The Wall Street Journal - 22.02.2020 - 23.02.2020

B14| Saturday/Sunday, February 22 - 23, 2020 **** THE WALL STREET JOURNAL.

revolution.” By the 1920s, profes-

sional managers had taken control

of corporations as stock markets

dispersed their ownership—a nec-

essary step to avoid the grandchil-

dren of founders running busi-

nesses into the ground. Today,

80% of the Russell 3000 is owned

by institutional investors, includ-

ing index funds.

Boards either have little power

or are made up of insiders. Last

month, new Boeing CEO David Cal-

houn argued that having been a di-

rector since 2009 had only given

him “a front-row seat” to the

problems that led to the com-

pany’s 737 MAX crisis.

Figures by economist Emmanuel

Saez depict the power shift from

owners to managers: A century

ago, the 0.1-percenters’ main

source of income was capital; now

it is pay and business income.

Glaring examples include toy

maker Mattel’s former CEO Margo

Georgiadis, who made 5,000 times

the salary of her median em-

ployee in 2017, her first year at

the helm. When she left the com-

pany in 2018, its stock was down

50%. Or Discovery’s David M.

Zaslav, who keeps topping rank-

ings: In 2018, he got paid $130

million, which was 22% of the

company’s net profit.

Pay has also skyrocketed at in-

vestment banks, consultancies and

private-equity companies, which

are, after all, outsourced manage-

rial structures. Even founder-cen-

tric technology giants like Micro-

soft are transitioning toward

professional management.

Shareholders shouldn’t wrest

back day-to-day control—manageri-

alism is a necessary evil. For too

long, though, governance concerns

have been centered on aligning man-

ager and investor incentives through

strategies like stock options. That

just ended up making CEOs richer.

Investors can change this by us-

ing their stewardship to impose a

fairer distribution of pay. ESG cri-

teria may even help rehabilitate

the role of trade unions in cement-

ing longer-term corporate stability.

A little progress might make in-

vestors feel less awkward about

uncorking the champagne after a

bonanza earnings season.

—Jon Sindreu

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

Investors who want to do good

while still doing well shouldn’t

worry too much about high levels of

corporate profit. They should worry

about exorbitant executive pay.

Income inequality remains the

elephant in the room for asset

managers who factor environmen-

tal, social and governance criteria

into their investment decisions. It

is an important one, though. Prin-

ciples for Responsible Investment,

a United Nations-supported net-

work of investors, warns that it

can fuel political unrest as well as

debt-driven financial instability.

There has been a lot of atten-

tion paid to how much of national

income goes to profits instead of

workers’ pay. Labor’s share of

gross domestic product remained

close to a postcrisis low in 2019

amid record corporate earnings,

according to the latest U.S. data.

But ESG investors are, after all,

still investors. Even they would

have a hard time forgoing profits

to raise workers’ salaries and

tackle long-term issues of income

inequality. The good news is they

may not need to.

For much of the 20th century,

the split between pay and profits

remained stable, which many econ-

omists saw as proof that market

economies gave everyone just des-

erts. Since the 1980s, though, the

balance has appeared to tilt to-

ward the latter. Because corpora-

tions are becoming larger and in-

dustries more concentrated, many

point to inequality as the explana-

tion for their accumulating excess

profits. Companies, they reason,

are either ripping off customers,

funneling money from workers to

buybacks and dividends, or both.

But wages and earnings might

not be a zero-sum game: History

shows that both can move in lock-

step because raising pay increases

not just firms’ costs, but also their

revenues. Henry Ford famously

paid his workers a then-generous

sum of $5 a day so they could af-

ford to buy his cars.

There is also scant evidence of

earnings being higher because oli-

gopolies hurt customers. Research

finds no clear relationship be-

tween firms’ market share and

profit margins.

Companies’ slice of the pie

hasn’t even grown that much. At

its highest in 1970, labor income in

the U.S. was 65% of GDP. At its

lowest in 2010, it was 59%—a

small change. The shifts seem to

be explained by property-rent in-

creases, the cost of replacing ag-

ing machines and the shift toward

self-employment. None of these

are the “profits” equity investors

care about.

Of course that doesn’t mean

market economies ensure fairness.

Increasing inequality is well docu-

mented and ESG investors can’t

disregard it.

One alleged culprit is low inter-

est rates that have boosted asset

valuations and thus wealth not

counted in GDP. The effect appears

small, though. A more convincing

explanation is that the struggle

isn’t between profits and wages

but between different types of

wage earners.

Globalization has concentrated

gains among fewer, larger firms:

A great chunk of rising income in-

equality is explained by widening

pay differences between compa-

nies. Breaking up the winners is a

clumsy solution and fund manag-

ers wouldn’t be doing their clients

any favors by clamoring for the

government to do so anyway.

But there is something else they

can directly influence: top-level

pay. From 1978 to 2018, the infla-

tion-adjusted compensation of

American CEOs grew 1,000% and

that of very high earners 339%

whereas wages for the typical

worker were up just 12%, accord-

ing to the Economic Policy Insti-

tute. Research shows that execu-

tives, managers, supervisors and

financial professionals account for

70% of the income gains of the top

0.1% between 1979 and 2005.

Inflation in CEO pay took off

just as trade unions weakened,

suggesting a link. The trend seems

to have softened in recent years,

but the gap remains huge. And,

unlike pay raises for factory work-

ers, giving rich people checks

doesn’t raise consumption much.

This problem is the culmination

of what business historian Alfred

Chandler dubbed the “managerial

Pushing for Fair Pay

Will Pay Dividends

Do-gooder investors now have a chance to tackle

inequality without sacrificing profits

Google’s Not Stepping

On Fitbit’s Toes Yet

Sales of the wearable device were up in the

quarter when the deal was announced

Has Google’s pending acquisition

ofFitbitscared off the wearable-de-

vice maker’s customers? The an-

swer, for the moment, seems no. At

least not at the right price.

Fitbit reported Thursday after-

noon that device sales in the

fourth quarter rose 8% year over

year to about six million units.

That is a nice improvement from

the 3% gain posted for the previ-

ous year’s holiday quarter when

Fitbit was just starting to emerge

from a two-year sales slump.

Thursday’s report was the first to

reflect the period in whichAlpha-

betInc.’s Google announced its

plan to buy Fitbit for $2.1 billion.

The jump in unit sales suggests

that Fitbit buyers aren’t overly

spooked at the prospect of having

their vital signs piped to a company

whose stated mission is to organize

and make “universally accessible”

the world’s information. What they

are willing to pay is another matter.

Fitbit’s revenue fell 12% year over

year to $502 million in the fourth

quarter. It amounts to an average

selling price of about $81 per de-

vice for the fourth quarter, which is

down 19% year over year.

That is less than half the sticker

price of the company’s flagship

Versa 2 smartwatch. In its an-

nouncement, Fitbit cited the intro-

duction of lower-priced products

during the period along with

“higher promotions” as reasons

for the pricing drop. Given the

pending deal with Google, the

company didn’t hold a call to dis-

cuss the results further.

The Fitbit acquisition isn’t a

huge one by Google’s standards,

but it is controversial given the in-

creasing scrutiny being drawn by

the internet titan and its big tech

peers. Google’s efforts in health

care are being closely watched in

particular. On Thursday, the Euro-

pean Data Protection Board called

for “a full assessment of the data

protection requirements and pri-

vacy implications of the merger in

a transparent way.” Google and

Fitbit have both maintained vehe-

mently that no Fitbit data will be

used for advertising.

Fitbit’s latest results didn’t shed

more light on this question, but

Google may find it encouraging

that six million people are still

willing to buy into a wearable-de-

vice business it plans to one day

own. They just don’t seem willing

to pay much for the privilege.

—Dan Gallagher

Fitbit buyers don’t appear too spooked about the Google deal.

Japan’s Pension Funds

Are Making Waves

The yen’s surprise decline may be explained

by a shift toward overseas assets

The yen has slumped this week,

perplexing investors who associate

periods of uncertainty and stress

with a rising Japanese currency.

The pattern makes more sense in

the context of falling hedging costs

and the country’s gargantuan insti-

tutional investment firms, which are

increasingly moving assets abroad

to escape low-yield Japan.

The dollar moved around 1.9%

higher in the two sessions through

Thursday, reaching almost 112 to

the yen, the largest two-day shift

in almost 2½ years.

Analysts at Rabobank and else-

where had wondered if the yen’s di-

minishing role as a haven was be-

cause Japan’s economy is itself at

risk of being further upended by the

coronavirus outbreak. A survey of

the Japanese manufacturing sector

released Friday showed the sharpest

reduction in activity in seven years

during the initial weeks of February.

But one-time events in Japan

haven’t stopped rapid yen appreci-

ation in the past: The yen rose al-

most 6% during the 2011 nuclear

disaster at Fukushima. The yen has

risen when North Korea’s missiles

have flown over Japan. The cur-

rency market isn’t always a place

of relentless logic.

Data released by the Ministry

of Finance might indicate what is

going on.

In January, the trust accounts

that act for Japanese pension

funds booked over ¥2 trillion

($17.94 billion) in net purchases on

long-term foreign bonds. That isn’t

just the highest amount on record,

but 62% higher than the next high-

est. It is equivalent to around five

months of purchases based on the

2017-19 average.

Hedging costs go some way to

explain the shift. Japanese hedging

costs have been high for several

years: In late 2018, a one-year dol-

lar-yen forward contract effec-

tively cost a Japanese investor

3.4% relative to the spot price.

That hedging cost has ticked al-

most continually lower as U.S.

bond yields declined, falling to

around 1.9% this month. Periods in

which hedging costs are falling,

more than the actual level of the

costs, tend to be correlated with

large-scale purchases of U.S. gov-

ernment bonds.

Indeed, in the three months to

December—the last for which we

have data—Japanese investors

bought more U.S. government and

agency bonds on net than at any

point over the past 3½ years, ac-

cording to the Treasury Department.

But some purchases aren’t likely

to be hedged at all. Rule changes

late last year allowed the ¥168.99

trillion Government Pension In-

vestment Fund to class fully

hedged foreign bonds as domestic

debt. That allows for more un-

hedged purchases, which would

further fuel the yen.

The failure of the yen to appre-

ciate in a risk-off scenario can also

become self-fulfilling. If it is no

longer received wisdom that Japa-

nese investors will repatriate for-

eign profits and pivot back home

in times of stress, markets will no

longer treat the yen as a haven.

Either way, traders who expect

the yen to rally in risk-off periods

may find themselves in an unenvi-

able position, fighting flows from

the country’s pension giants’ deep

pockets.—Mike Bird

Yen to Travel

Netbuyingofforeignlong-term

bondsbyJapanesetrustaccounts

Note: 1 trillion yen = $8.92 billion

Source: Ministry of Finance, Japan

2.0

–0.5

0

0.5

1.0

1.5

trillion yen

2016 ’17 ’18 ’19 ’20

OVERHEARD

You hear it all the time

when people talk about a

luxury good or one temporar-

ily in short supply: “It’s worth

its weight in gold!”

Very few literally make

the grade, though—

particularly something an

ordinary person might legally

buy or consume. Rhodium

and heroin don’t count. The

latest product to attract the

inaccurate label is humble

toilet paper courtesy of the

coronavirus epidemic, or

rather the public reaction to

it. A rumor in Hong Kong

that supplies would be

disrupted set off panic

buying and shelves are

empty. Supermarket chain

Wellcome has instituted a

purchase quota.

When shortages emerge

bad guys soon sense an

opportunity, and it was no

different in the relatively

crime-free city. Thieves stole

600 rolls with a retail value

of $218.

Crime usually doesn’t pay,

and it didn’t in this case, ei-

ther. The thieves were appre-

hended. Had the rolls been

literally worth their weight in

gold, at least the effort may

have been worth the risk. A

typical 227-gram two-ply roll

would have to be fenced for

$11,895, though.

At that price, even a pre-

mium newspaper like this

one would present an irre-

sistible arbitrage opportunity

for a bathroom-goer—and

you could even read it first.

MATT CHASE

ExecutivePay

U.S.chiefexecutiveofficerpay

relativetoworkers

Note: Annual compensation. 2018 figure was a

projection. Ratios based on averaging specific firm ratios

in samples.Includes realized options.

Source: Economic PolicyInstitute

CEOswerepaid

368timeswhat

workerswere

paidin2000

400

0

100

200

300

1970 ’80 ’90 2000 ’10

times

FITBIT: BRENDAN MCDERMID/REUTERS; TOILET PAPER: ISTOCK