Silver spoons, not bootstraps

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.

Slade Smith's Blog ::

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.
Stewart 2010 Annual report

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.
Stewart proxy statement

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.

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	But The "Rich" Pay Most of the Taxes As It Is
	I recently ran across an article on MSNBC that says the rich are already shouldering most of the tax burden. According to the CBO, the top 10% of income earners pays more than half of all federal taxes, and more than 70% of federal receipts from the Income Tax. Capital goes where it's treated best, and let's face it, the rich have options. Tax them more and they can simply "take their toys and go home." The better idea is to broaden the tax base, or "level the playing field", as progressives are wont to say. I like what I'm hearing from some in the field of Republican presidential contenders regarding their tax plan proposals. I don't think any of those plans is quite ready for primetime, but they're at least a good starting point for discussion. To put it all into perspective, consider this: the Russian Federation imposed a 13% flat tax in 2001, and by all accounts, their economy is booming. Meanwhile, we're stuck with an archaic system of taxation that punishes achievement, rewards failure and foments class envy. Simply put: Russia has Steve Forbes' tax and the United States has Karl Marx's. Regards, Scott Perry
	by Scott Perry \| 2011/11/05 \| log in or register to post a reply

	I know that the rich pay most of the taxes...
	But the reason for that is that they are keeping more and more of the income from production for themselves. Their tax rates have been cut, not increased. And when they got their tax cut, we were told that they would create jobs and the tax base would be broadened. It hasn't happened. Tax reform is really mostly just rearranging deck chairs. A flat tax is not a silver bullet-- and we've had a good economy in the past with roughly the same tax system that we have now. I think some tweaks would be of modest benefit. I don't like any of the Republican tax plans. These Republican plans are effectively tax cuts for the rich and tax increases for the poor and middle class. I pay more tax under their plans-- and I already pay 30-35% of my income in taxes. I pay more than 10% of my income in property taxes alone! The idea that people with modest incomes don't pay any tax is laughable. I'm one of those people who pay more in taxes percentagewise than Warren Buffett. I want to do my part, but I really don't think that I'm due for a tax increase. I think it's time fore the rich to get a tax increase, and it has nothing to do with envy.
	by Slade Smith \| 2011/11/05 \| log in or register to post a reply

	There is no real proof...
	There really isn't any real proof that lower taxes for the rich equals a better economy. We had slightly higher taxes under President Clinton and the economy was booming. Today we have much lower taxes than under Reagan and the economy today is still much worse than we had then. In fact, since 1950, lower top tax rates have coincided with weaker economic growth. I'm certainly not advocating that we need to go back to the 90% top tax bracket that we had in the 50's, but we could certainly increase the top bracket to the 39.6% we had under Clinton (which is still far lower than the 50% top bracket under Reagan), and ask the rich to pay a little more to help with our current crisis. We should certainly strive for greater equality in taxes, but until we have more equality in what the classes earn, it just isn't possible. Consider that in 1980 CEO's made about 42 times that of an average worker - In 2010 they made 324 times the average worker. I found a very interesting chart, though it was only current to 2005, it illustrates the point very well. between 1990 and 2005, CEO pay increased 298.2%. Corporate profits increased 106.7%. During the same period, production worker's pay increased only 4.3%. If the rich don't want to pay more in taxes (and granted, nobody does) they should be striving to strengthen the middle class. When more and more of the income is shifted to the wealthiest Americans, they are obviously going to have to shoulder more of the tax burden. Put another way, if you destroy the middle class, there won't be anybody there to help pay the taxes. Looks like the lesson is going to be learned the hard way.
	by Robert Franco \| 2011/11/06 \| log in or register to post a reply

	Think Outside the Box!
	Alexander Hamilton in the Federalist No. 30 wrote that, "Money is...the vital principle of the body politic...which sustains its life and motion, and enables it to perform its most essential functions". And taxing is a perpetual balancing act which teeters on "the people must be subjected to continual plunder, as a substitute for a more eligible mode of supplying the public wants, or the government must sink into a fatal atrophy, and, in a short course of time perish". What is interesting is we base most taxes, if not all, on a percentage of value, income or number. The result is that the tax base rises and falls with the economy. In times when tax revenues fall the theory is the government can borrow to make up the difference. Of course, our government has kept borrowing when tax revenues have been increasing! But the point is this. The cost of maintaining the road I drive to work on, the fire department which stands by in case of fire at my residence and the police who patrol the area do not cost more to maintain because my income or property value increases. Why then, do we provide government with basically a windfall of revenue to which they are ill equipped to deploy? They have not earned the money nor shown any necessity. The plans for which the additional money is used are developed "after" the rise in the tax revenues. In other words, the cost of government has remained the same, for the most part, whether my income or property values rise or fall. Hamilton went on in several other Federalist papers to describe the inherent conflicts which ensue in tax assessments and collections. A report entitled Corporate Tax Dodgers details "federal income taxes paid or not paid by 280 of America’s largest and most profitable corporations in 2008, 2009 and 2010". This angle of consideration does not do justice to other taxes these corporations may pay. As an example, "NextEra Energy, FPL's parent company, earned $6.4 billion before taxes, and paid an average tax rate of –2.2 percent, according to the report" (no taxes). However, Florida Power and Light has the largest real property tax bill in Palm Beach County, Florida, of any real property taxpayer. FPL is number one with $53.2 million in taxes and Bell South (now AT&T) pays $7.4 million. FPL is 1.6% of the entire tax base of Palm Beach County!! And one must also consider the sales taxes, fuel taxes, etc. paid by the enormous purchases these big corporations and the wealthy make. I'm sure a company like GE pays a big number in sales taxes as does FPL and ATT. And at the same time I do have a problem with GE taking taxpayer bailout money and then paying no income taxes in 2010. They are drinking from the trough to which they are not contributing which seems especially egregious!! As Jesse Jackson once described Dan Quayle as having been born with a "tailwind" so it is with Matt Morris and other members of the Morris and Stewart families. But one must recognize that the taxes paid by the Morris and Stewart families are probably an order of magnitude greater than the taxes paid by the ordinary American. And even though those with great resources may have the ability to "pay more" the main point which is being ignored is why and how has government brought us to this precipice!?! It does not settle well with me that an "assessment" of taxes is made based purely upon the value of commerce. It must consider first and foremost the overhead and cost of those resources which are to "supply the public wants"!! Then, and only then, can a fair and equal tax base be established. We are totally disconnected from the limitations and throttles of government when we add to the public treasury without necessity! I think the government has borrowed and taxed beyond any sensible limit!! Take a homeowners' association that is charged with maintaining a security entrance gate and maintenance of the common elements of the neighborhood. The governing association determines the value and cost and then assesses accordingly. If the property values and incomes in the neighborhood rise there's no additional assessment monies made available to the association. In fact, if there were the residents would demand a return of the money. But one can imagine the imaginations of the association members if monies beyond the actual expenditures so happen to serendipitously appear because the value of homes and incomes begin increasing - and conversely if they begin to decrease!
	by Wyatt Bell \| 2011/11/07 \| log in or register to post a reply

	Wyatt
	I have been non-plussed by several of the rather hyped stories about this or that corporation (for example, GE) that has paid zero income tax in this or that year. In many of those cases, the corporation lost money, legally reported profits overseas, or took advantage of tax carryback provisions that enabled them to offset previous losses against present profits in an accelerated fashion. While I strongly disagree with some of the tax policies that allowed this, the companies have complied with the law, which is all that can be expected when it comes to paying taxes-- we don't expect individuals to pay more tax than the minimum required under the law, and we shouldn't expect corporations to do so either. If a huge company's corporate income tax works out to zero, so be it. Of course these huge companies are buying politicians in our money-crazy election system, and that's how they get tax policies that favor them. Since the courts have essentially decided that the First Amendment permits near-unlimited corporate spending to influence elections, it looks like it's going to be up to the people to wake up and see that the politician that they vote for over and over out of habit is in fact rented if not owned. I think that people have to start taking the mindset that the more TV commercials a candidate puts on the airwaves, the less likely they should vote for that candidate. They should be asking themselves, "why does this candidate have so much money to spend?" As far as the overseas profits in particular, I believe we need to lower our marginal corporate tax rate to be competitive. Even if we simply raised the income tax on rich people and used it to lower the corporate tax rate so that multinationals weren't so incentivized to locate their centers of profit overseas, I believe it would be of significant benefit. However, like I said to Scott, I do not think that tax policy changes alone will turn our economy around. There's more ailing this economy than just bad tax policy. I think it is incorrect for a person to look at the amount of taxes they pay, tally up the value of the benefits they receive, and conclude that they are taxed unfairly because they aren't getting out what they put in, or to look at the fact that they are paying more this year than last and getting no more in return. For our taxes, we should expect only a functional, well-run state. The rich, who in a narrow view pay more than their share for the roads and bridges and schools, should look at the failed states around the world. The very poor can be poor anywhere in the world, but in a failed state, there are few if any people who become rich except for ruthless individuals willing to go to extremes that civilized people could not bring themselves to do. Looking at things this way, it becomes clear that successful policies that work well for the masses are the only thing that make it possible for people to accumulate great wealth. So the rich have gotten benefit from good government in this country that goes far beyond roads and bridges and schools.
	by Slade Smith \| 2011/11/07 \| log in or register to post a reply

	Robert
	Right on! My post was getting too long to bolster my conclusion with facts like this, but if I had chosen to sum up the reasons for increasing taxes on the rich, I could not have done better than your comment. The evidence is overwhelming: the ultra-rich have done spectacularly in this country in the past few decades... and everybody else has been treading water at best... and drowning at worst. A content and happy middle class will enable the rich to enjoy their wealth in peace, even if they have quite a bit less. Or, we can continue current policies which cause the rich get richer and the poor get poorer, to the point where the rich will have to spend their extra money on fortified castles with 20 foot high walls and guards with Uzis at the gate.
	by Slade Smith \| 2011/11/07 \| log in or register to post a reply

	At the top!
	Slade, Our predicament is simply the "public wants" far outweighing the "public resources". It's been Democrat, Republican and Independent which has led us to this point! The concentration and acceleration of the richest sectors of the United States has largely occurred by two developments - a tiered system in which application of the law is applied differently at the top vs. the remainder which, in turn, provides this special class advantages and opportunities separate and apart from all the rest. The whole of this accelerated and gained substance, I believe, when Gerald Ford pardoned Richard Nixon. And it was further expanded with Bill Clinton. The mantra was a greater harm to the country ensues by long and bitter prosecutions and equal application of the law. Gerald Ford when pardoning Richard Nixon: "I deeply believe in equal justice for all Americans, whatever their station or former station. The law, whether human or divine, is no respecter of persons; but the law is a respecter of reality." By extension dismantling the failed, mismanaged and corrupt institutions and tax policies will cause some greater harm than keeping them intact - "but the law is a respecter of reality". What brings me to a boil is that each week I send a good deal of my paycheck to Washington which has manufactured an economic system for a select few and kept fortunes intact that would otherwise be dead. This privileged class enjoys near 0% loans at 5 times their net worth so that the Wall Street Credit Default Swap casino can remain in play! Tax policy and who pays what is just noise until we return to the principle that "all are equal under the law"! The idea proposed by Gerald Ford that "the law is a respecter of reality" lets anyone bend the law to whatever is the perceived reality - which is to say that the VIPs are too lofty to let fail!
	by Wyatt Bell \| 2011/11/07 \| log in or register to post a reply

	Wyatt
	Agreed about equality under the law... but remember that the bank bailout was created by the enaction of law by Congress, not through some extra-legal process. Seeing the economy falling apart by the day, I think they chose to change the law to allow for the bailout as the only option they felt they had. I don't think that they did so necessarily to benefit the banks or the bankers. We were in a crisis, and I think the vote was genuinely a crisis vote-- I think at that moment, members more or less voted their consciences. In fact, the bailout votes may have more free of political influence from the banks than any other financial legislation that has been passed for decades. The problem was not the bailouts themselves. The bailouts worked as intended-- they prevented the banking crisis from taking down the whole country. The problem was that once the crisis passed, when big finance tried to act like the bailouts had been a burden imposed on them rather than something that saved their bacon, members of Congress immediately went back to old and comfortable habits of siding with big finance. These moneyed interests were due for a comeuppance, but have yet to get even a small measure of it. Now, tthey still have all their money and the political influence that money can buy.
	by Slade Smith \| 2011/11/09 \| log in or register to post a reply

	refinement
	I've never blamed the rich for gathering and protecting wealth, nor anyone else who commits to doing so. I think that the issue is not millionaires and their ilk, but rather the trillion dollar corporations who pay zero tax thanks to all the loopholes that our legislators build into the laws.
	by William Pattison \| 2011/12/14 \| log in or register to post a reply

Slade Smith's Blog

I'm the web developer for Source of Title. Due to this role, I have become an interested observer of the title insurance industry and the broader issues arising out of real estate and finance. I have also blogged extensively about politics under the pseudonym "skymutt" at the partisan Democratic blog Daily Kos and the non-partisan community Swords Crossed.

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