To hear some tell it, even around these parts, the rich make up a class so virtuous that we must not disturb the flower of their pure entrepreneurial creativity by ever taxing them an additional dime as we sink deeper and deeper into debt and consider cuts to programs for the the very old, the very young, and the very poor. The rich, after all, are folks who pulled themselves up by their bootstraps, created jobs and wealth, and pay more than their fair share of taxes already. If we asked them to pay more, it would only allow more freeloaders to lie around and watch cable TV all day. Better to cut health care benefits to senior citizens than to ask these folks to pay a little more. And anyone who thinks that it would be better for the rich to pay more tax is just envious and wants to be given things they haven’t earned.
That’s basically what I am hearing.
I see things differently. The way I see it, for every self-made rich person, there is a rich person who received their opportunity as a birthright, rather than by any extraordinary merit or effort of their own. These folks were born with a silver spoon in their mouth. This does not make them bad people, but let’s recognize that these folks have never laid a finger on a bootstrap. They may run enterprises with famous names and have prestigious titles and rake in millions, but they did not build those enterprises themselves. They may work hard, but it was their predecessors who did the heavy lifting. It would be an error to generalize this class as “job creators” because many have created the same number of jobs as the lowliest Occupy Wall Street protester– that is to say, zero. Some in fact grant themselves raises that would have paid the salaries of workers they laid off.
We don’t have to look outside our own industry to see this, because all of these statements apply to the recent leaders of Stewart Title, a company with which we’re probably all familiar.
The Morrises, heirs to the founders of the company that is now Stewart Information Services Corporation, have owned or controlled Stewart for a very long time. According to the history published on the company website, the company was founded in Texas by a man named Maco Stewart in 1893. The first Morris involved in the company, William C. Morris, joined the company as a stenographer in 1897. William C. Morris eventually married the Stewart’s sister in 1903, and in the early part of the 20th century, William became president of Stewart Title Company and executive vice president of Stewart Title Guaranty Company and was issued the first stock certificate of that company.
For several decades, Morrises shared ownership of the company with generations of other heirs with the Stewart surname. In 1950, when William Morris died as sitting president of Stewart Title, his ownership interest and control of the company passed to his sons, Carloss Morris and Stewart Morris Sr.
By this time, while Stewarts still held a significant ownership interest in the company, it was Morrises who were leading the company. Stewart Morris Sr. is credited with expanding the company from a Texas operation into a national company during the 1950s and 1960s. Carloss Morris served as president of the company during this time and played an active role in the company as well.
In 1972, the company was taken public in an initial public stock offering by its owners– the Morris brothers (Carloss and Stewart Morris Sr.) and other heirs of the Stewart clan. In the process, two kinds of shares were created– normal shares intended for the investing public (“Class A” shares), and special shares with powerful voting rights (“Class B” shares.). The two classes of shares are nominally equal in equity value per share; however, the powerful voting rights of the Class B shares reserve control of the company for the holders.
The Morris brothers and other Stewart heirs retained all of these Class B shares. This allowed the Morrises and other Stewart heirs to cash out a vast amount of their equity in the company– the Class A shares now outnumber the Class B shares by a ratio of greater than 15 to 1– and yet retain firm control of the company, as the heirs have done ever since the company was taken public.
The heirs in essence have had their cake and have eaten it too. They have sold the majority of the company, received the cash, and yet can still control and operate the company almost as if they kept complete ownership of the company within the family.
How powerful is the control? Well, for one thing, Stewart heirs– now all Morrises, as has been the case ever since Maco Stewart III sold Carloss and Stewart Morris Sr. his allotment of Class B shares in 1975– have the right to choose four of the nine members of the Board of Directors. This is a sufficient number to give them an effective veto over any action by the Board of Directors, due to the way the company’s bylaws are drafted. Here’s how it works:
The holders of our Class B Common Stock have the right to elect four of our nine directors. Pursuant to our by-laws, the vote of six directors is required to constitute an act by the Board of Directors. Accordingly, the affirmative vote of at least one of the directors elected by the holders of the Class B Common Stock is required for any action to be taken by the Board of Directors. The foregoing provision of our by-laws may not be amended or repealed without the affirmative vote of at least a majority of the outstanding shares of each class of our capital stock, voting as separate classes.
As is their right, the Morrises have chosen friendly directors who will vote to install and keep Morrises in control of the company. Often, the Morrises have chosen one or more of themselves as directors.
There have been a total of five CEOs at Stewart since they took full ownership of the Class B shares in 2005… and they have all been named Morris. Carloss Morris and Stewart Morris, Sr. passed control of the company to their sons, Malcolm Morris and Stewart Morris Jr., and then this week, the reins were passed to Malcolm’s son Matt Morris.
The fact that operational control of the company remains in the control of the Morris family should not be a surprise to the company’s many shareholders. Investors who do their due diligence are on full notice that this is a family company, run by Stewart heirs, and intended to be run by Stewart heirs. In fact, this is explicitly stated in the company’s filings with the SEC, in explanation of the composition of the company’s top leadership… all Morrises:
In light of the Company’s long history as a family-managed business, the extensive experience of Malcolm S. Morris in the Company’s business, including his involvement in the day-to-day operations of the Company and implementation of its long-term strategy, and the balance provided by our appointment of Co-Chief Executive Officers [Malcolm Morris and Stewart Morris Jr.] and our use of an Executive Committee and a presiding director, we believe that our current leadership structure, including combining the roles of chief executive officer and chairman [Malcolm Morris was chairman], is the best way to ensure the long-term success of the Company.
Presumably, investors who put money in the Stewart want to keep the company a family-managed business. At any rate, they don’t have the power to change it.
At this point, just so there’s no misunderstanding: I have a problem with very little of this. It’s evident that each generation of Morrises has paved the way for the next to take over the company, but I think most parents would have given the same opportunities to their children. Every generation of Morrises who has taken over the top spot has apparently worked in various lesser roles in the company for many years, presumably preparing them for capable stewardship of the company in a leadership role.
That being said, if you aspire in your career to be the top dog at Stewart, it’s a hell of an advantage to be named Morris! If your name is Morris, you are apparently entitled to a shot at the top job and the power and prestige and seven-figure income that comes with it– even though your family only owns a tiny fraction of the equity in the company. If your name is anything other than Morris, there appears to be a glass ceiling which you will not break through, no matter how hard you work.
Also, if executive performance is measured by financial performance, then it’s hard to make a case that the last generation of Morris leadership was very successful. Stewart’s stock price is near 15 year lows, falling below $10 a share. The stock has fallen from $53 at the height of the housing bubble– more than an 80% drop. The stock pays a paltry dividend of 5 cents a share– little consolation for folks who have bought the stock within the past 15 years and seen no price appreciation.
Much of this poor performance can be chalked up to events beyond the control of Stewart’s leadership. But on several levels it has lagged when compared to its peers. Over the past five years, Stewart’s stock has underperformed all of its rivals. Stewart’s claims ratio has been consistently higher than the average of its peers over the past several years, and its title business has been the least profitable of its peers coming out of the housing crisis. So far this year, Stewart has been profitable, but only by a slim penny per share. That’s an improvement over the significant losses for the past several years running, however.
The recent leadership of Stewart has not created jobs. At the end of 2010, Stewart employed approximately 5700 people, according to its annual statement– down from 9900 at the end of 2005, and approximately the same amount of people employed by the company ten years ago. Despite cutting another 120 employees last year– the fifth consecutive year cutting staff– the company raised the compensation of its dual CEOs, rationalizing the increase as necessary with the following statement:
[T]he Compensation Committee has historically employed a compensation philosophy of fairness, rather than focusing on retaining its Co-Chief Executive Officers. The Compensation Committee’s compensation philosophy is intended to maintain associate satisfaction and morale by assuring that the compensation of executive officers, particularly the Co-Chief Executive Officers, is not out of line with that of key employees and other associates. As a result of this focus on internal pay equity, in some years the compensation of one or more key employees has exceeded the compensation of our Co-Chief Executive Officers. The Compensation Committee believes that our historical compensation programs achieved the goal of fairness, even though it resulted in below-market compensation for our Co-Chief Executive Officers. However, in late 2009, in connection with its annual review of executive compensation, the Compensation Committee determined that the below-market compensation of our Co-Chief Executive Officers was potentially affecting our ability to attract top executive talent and retain our current key employees and was also creating wage compression issues internally. Because of these structural issues and in light of the management team’s successful implementation of certain strategic initiatives in 2009, the Compensation Committee recommended, and the board of directors approved, an increase in 2010 compensation for certain executives and key employees, including the Co-Chief Executive Officers.
There’s no explanation as to why a key employee could not be paid more than the CEOs if necessary, as was apparently done successfully before, which would seem to be an easy solution to any “wage compression issues”. Could it possibly be that the CEOs just wanted raises? Regardless, they got raises because some executive evidently wanted more money, while workers were being cut, the stock was declining, and the company was losing money.
If the Occupy Wall Street protesters have an entitlement mentality, it appears they are not the only ones.
As for myself, I can honestly say I am not envious of the rich. I am satisfied with what I have. But it does bother me greatly that as a nation we are considering cuts to programs such as Medicare so that we can afford to keep taxes lower for rich people.