A Rising Tide Lifts All Boats, But a Tsunami Breaks Them


Lanai is the sixth-largest Hawaiian island with one public school, no traffic lights and a population roughly half the size of Lewisburg.  Its history is mysterious.  The first settlers arrived sometime during the 15th century.  Four centuries later, an American explorer acquired much of the land for ranching, only until the founders of Dole Foods purchased it to export its abundant pineapples.  The island remained fairly unknown until 2012, when Larry Ellison acquired it for over $500 million to finally give the land its day.  His goal, in alignment with his visionary mindset, has been to cultivate it as an “environmental experiment,” something of a Schor-Orr paradise with solar power capabilities and a burgeoning organic farming industry (Allen).

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Larry Ellison is fiercely competitive. He sailed in last year’s America’s Cup with the USA-17, a carbon-fiber racing trimaran. The boat has 250 sensors and is capable of sailing faster than the prevailing wind.

Ellison is currently the third richest American with a net worth of $48 billion and currently serves as chief executive officer (CEO) of Oracle, a global provider of software and computer hardware products and services.  In 2013, Oracle paid him a symbolic $1 in salary and $78.4 million in stock options, retirement contributions and other perks.  His vast material holdings include the 98% stake in island of Lanai, a lavish $400 million real estate portfolio of homes in California, Nevada and Rhode Island, a 50% share of the BNP Paribas tennis tournament, a 288-foot yacht, two military jets and plethora of high-end automobiles.  His endless pursuit of material holdings reflects his ambitious start-up of Oracle with just a $2,000 investment in 1977.  Needless to say, politicians, shareholders, economists and the general public have argued on the limits of his generous compensation package over his three-decade reign at the technology heavyweight.

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Larry Ellison was raised in the South Shore of Chicago by his aunt and uncle. He dropped out of the University of Chicago and moved to California to form Oracle in 1977. Today, he is the third wealthiest American with a net worth of $48 billion.

Globally, executive compensation is an ancient debate, taking place in glassy conference rooms, exclusive golf outings, dark factory floors and tired regulatory agencies.  Except for rare exceptions, such as Warren Buffet’s clamoring for tax fairness policies, the wealthy spend little time debating the topic, but politicians, lower-level managers, union workers and journalists have chronicled an unimpressive history of curbing excessive executive pay.  This includes the explosion of perquisites in the 1970s, golden parachute plans in the 1980s, stock options in the 1990s and restricted stock in the 2000s (Murphy).  At each epoch in history, corporate America’s elite appears to have one leg ahead of federal mandates on compensation packages.  In response to the interconnected banking complexities of the Great Recession, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) features a small section devoted entirely to providing more transparency to executive pay practices and corporate governance reforms.  Undoubtedly, taxpayers and investors continue to champion the cause for more transparency, disclosure and sound reasoning behind hefty pay-packages at the top of corporate hierarchies, as in the case of Ellison’s Oracle.

Peeling back the lengthy, 848-page Dodd-Frank Act, however slowly, illuminates the core ethical concerns of classical economics: how are resources allocated and distributed among individuals in society?  Is it fair on an individual basis?  Do the incentives create for selfish or selfless behavior?  The most fitting ethical lens for examining the intersection between Ellison’s compensation and basic economics is distributive justice.  Within this ethical gaze, I will focus on three distinct sub-concepts that will help clarify and enlighten the modern debate on such practices.  Drawing from micro to macro-analysis of individuals set within distributive justice ethics, I will explore Robert Nozick’s Entitlement Theory, John Rawl’s theory of justice as fairness, and the corrosive social struggles within organizations.  Nozick’s approach is classically Lockean with an emphasis on free-markets, and has rich implications of how individuals acquire, transfer and preserve holdings in society.  The Rawl’s approach explores social effects of pay disparity in business organizations.  The hybrid ethical analysis serves to enrich the debate from a public moan to a mature socio-economic reflection of society.

Ellison’s personal and career history resembles America’s obstinate drive for technological progress – uninhibited and relentless.  Born in 1944 to his 19-year old mother in Manhattan, Ellison suffered a serious bout of pneumonia and was quickly adopted by his aunt and uncle.  The two married during the Great Recession, and raised their only child the blue-collar neighborhood of South Shore in Chicago in the mid-1950s.  In 1962, Ellison enrolled in the University of Illinois at Urbana-Champaign with hopes of becoming a doctor.  However, he failed to maintain passing grades and dropped out after his first academic year.  The next year, he enrolled at the University of Chicago, but again dropped out after only one semester.  Abandoning the traditional academic path, Ellison set out for Berkley, California to learn computer software code in 1966 (“World Biography”).

Through a few instances of raw curiosity and a willingness to improve minor inefficiencies in database systems, Ellison created a corporate behemoth a decade after dropping out of college.  While in the midst of his first divorce, apparently due to his general “aimlessness and bad debts,” Ellison worked on a small project at his first company, Ampex, which focused on computer storage and retrieval processes.  The project was named “Oracle” and its customer was the Central Intelligence Agency (CIA) (“Larry Ellison Biography”).  Two years later, he worked on a similar project at another small company, Precision Instruments Co., where he recruited his former colleagues from Ampex, Robert Miner and Edward Oates, to configure the process on microfilm.  The three soon identified more potential refinements to data storage and retrieval.

Unleashing his newfound entrepreneurial spirit, Ellison formed Software Development Labs in 1977 with Minor and Oates inside the same building as Precision Instruments.  Perhaps the spark that ignited the enduring flame, the three came across an obscure IBM Research paper entitled “The System R Project,” which described the untapped benefits of relational databases.  Unlike conventional databases, that could locate lists of employees and their salaries, a relational one could compare employee salaries across departments and track new hiring and bonuses.  In short, relational database method was more flexible and dynamic, yet still underdeveloped by large software corporations (Bloomberg Game Changers).  Ellison, Minor and Oates jumped on the opportunity, replaced their company name with Relational Software Inc., and built their own relational database code.  In 1978, they sold their new software product, Oracle, to various companies and agencies, including the CIA and the U.S. Navy.  As sales gained traction, Ellison adopted the role of an “aggressive marketer” owing to his “eclectic personality.”  By 1982, RSI employed several dozen employees and commanded $2.4 million in sales, which doubled or nearly doubled annually for the rest of the decade.  After going public in 1986, one day prior to Microsoft’s debut, Ellison shifted the corporate gears into full throttle on the research and development (R&D) and sales fronts.  However, the newfound success precipitated widespread irresponsibility at the company’s helm.

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In 1977, Ellison and two former colleagues built their own relational database named “Oracle.” Today, the system is used by over 400,000 customers in 145 countries to store and retrieve all types of information.

With the firm’s name changed to Oracle, an emblem of its commitment to its top software product, Ellison pursued sales growth at the expense of loose operational constraints and hasty sales practices.  By the late 1980s, an Oracle manager reported that “few traditional corporate controls were intact,” at the rapidly growing company which faced pressures to exceed analyst earnings expectations.  Reminiscent of the flamboyant, fast-and-loose Enron culture led by Jeff Skilling, Ellison instituted a “Go for Gold” incentive program, where employees who met or exceeded sales goals were paid in actual gold coins (Katovich).  Additionally, the various sales teams “routinely cut corners,” often booking sales on future contracts with other firms involving products that were still untested and undelivered.  Ellison, like Skilling, cultivated a “bad-boy image,” indulging in his passion for fast cars and extravagant yachts, building a 23-acre, $200 million feudal Japanese-style home in California.  Eventually, Oracle’s financial auditors disturbed the public in August 1990 by forcing the company to revise its revenue recognition method, erasing $15 million from bottom-line.  The following month, Oracle posted its first ever loss, laid off 400 people, or 10% of its domestic workforce, and restructured several divisions.  CEO Ellison chalks this up to “an incredible business mistake” (Katovich).  Fortunately, unlike Enron, auditors Earnest & Young (E&Y) took responsible action to amend the impending revenue discrepancies before matters grew worse.  Fast forwarding to today, Oracle continues to build reliable products, generated roughly $37 billion in revenue and posted stable free-cash flows in 2013, and remains fiercely competitive with two other global software giants, IBM and German-based SAP.

Though Ellison has proved to become a sparring titan of Silicon Valley, the 1990 case of Oracle’s dubious revenue recognition and a 2001 lawsuit of insider trading against Ellison have presented clear ethical dilemmas.  Oracle’s most popular product is its relational database software, which offers the highest transaction speeds for systems like hotel and airline reservation systems and inventory tracking for chain stores.  Oracle generates revenue streams from licensing products to end-users and sublicensing with original equipment manufacturers (OEMs) and software value-added relicensors (VARs).  In the late 1980s, Oracle recorded revenue from upfront signing fees which confirmed product delivery.  However, the company gradually began recognizing licensing revenues fully from undelivered services, with an accounts receivable journal exceeding 160 days, which was “significantly higher than the 62 days of other software developers” (Heafy).  In other words, the company adopted a lenient attitude towards receiving future payments, succumbing to the macro pressures of higher share price performance and the potential to unlock lucrative option stock grants.  Upon the story’s eruption in the media, Oracle shocked investors with a surprising $36 million loss.

Just two years later, in March 2001, a small pension fund that invested in Oracle accused Ellison of committing insider trading.  The lawsuit alleged that Ellison sold nearly $900 million worth of shares just one day prior to its third quarter 2001, as senior management anticipated the market’s unpleasant reaction to poor earnings.  Ellison dumped his shares for an average of $30.76, while the share price tanked by over 50% post-announcement, closing at $16.98 the next day.  After four years of hefty legal fees, Ellison agreed to pay $100 million in 2005 to his nonprofit medical foundation, the Ellison Medical Foundation.  In the largest derivatives action lawsuit for a single person, Ellison cloaked his greedy motives and appeased the public by a reactive measure of largess.

In both cases, Ellison and top executives engaged in activities that compromised financial integrity to inflate their own compensation packages and breeched Robert Nozick’s ethical boundaries.  According to the libertarian theory, Nozick advocates for a free-market society whereby individuals have the autonomous abilities to own themselves, their labor and the ensuing fruits.  In this minimalist state, individuals are essentially “self-owners” with the entitlement to just acquisition, transfer and rectification.  As long as the exchange of wealth among individuals is fair, and no undue influence is projected onto one or another, he or she may reap the material benefits society has to offer.  In his foremost example, Nozick describes the hypothetical scenario of basketball enthusiasts paying ticket fees to admire the skills of the prime “gate attraction,” Wilt Chamberlain, with a portion of revenue assigned directly to Chamberlain.  Indeed, this is a just exchange because both parties make decisions on their own accord.  Even further, Nozick universally accepts “unlucky hard workers having less than lazier but luckier ones, morally repulsive individuals having higher incomes than saints,” pending the just acquisition of material goods (Katovich).

Whether Ellison is “morally repulsive” is a debatable topic, but the hasty act of recognizing revenue earlier than Oracle’s competitors and illegally capitalizing on private information violates both of Nozick’s principles.  Quite blatantly, Ellison booked speculative financial gains prior to the good’s delivery, breaking the principle of transfer.  While Nozick believes that transfer violations harm the empty-pocketed party, Oracle’s accounting overstatements defrauded financial analysts and the general public of the firm’s true condition.  Moreover, Ellison personally infringed on the principle of acquisition by acting as a private thief, who by Nozick’s standards, are “not entitled to ill-gotten gains” (Harris 151).  Thus, “executives who use an insider’s advantage to enrich themselves at the expense of other stakeholders” engage in a process that is “less than fair and transparent” (Harris 151).  In applying Nozick’s core principles in his Entitlement Theory, Ellison demonstrated personal greed and injustice in the process of striving to accumulate more wealth.

Additionally, industry analysts and journalists label Oracle as a severely top-heavy management organization, which delegates a disproportionate degree of autonomy and compensation packages to senior executives.  According to Rawl’s theory of justice as fairness, these types of closed loops encourage “bandwagoning” of senior managers and discourage innovation from lower-level managers.  Both Larry Ellison and CFO Safra Catz rank near or at the top of the highest paid business executives each year.  In 2013, Catz was the highest paid female executive officer at $44 million in the Standard & Poors 500 (S&P500), which comprises 500 American companies with the largest market capitalizations to date.  Ellison, Catz and three other senior manages received roughly $215 million in total compensation last year (“Highest-Paid in the U.S. CFOs”).  In Rawl’s analysis of distributive justice, he opines that executive selection and compensation methods are muddled with private social connections, “backdoor chats,” and bandwagoning, which refers to “the use of popular management techniques on the part of executives” to keep their positions (Harris 150).

Furthermore, James Wade and other researchers highlight the detrimental effects of perceived inequities of top-heavy organizations among middle and lower-level managers.  Oracle’s CEO-to-worker compensation ratio is 1,287:1, astronomically higher than the still-high U.S. average’s average 204:1, which instills unproductive behavior among the lower ranked employees.  The pay injustice at firms like Oracle “increases turnover among lower level managers… [and] decreases in performance, non-compliance with organizational rules” and “frequent absenteeism” (Liedekerke 769).  While these symptoms are diverse, Wade and Liedekerke identify heightened feelings of injustice during highly publicized events, like executive compensation announcements and division layoffs.Image

Drawing a parallel between the distributive injustices within organizational culture and Oracle’s own imbalances, investors are now bellowing for a halt in Ellison’s pay.  In the Dodd-Frank Act, legislators penned Sections 951-955 aimed at empowering shareholders’ voices on executive pay, golden parachutes, director nominations, compensation committee nominations and reparation for inaccurate financial statements.  Specifically, legislators have given shareholders of public companies a non-binding vote on approving executive compensation for the appropriate directors (“Corporate Governance Issues”).  While the vote is non-binding, meaning that compensation committees are not required to alter packages in the event of shareholder disapproval, the legislation represents an optimistic step towards alignment with Nozick and Rawls’ theories.  For the second consecutive year, however, shareholders have disapproved of Oracle’s pay plan, including large investors like the CtW Investment Group, the California State Teachers’ Retirement System, the U.K.’s Railway Pension Investments Ltd., and a Dutch pension-fund manager PGGM NV.  This is a rare act – just 12 companies in the Russell 3000 Index of large U.S. companies have lost more than one such vote.  Even more telling, the 57% of shareholders who voted down the pay plan is a nominal percentage; Ellison owns 24% of the company, and thus up 81% of shareholders may have rejected the plan if he had not voted.  If up to 81% of Oracle’s shareholders reject senior management’s excessive pay, it is only rational to believe that its employees share similar feelings.

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The Dodd-Frank Act of 2010 and ancillary legislation has ushered in a “Say on Pay” campaign in America. Shareholders of public companies look to gain more transparency on CEO-to-average worker compensation levels.

Lowering executive compensation nation-wide alone will not solve the ever-widening income inequality gap in the U.S.  In fact, such legislative action will only chip a dent in the glacier-like pay packages of high-net worth corporate executives like Oracle’s Ellison, Tesla’s Elon Musk or Bucknell’s very own, Leslie Moonves of CBS.  Through the ethical lenses of Nozick and Rawls, it becomes not a question of how much is being paid, but for what reasons.  Are executives entitled to $50 million-plus stock option grants?  Does it further incentivize them to lead the company in the interests of its stakeholders, or merely tie the private loop of senior managers closer together?  Does Ellison ever reflect on 2008 ING “Your Number” campaign, which asks people to think about how much they need to retire?  I wonder if he has hit it yet, or is holding out for more.

 

 

 

Works Cited

Allen, Nick. “Oracle CEO Larry Ellison Planning Green Experiment on Hawaiian Island.” The Telegraph. Telegraph Media Group, 03 Oct. 2012. Web. 16 Apr. 2014.

Bloomberg Game Changers: Larry Ellison. Dir. Brian Knappenberger. By Eric Salat. Perf. Larry Ellison. Bloomberg, 2010.

“Corporate Governance Issues,.” Dodd-Frank Act Rulemaking: Corporate Governance Issues, including Executive Compensation Disclosure and Related SRO Rules. Securities & Exchange Commission, 28 Oct. 2013. Web. 18 Apr. 2014.

Harris, Jared D. What’s Wrong with Executive Compensation. Rep. N.p.: Journal of Business Ethics, 2009. Print.

Heafy, Paul. Oracle System Corporate Case Analysis and Valuation. Rep. N.p.: n.p., n.d. Print.

“Highest-Paid in U.S.: CFOs.” Bloomberg.com. Bloomberg, 21 Sept. 2013. Web. 16 Apr. 2014.

Katovich, Megan. “A Modern Day David?” IML. University of Florida, 3 Dec. 1997. Web. 15 Apr. 2014.

“Larry Ellison Biography.” Academy of Achievement. N.p., 15 Oct. 2013. Web. 18 Apr. 2014.

Liedekerke, Luc Van. Executive Compensation and Distributive Justice. Publication. N.p.: Handbook of the Philosophical Foundations of Business Ethics, 2013. Print.

Murphy, Kevin J. “The Politics of Pay: A Legislative History of Executive Compensation.” Social Science Research (2011): n. pag. Social Science Research Network. Web. 17 Apr. 2014.

“World Biography.” Larry Ellison Biography. N.p., 2004. Web. 18 Apr. 2014.

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One thought on “A Rising Tide Lifts All Boats, But a Tsunami Breaks Them

  1. I learned much from this paper. I use relational databases and in the past did more so, and I never really knew Oracle’s role in developing them.

    Moreover, given the rhetoric about “free markets’ from the right wing in US politics, it is interesting that some of Oracle’s early breaks came from government contracts.

    You provide compelling evidence that Nozick’s just holdings ideas are violated in both instances.

    The link from Rawls to band-wagoning is less clear to me. WHat is the relationship?

    One question is how we can shift from Rawls’ ideas of a just society to a just firm. Do principles like the one that inequalities are good as long as they help the worst off valid for firms? If so, waht to make of that eye-popping ratio?

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