Remember the good old days, where every CEO was a visionary, a patriot, an innovator…a superhero! In the late 90s, triumphant executives would grace the covers of business periodicals with big smiles and statuesque poses. (Our favorite one is the classic repose of a pinstripe-suited CEO looking to the sky with his hands on his hips like Superman.) These stalwart CEOs were steering companies to great success and profitability…and causing stock prices to climb ever higher. We loved them!
Those days are long gone, and (according to the media) today we live in very dark times. In the wake of the bear market, our naïve eyes have been opened and the truth made plain as those greedy, smarmy rascals are exposed for who they really are: supervillains! Not Supermen, but Lex Luthors all! How unlike us they are with their expensive suits and cushy lifestyles. Why, they pay themselves more and more and we're so much the poorer because of it. Treachery most vile!
This is the message many have gleaned from the media. Here are some examples from today's headlines:
More Cream for the Fat Cats
By Justin Fox, Fortune
Capitalists We Don't Trust
By Sebastian Mallaby, Washington Post
Let's get a few things straight. Yes, executives are getting paid more. But the reality is they probably should be. For one thing, the companies they run are producing record profits—which is a good thing for the entire economy. As we've often written in this space, market-based economies create wealth, they don't just share it. Just because someone gets a raise doesn't mean there's less for everyone else. A growing economy creates a bigger pie.
Moreover, being a CEO is a lot more risky than it used to be. A record number of chief executives have left their positions in 2006, and most were shown the door as the result of increased board pressure. "It's deliver or depart" for CEOs these days. Less job security means more risk, which means more reward is demanded for being successful. That's just standard economics, and we should consider it a good thing: those who don't perform are replaced, and those who are successful are rewarded. This web video provides some color:
Whither Chief Executives?
By Staff, Forbes
CEOs are figureheads—representations of their companies and also of public corporations in general. Therefore, the general attitude towards them is a great indication of sentiment. We're nearly FOUR years into the current bull market and people are still angry and skeptical of executives. They're all still supervillains. We still feel bad about CEOs and we still feel bad about the economy.
Angry investors point the finger at CEOs because…gulp…people actually lost money on stocks in the bear market! The common investor wants to blame somebody for those losses. Behavioral Psychologists call it "regret shunning" (see our past commentary "Brain Discord" for more). A cycle of regret shunning can take a long time, years in fact, before it completely washes out.
This can be used to the investor's advantage. Formerly, many looked upon executives as great people because they were making shareholders richer. Sentiment was high and euphoria ensued. It was the "new" economy. When high optimism becomes pervasive it's a bad sign because the consensus is often wrong (see our past commentary "Contrary About Contrarians" for more).
This is great news for a savvy investor seeking to take advantage of something widely believed that is actually false. A dispassionate, empirical analysis of the economy shows that corporate profits are surging, global economies are growing, and stocks are posting good returns in kind.
Yet people still hate CEOs and in turn feel bad about the economy. Let them. So long as CEOs are supervillains, stocks have superheroic potential.