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companies had a stock grant or option package for board members, in contrast to virtually none in 1983.

The widening use of stock options has greatly increased the importance of shareholder returns in the measurement of managerial performance. Such developments are not limited to the United States. Stock options and share grants have become important elements of executive pay in England and France. As the competition for executive talent becomes global, it seems likely that the use of stock options will become more and more popular in most open economies.

The Popularization of Equity

The remarkable performance of U.S. and European equity markets since the early 1980s not only contributed to the popularization of stock options in executive pay packages, but also to the increase in stock ownership by households in many countries. This is not to say that many U.S. and non-U.S. households have become active investors in individual equities. What has happened is that growing segments of the population are becoming shareholders through mutual funds and retirement programs. Among the most vocal proponents of shareholder value are the managers of major retirement systems, such as the California Public Employees Retirement System, which has $130 billion in assets under management, a large part of which is in equities.

As shown in Exhibit 1.2, equities are by far the largest asset class in which pension funds are invested in the United States and the United Kingdom, with 58 percent and 76 percent, respectively, in 1996. The difference compared to countries like Germany, with 8 percent, and Italy, with 3 percent, is quite striking. But the situation in these countries is changing rapidly, with an increasing proportion of pension assets moving into equities.

Exhibit 1.2 Pension Fund Asset Allocations

Exhibit 1.2 Pension Fund Asset Allocations

A shareholder culture seems to be developing in many European countries. This has been prompted partly by privatization of large government monopolies in areas such as telecommunications, where governments became active marketers of the shares of these companies. Noteworthy was the German ''Deutschland Aktienland" (Germany: Country of shares) campaign in support of the privatization of Deutsche Telekom. The subsequent strong performance of the shares of the privatized companies gave a boost to the popularity of stock investment in these countries.

Exhibit 1.3 illustrates how significant equities have become in terms of market penetration in the United States, covering both direct and indirect share ownership through mutual funds, retirement accounts, and defined contribution plans. While in 1975, 25 million people, representing 12 percent of the population, owned equity shares, by 1995 this number had surged to 69 million and 26 percent, respectively. Under these circumstances, the old notions of labor versus capital are losing currency. No longer is the shareholder someone else: The shareholder is us. As a consequence, the ideological tension that fired the debate on shareholders versus stakeholders is diminishing. With more and more people as shareholders, the support for shareholder value as the objective function for a corporation is gaining momentum.

Pension Insolvency

The fourth contributing factor for the increasing importance of shareholder value is the time bomb ticking away under the public pension systems of most developed countries. In these countries, mandatory public pensions represent the largest part of the income of retirees, with Germany and Sweden leading with respectively 95 percent and 91 percent of retiree income derived from public pensions. Most of these public plans are set up as pay-as-you-go systems where contributions by workers today are used to pay

Exhibit 1.3 Ownership of Equity Shares in the United States

People

(millions)

Share of population

(percent}

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