

Stitzel:…in future compensation. I mean, obviously it is that.

Owens: Yes.

Stitzel: They have some of those stocks. And so, in part, you know, CEOs as companies have gotten larger. They've gotten more global. Their skill sets have gotten broader. You've mentioned from the get-go part of what you're compensating them for is risk, and that risk is going up. [So], the bigger the company --- the further you get away from the ground floor, the more risk, the harder it is. And that there's this, sort of, causing the market to go up. Or as the market goes up, your compensation goes up. So we see a relatively clear picture then of, kind of, how it is that we've got here. We have some, sort of, negatives about what's the feedback mechanisms of how the nitty-gritty…

Owens: Yeah.

Stitzel:…the details the mechanism of how they get paid. But sort of, the overall picture is: these are people whose jobs you probably don't want, doing, you know, pouring their whole life into this, working very hard, [and] taking on a lot of risk. So, it strikes me that the story you're saying, you're not as worried about executive compensation itself. That doesn't bother you. But, like, it seems organizational structure seems to have maybe systematic flaws.

Owens: I think...

Stitzel: Do you want to comment on that?

Owens: I think that is where the flaw is. Most of us --- we are determined to please the boss. We perceive that to be in our best self-interest. May not be in the best self-interest of the boss or the company. But most people just can't bear to be [around] --- well, and partly its culture --- we don't like negative people. We make a big issue about that. Everybody should have dimples on their cheek and smile. I mean, that's just a requirement of life, and it's just part of our culture. But as a consequence, you have people who don't know what's going on, and that puts them at risk even more. It's not that you intend to do that. It's just part and parcel of the way we work. The other issue, I think going forward in a lot/of for a lot of these CEOs, is we condemn so fast now. You're guilty immediately. And for example, there was a lady on the Board, a lady by the name of Quigley, who received some material from the FAA.

Stitzel: At Boeing?

Owens: At Boeing. She's on the Board, and she responded back to the FAA: why are you sending this to me? Shouldn't this go to the department that it involves? Immediately, she was branded as not being an effective Board member, because she was not paying attention to that. And she was off the Board.

Stitzel: That seems pretty reasonable on her part.

Owens: And to me, that would be something I would say: did you mean to send this to me? Wouldn't that really go to the department that is doing this? You know, maybe you misrouted it? It was totally taken out of context, [that] she was not an appropriate Board member, because she's not paying attention to these messages. And you go: that's a very quick judgmental position. And that's characteristic with social media, with the speed of telecommunications, with the fact we don't all get the full story, and we just bang --- you're guilty. All you gotta do is watch Twitter. I mean, I try not to because I have a hard time with the first four letters of it. Because I came from a culture where if you were a twit you were…

Stitzel: Yeah.

Owens: Yeah. That's about as low as you could get. But when you look at some of the stuff that comes out about these people, you've got to go who would want that? Who would want that job? Now, you know, when you look from the outside, this would be great to be a Board member. The average Board meets eight times a year, right? So, you've got to have access to all the information relevant to your position on the Board eight times a year. O.K., I'm paid a quarter of a million dollars, but I don't know if I really want to do that. I mean, that's all I gotta do is make one mistake. Say it wrong one time. Boom! It's over.

Stitzel: I think, the listeners are probably saying: well, that does sound pretty bad in order for me to take that position. You have to pay me a lot. Ergo, why we see those people get paid a lot maybe?

Owens: Yeah, it is. Plus, which fact --- I'll pose a simple math problem to you. Take the CEO pay. Take the highest one you can find. Oracle's one of the biggest. Divide by revenue.

Stitzel: So just normalize it?

Owens: It's down below 1%.

Stitzel: So, there's a part in Cowen's book where he says: different labor economists try to estimate how much of your marginal productivity do you capture in pay? For --- we do this as an exercise. So, for our listeners at home, you know, one of our fundamental arguments in economics is that you're getting paid by your marginal productivity.

Owens: Hmm mmm.

Stitzel: And so, that means, you know, how much more are you producing? How much are you adding to the company on the margin, right, given the conditions that you're in? And so, Cowen shows some studies --- and I'm not familiar with this literature, so I'll take his word for it --- but he says, you know, the average is something like 80-85% for your typical worker; and that CEOs are capturing something like to 60-70%. So that jives with what you just told us about how much of the revenue, you know…

Owens: Yeah.

Stitzel:…going to the CEO. You know, and I've always [thought] --- this may not be a good way to think about it, so it might be a good question for you to turn your attention to --- [that] CEO compensation is a cost to the company. And so, you feel like the Board and these committees that you're talking about would want to treat it like such. Do you…

Owens: Hmm mmm.

Stitzel:…do you think that's how they view that?

Owens: No, to them it’s free money…

Stitzel: To the Board?

Owens:…to the Board, because the award (the stock awards), you’re just…

Stitzel: I see.

Owens:…handing over shares.

Stitzel: Gotcha.

Owens: And what most people don't understand is the number of shares outstanding typically is a fraction of the ones that are authorized. Most companies will authorize vast number of shares more than they've actually issued.

Stitzel: So, for our listeners at home, explain what that means --- authorized versus issued.

Owens: Somewhere in the past, the shareholders have said: we grant the Board the right, for example, to issue 50 million shares of common stock. The Board has only issued 10 million. You've got 40 million shares that you have permission to issue at your will. So, when they give it to the CEO, they're just dipping into that pool and saying: here's a million shares. But to them, it's not real. I haven't really given you cash. It's not going to come out of the checking --- the company's checking --- account. I've just given you some authorized, but previously unissued, shares. I will make it legitimate by saying it's going to take you three to five years to vest it by meeting performance goals. Perfectly acceptable. But from the Board's perspective --- or the Compensation Committee really, because the Board usually just approves what the Compensation Committee says --- I've not really spent anything. I've just handed over more shares of stock. So yes, I have diluted the shares, but proportionally it's pretty small. It really isn't going to matter much. Plus, which fact for most individuals, even if they own shares and they receive a proxy statement, they don't read it, one. And two, I read them constantly for my governance class. It's called the DEF 14A. You can go to Edgar (the SEC site). Any company that's publicly traded and you're looking for the DEF 14-A. The DEF 14-A, and that's the proxy statement. If you dig deep in that, it has to state the total compensation, and what the pieces are for each senior executive. Most people are never going to go look at that. They'll never know that it's even there. If I send them the proxy statement, it is 70-80-90 pages. Most of it is boiler -- legalese boilerplate. You've got to dig your way down to that one exhibit that says: here's what the CEO makes. I would argue [that] very few people, even fund managers, don't go there. It's just --- I do it in class, and I can see the eye roll while I'm scrolling down through all of this gibberish, trying to get to the piece I need. And it's just something that, again, yes I'm paying them, but I don't feel that I've really spent anything.

Stitzel: I find that so fascinating. That's amazing that you've laid that out that way. That literally changes my view. Because I had this, sort of, I mean, it's factored right into their expenses. And you're saying: well yeah, a million dollars is.

Owens: Yeah.

Stitzel: But the other $12 million, they're getting paid in stocks we issued that were sitting there just diluted.

Owens: They're just sitting there any way.

Stitzel: It’s a little bit of diluting our stock…

Owens: Yes.

Stitzel:…that's always done.

Owens: And most Board members…

Stitzel: Buy a fraction probably.

Owens:…most Board members don't own enough stock to really care about dilution.

Stitzel: Is that right?

Owens: No.

Stitzel: I was gonna say they may we may want them to own some stock too. So…

Owens: Most companies require it, but it's very minute. [Chuckles]

Stitzel: So, you've painted a picture, and we've kind of encircled a topic here that I wanted to bring up with you. You teach corporate governance.

Owens: Yes.

Stitzel: I think that's even the class you're talking about.

Owens: Yeah.

Stitzel: You're saying you're scrolling through things and showing your students these kind of things. One of the other arguments that Cowen makes is: you/we'd be worried, sort of, from like a moral issue that there are reasons these CEOs are getting paid that aren't due to performance. We've talked a lot about the performance reasons that executive compensation…

Owens: Hmm mmm.

Stitzel:…has gone up. So, you don't see it as a huge problem. There are different parts like you're saying. This new idea about there/it's not factoring straight into your expenses for your firm. And this other idea about, sort of, the mutual funds and some of these executives having, sort of, a part of the feedback loop, where they would actually want to encourage the upward…

Owens: Yeah.

Stitzel:…spiral…

Owens: Yeah.

Stitzel:…as you've said. Nonetheless though, Cowen makes the argument that these CEOs actually have to deal with tighter and better corporate governance than ever before. And part of the evidence he gives for that is that outside hires of CEOs were only 15% in the 70s and they're up to about 25% in the 90s. I don't know where the numbers have gone since.

Owens: They've gone higher.

Stitzel: And so, you talked about that idea of hiring somebody off the Board to be the CEO. Well, I think an outside observer would say: well of course that guy's getting paid a lot. These are his people. That's a little nepotism there.

Owens: Yeah.

Stitzel: That's getting them pay. So, it's a good thing, probably, that we see these outside hires climb. So, can you talk about those two things? This idea that corporate governance is tighter and it's better than ever before. And so, we probably should be less concerned about that. Outside hires is going up, but I'm guessing still [that] inside hires make up the majority of higher systems?

Owens: The inside hires makeup the majority. We're going to go outside in a big way. Let me tell you why I think it'll happen. A large number of the people who are candidates are in their 50s and 60s, right, because they've got experience in the firm or with other firms. The current, not craze, [but] the current drive-in corporate governance is what we call ESG (environmental, social, and governance). You have got not only to prove that your firm is environmentally conscious to avoid punitive risk (violating the law and being punished legally), you must now demonstrate to investors that you are taking a solid action to move forward on environmental issues, or on social issues, and you're improving the governance. The issue is those are the demands of the millennial investors. And the ESG funds have jumped by over 200% in the last five years, and they're going to continue to go. That's a younger group of new CEOs. Those 50s and 60s --- to them the environment [is]: yes, I don't want to drink nasty water; but, you know, as long as my company's O.K., I don't have a problem. What the new investor is demanding is: not only do you not pollute the water, what are you doing to make it even better? And that's going to require a new group of younger outside CEOs, because they're the ones who've grown up with those social needs. Lord bless them for doing so. But they're very cognizant of this, and it is going to be [going forward]. If you go to any governance conference, or any publication, you will see ESG over and over and over. Now, we started out about five years ago with what they call CSR (corporate social responsibility). That has now morphed into this environmental, social, and governance; because there are funds out there that basically (the millennials) have demanded every stock in that fund must satisfy minimum standards on environmental, social, and governance factors. And [by this, I mean] not just meeting the law, but how are you improving [and] how are you enhancing those activities? So, I think you're going to see a massive turnover. And I do think they'll come from outside, because you won't have that focus if you've spent 25 years inside the company, doing it the way we've always done it. Now I want somebody with some new thoughts. So, I think if I were a young manager, I would tie myself into one of those companies, and I would be on the forefront of that; because I think that's where you're going to get your new CEOs. Would be surprised if you don't start seeing a change in Boards --- younger Boards, more diverse, who are more sensitive to these issues. And again, I'm not faulting the older people. I mean, I'm one of them. We were not brought up that way. We were just brought up --- pick up your trash. You know don't throw crap out the car window. Now you've solved your contribution to environment. You know, my dog and I go for a walk every day. But twice a week, we take a plastic bag, and we clean one of the parks over at the school. You know, we pick up trash because most people are slobs. So, it gives her something to do while I'm walking around. And gives me something to do while she's running around. To us --- boy, we really did something for the environment. No. No. We're talking about major corporate investments in environmental enhancement [and] in social improvement. That's going to be a new generation. That's going to be a younger group of people who grew up with that. Grew up with that mentality. And it's not that old dogs can't learn new tricks. They just don't learn them real well.

Stitzel: [Chuckles]

Owens: You know, yeah. I can learn to sit, but I can't do it for very long. So, it's going to change, I think. I would be surprised if you don't see the disparity between CEO pay and employee pay decline as that occurs; because again, they're going to be more sensitized to those governance issues. It does not enhance morale when it becomes obvious the CEO is making so much more than the people whose, as they say, where the rubber hits the road. So, I would not be surprised to see this somewhat as a Nader here soon. And I'll start seeing that back off a bit, because we've seen it in Europe. We've seen it in Japan, where basically, yeah, you make more money than the average worker, but not the levels we're seeing here. And I think it's just a different generation, which I think is great. I mean, that's where the innovation is going to come from. You got to love it. I mean, I don't know that I will benefit from all that gain, but somebody will. And I think, you know, my grandkids will. And it should happen. But I'm not faulting the older people either. You're not trained in it.

Stitzel: Yeah. Times change.

Owens: It’s just…

Stitzel: You're painting a very hopeful story there. There’re so many things to like about that, you know, where I think sometimes I'm disenchanted with, you know, the political environment. I think we all are…

Owens: Hmm mmm.

Stitzel:…probably not alone in that, you know. But I also --- I do [and] I would advocate this, is [that] this episode isn't about climate change or anything like that. But, you know, I would advocate for certain types of policies. You know, but neither do I think that it can be the case that we can just, sort of, by sheer political will, you know, cause us to get to a place where we live in a sustainable place; and we, you know, improve the environment (like you said, hopefully, for your grandkids, for my grandkids, and so on). So, this idea that you're saying that, literally, the markets, the funds, [and] the activist funds are out there pushing the corporate world towards these type of practices…

Owens: Yes.

Stitzel:…is very promising. So, we're talking about a you're making it sound like it's already a pretty significant movement that’s…

Owens: It has.

Stitzel:…gaining steam.

Owens: It's on its way. And again it's --- I don't. There's no turning back. I mean, this is on its way now.

Stitzel: Right.

Owens: Again, you've got moving into positions of not only authority, but economic power is that generation. Those 30- to 40-year-olds who came through, and then behind them some 20 year-olds who are even more enthusiastic and very technologically adept. But I would not want to be a CEO with my company accused. For example, some years ago in India where they were dumping the stuff in the rivers --- dumping some very difficult chemicals in the river ---- in today's world, that CEO would be gone within days…

Stitzel: Yeah.

Owens:…because of the publicity that would come out. And the fact you've got a group of young people who are on top of that. They just don't put up with it. If nothing, I don't know how many of you watch some of the tragedies that have occurred in India, Yemen, [or] Syria. If you ever watch the films on the BBC, there are horrible victims with iPhones…

Stitzel: Yeah.

Owens:…video recording these atrocities. Who would have imagined that?

Stitzel: Yeah. Poverty is not the same today. As much as we dislike poverty and would like to eliminate it --- it's not the same.

Owens: It's not the same. These are people --- the people who are fleeing Turkey heading for Greece have iPhones with them.

Stitzel: Yeah. I saw some of those videos too.

Owens: And they're showing the videos of what the Greek soldiers are doing.

Stitzel: Yeah.

Owens: Well, that's going to change things here…

Stitzel: Yeah.

Owens:…at some point. You can only fire on those dinghies X number of times before people react.

Stitzel: Yeah.

Owens: The same is true the corporate world.

Stitzel: Right.

Owens: You just cannot --- you can no longer get away with things that maybe five-ten-fifteen years ago you say: ah, that'll slide. Not today. Not today. And that again, if I was that CEO, that's a risk. There I see it. Now all of a sudden, I'm guilty. And Muilenberg at Boeing, if you ask him back in the beginning: what's an MCAS system on your plane? He would have zero idea. But he's out of a job.

Stitzel: So, I wasn't expecting today to come in here and have, you know, so much hope infused…

Owens: [Chuckles]

Stitzel:…into the story where I think our listeners, probably, have that, sort of, general sense. And, you know, maybe it's overblown. Maybe it's one of those things that social media distorts…

Owens: Hmm mmm.

Stitzel:…our view of the world, and our view of how other people see the world. You know, but you said a couple of really important things here today. You know, one is, you know, executive compensation --- it does have some problems. You know, it's definitely not this super rosy story in some sense. But there are reasons for what it is that we're seeing…

Owens: Hmm mmm.

Stitzel:…going on with trends in executive compensation. You, even just a minute ago, said you think probably that disparity between those between your (what Cowen calls the typical worker you call the)…

Owens: Right.

Stitzel:…median worker, which I assume refers to their median…

Owens: Yeah.

Stitzel:…income or pay. And the top --- that you think that will go down.

Owens: Yes.

Stitzel: You know, and also this story about how companies/corporations are becoming more and more sensitive to social values and environmental concerns, both of which are probably very, very good things. And so, you know, I think when you look at it from the perspective of: why is it that somebody's in an educational role like you and me, right?

Owens: Hmm mmm.

Stitzel: We love nothing more than have students really listen, and learn, and think, and come to their own conclusion --- even if they don't get exact they don't get to the place where I am, in terms of what I believe --- watching them think and learn is very important. I think you've highlighted today a really important thing that we can do which is: step back and break down why is it executives get paid this way, and what are the problems, right?

Owens: Yes.

Stitzel: Because I think there's probably a general notion --- and again, maybe this is my distorted view based on my social media interaction --- that CEOs just pick their pay. And then it's, I think, having a real explicit understanding [that] they're doing this based on these committees. And that has its own problems, and there are feedback mechanisms, but those have problems. And so, having a much more nuanced view of that is really important. And it can even lead us to a place where maybe we have a little more hope. So, I find that extremely appealing. So, we're here sneaking up on an hour. So, I do want to bring this in for a landing. You kind of talked about where corporations are going [and] where executive compensation is going. How/what do you see the role of governance, because we kind of touched on that briefly --- about the quality of governance. Is that getting better? Do you see that getting better? How do you see that fitting hand in hand with those other two topics?

Owens: It is improving dramatically year by year. Truly, ten years ago governance was barely a topic. And now, every firm will typically have a Governance Committee on the Board. It is part of the --- it's not required by the SEC, but they will voluntarily put it on there to make sure that from the --- Board's perspective [that] the governance structure is working. That it is --- for example, we do [and] we have a succession plan for the CEO that needs to be in there. That's part of good governance. Are we treating/ how are we handling the diversity issue? Do we have a specific policy? Those are all indications. And I'm very optimistic about it now that it has been brought out to the (laid out on the) table. I think it's going to just get better and better and better. For one thing, truly five-ten years ago, I don't know. We would have, you know, I offer a course in governance and ethics. I don't know that anybody would have even thought that. So well don't you do that in management? And I'm teaching it in the Fin group, mainly because after the 2008 disaster, that was [when] the financial institutions [who] were the ones who could have used a little governance enhancement. So, it got started there, and now it has just grown. And I think that's nothing but a good thing going forward.

Stitzel: My guest today has been Jim Owens. Jim, thanks for joining us.

Owen: My pleasure. Good fun.

Stitzel: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at econbuffpodcast@wixsite.com. You can contact us at econbuffpodcast@yahoo.com.