It is the kind of power that has never quite been seen in history: the world’s most populous nation, run by a centralized dictatorship fully capable of violently clamping down on dissent and democratic demands, and still the rest of the world is beating a path to its door. Its GDP growth runs at ten percent a year. It has the world’s largest standing army and a formidable nuclear arsenal. It is also riddled with corruption and abuse that comes from being an opaque society where basic rules of accountability, transparency and sound governance have yet to take root.
But when a steady stream of bad news out of China —from melamine in wheat gluten that contaminated U.S.- and Canadian-made dog and cat food, to fake vitamin tablets and counterfeit toothpaste containing diethylene glycol, and now, just this week, lead in children’s toys— hit North America, the public seemed shocked —shocked that corruption and lack of integrity in China could actually be affecting their lives.
China’s contempt for intellectual property laws and copyright standards makes Kazaa- downloading college students look like disciples of the late Jack Valenti. Recently, Wal- Mart settled with the designer Fendi over the retailer’s selling of counterfeit handbags which it claimed were made in Italy. Where do you suppose they really came from? Two-thirds of all the products recalled in the U.S. come from China. The Chinese stock markets, where modest wage earners have borrowed and have mortgaged themselves to the hilt to put huge amounts at risk, are overheated and poised for serious meltdown. When it comes, it would not be entirely surprising to see it accompanied by widespread violence. China, by the way, continues to receive billions in loans from the World Bank, despite its ability to double its number of billionaires on an annual basis and the fact that it is one of America’s largest creditors. Not surprisingly, China remains the principal sponsor of the despotic and genocidal thugs who are responsible for the African holocaust in Darfur. China doesn’t much care about where it gets its oil, as long as it gets it. Does the West embrace these values too, unable to resist the allure of cheap ski jackets and good buys on patio umbrellas?
We have discussed before on these pages there are consequences when consumers and policy makers decide that where they do business and with whom is not really that important, as long as the price is right. This short-sighted approach not only creates an invitation to the kind of tampering, short-cutting and outright criminal activity that has come to be associated with China’s exports in recent months, but it makes even stronger and more powerful a regime that places little value on freedom, integrity, openness, human rights or even human life. China’s air and water pollution, not to mention its people’s endemic cigarette smoking, will someday tender a health care bill that the country might not be able to pay. It may not even bother to try, as the ease by which state-run companies and cronies of the regime are permitted to pollute rivers and lakes with impunity already foreshadows. These facts, like anything else critical of established power in China, rarely make their way into the state-controlled media. There is no freedom of the press. Internet access to many popular Western news sites is prohibited. For the oligarchs and elite in China, this, too, is seen as an admirable departure from Western-style governance.
That China has embarked on an interesting experiment in its approach to capitalism there can be no question. Rather than extending freedom for all its citizens, it has chosen to elevate a privileged few and allow them to attain and keep enormous wealth —wealth doubtless shared with the appropriate party official. There have been two Chinas for many decades. The concept will continue for many more. Creating a well educated and affluent elite with connections to government and the ability to get things done in ways democracies might find offensive is how the current regime hopes to maintain power and stave off the wider push for reform. With its ever increasing demand for cheaper products from knock-off antiques to mp3 players, the West may well be accommodating the rise of a more powerful, but nevertheless authoritarian, unaccountable and unfailingly communist, regime. Yet the West continues to slumber in the face of the potential political consequences of those trends, just as it does over the implications of a more powerful China within its own economy and corporate sphere.
Now the tentacles of that regime are making their way into the ownership of long- standing America business icons. State-run investment funds have bought their way into a piece of the Blackstone Group. This was revealed only because Blackstone is about to make available shares to the general public. How much else China owns by investing in private hedge funds and other secretive pools of capital may never be disclosed. And what are the consequences when large private corporate interests become more closely aligned with the state interests of this closed and unaccountable totalitarian system? On this question, Western policy makers remain asleep, just as they were over the possibility of contamination of North America’s food chain from Chinese imports.
The Chinese people are a noble people whose yearning for freedom and opportunity has captured the hearts of millions around the world. We do a disservice to their hopes by our ever-increasing business with dictators who are propped up by secret police and the use of torture and a so-called justice system where an email complaining about corruption can send a Chinese citizen to years in solitary confinement.
The West cannot continue to claim shock and surprise over the untoward effects of China’s growing power, since it is the industrialized world’s own consumers, corporations and governments that are making it possible. It needs to take responsible action to minimize those impacts. As long as North America, in its dealings with China, continues to turn a blind eye to the values of freedom, democracy and human rights it is supposed to cherish —values its young men and women fought and died to defend— and as long as accountability and openness are relegated to bit players on a stage where low, low prices and big, big markets have the lead parts, the problems of China’s corruption will continue to infect our imports, our health and, soon enough, our economy. This is not to suggest that we should isolate China or refuse to do business with that country. But it is to put forward the proposition that the repeated failure of everyone involved —from ordinary consumers to major corporations and democratic governments— to grapple with the gathering storm posed by China’s economic might, lack of transparency and failure, to observe principles of sound governance and accountability, are bound to have even more far-reaching consequences which will make the recent flurry of consumer recalls look like a calm breeze. And it is our choice for the Outrage of the Week.
There was an interesting contrast between two prominent American figures who support the war in Iraq over the weekend. On Meet the Press, former House Republican Majority leader Tom DeLay took the position that during times of war, like now, there should be no opposition. And demonstrations of the kind that occurred during the last few days in Washington and elsewhere were “aiding and abetting the enemy.” All Americans have a duty to stand by their “commander-in-chief” he asserted. On Face the Nation, Defense Secretary Robert Gates said he believed that everyone involved in the debate about the war is “patriotic” and looking for the best solution. (more…)
There were several suitable candidates for the Outrage this week. A Harvard educated MBA trained as an accountant, who founded a center to deal with governance issues in global financial institutions, claimed to be befuddled by both accounting rules and good governance practices. RIM co-CEO Jim Balsillie spun quite a story to escape any suggestion of wrongdoing over stock options he and others backdated at that company.
Then there is the role of the Ontario Securities Commission in all of this, which is becoming quite a loser in enforcement cases. A conviction in a major stock tipping case was thrown out on appeal. The Bre-X trial has taken years without result. They dropped a case altogether last week in the middle of the trial. And there is the regulator’s perpetual tardiness in adopting rules to protect investors and give them more clout long after they have been approved in the United States.
Since last September, the OSC has given RIM extension after extension for the filing of financial statements. They even allowed company founders to exercise more than 750,000 stock options during this period. This week, they extended their extensions until June. There is not the slightest evidence to suggest that the OSC sees anything terribly wrong with a company that repeatedly fails to provide investors with the audited information they are entitled to by law, which along with its embarrassingly inept enforcement record, leaves many to conclude that the OSC must be the most dysfunctional securities regulator in the G7. Does the OSC even have files marked Livent or Nortel any longer or is justice to be a casualty there as well?
Worthy as these incidents are for this weekly slot, they pale in comparison to revelations that certain U.S. companies exploited the terrorist attacks on America by backdating stock options to that horrific time in order to further line their pockets. When the full extent of this disgraceful conduct emerges, it will shock and outrage Americans in a way that previous abuses in CEO pay have not.
Much has been said and written about the generation that fought a world war against oppression, saved democracy and built the foundation for today’s prosperity. They have been called the Greatest Generation. This was the generation of my father and mother. The grandchildren of this generation carry on that tradition on battlefields far away in Afghanistan and Iraq, where they courageously fight to bring peace to lands too long in the grip of tyrants and the intolerant. I have opposed the war in Iraq and, more particularly, the manner of its commencement and execution by the Bush administration. But I have never for a second doubted the heroism of those answering their country’s call.
At home, however, we see time and again leadership of a different kind: a world where no CEO can be left behind. For many, there is never enough. They believe the world owes them tens, and sometimes hundreds, of millions just for showing up. They need to be motivated, so the conventional boardroom wisdom goes. And the money just pours into their laps. Thus we see, both in the United States and in Canada, reflections of the Greatest Generation and what I call the Greediest Generation: young men and women struggling and dying for a cause that is greater than themselves; CEOs amassing unparalleled fortunes for a cause that is so often singularly about themselves.
And now we have some that have used the tragedy of 9-11 as an opportunity to gain even more. It doesn’t get much worse than that in the boardroom. Which takes this growing scandal of stock options backdating into an entirely different ethical sphere that should appall responsible investors and thoughtful individuals. It is a story we will be hearing much more about in the weeks and months ahead and is, without doubt, the Outrage of the Week.
The shameful condition of U.S. medical facilities for treating wounded veterans was highlighted this week in what will surely be Pulitzer Prize winning stories for the Washington Post. It symbolizes a culture of betrayal on the part of official Washington that has rightly seen Americans everywhere register their indignation.
But the outrage goes beyond the squalor in certain buildings or even the red tape and run around facing returning military personnel. It is that this was allowed to happen for years without anything being done. During this time, veterans and their families were writing to their members of Congress and senators pleading for action. Yet with all their staff, these political representatives of the people apparently couldn’t be bothered to pull together the same story that virtually fell into the laps of Post reporters Anne Hull and Dana Priest. There was no investigative reporting here. The deploring situation was out in the open for anyone to see.
It is bad enough for the military chain of command to have permitted this situation. But one likes to think that at least elected officials –and there are enough of them in Washington– are there to serve as a check on executive power especially when it drops the ball. America’s federal lawmakers are busy folks. But they have no higher duty than to ensure that the best treatment and care is provided to those who are sent off into battle and return the worse for it. What happened to the staffs of the armed services committees of Congress or to the committees that oversee veterans affairs? Much is made on both ends of Pennsylvania Avenue about the need to support the troops. But no senator or congressman —Democratic or Republican— it seems cared enough to respond affirmatively to the hundreds of letters they received or to walk over to Building 18 of the Walter Reed medical campus to see what the reporters saw. They, like the officials in charge, let the troops down.
This would be a disgrace anytime. During a time of war, it is an intolerable outrage.
As we noted here last week, President Bush’s speech calling for higher standards in the awarding of CEO pay came as something of a surprise. It seems we are not alone in our astonishment. But if you think about it for a moment, it’s really part of the Bush management style. You wait until a problem is well advanced and has been widely debated, and others are demanding action, and then you move –or at least give a speech. This is what President Bush did in responding to the corporate scandals in 2002, where he favored a more voluntary approach to corporate reform but ultimately signed the Sarbanes-Oxley bill. It also defines his approach to the problems in Iraq, where he waited until public opinion and the November elections confirmed widespread discontent with his handling of the war before he announced a change in strategy and military leadership. And there is Katrina, a showcase of failed presidential leadership if ever there was one.
As with his proposed change of course in Iraq, Mr. Bush’s approach to dealing with the excesses of CEO pay is unlikely to satisfy critics or restore sanity to the compensation committees of North American boardrooms. If Mr. Bush were the CEO of a company, he would probably be heading a big American auto maker. Few industries have more problems today or are so replete with discontented customers and shareholders. Here, too, the problem can be traced to a succession of CEOs who stumbled upon reality too late and long after it had been apparent to buyers who moved on to the competition in the millions. This is what happens with imperial CEOs whose thinking is so set in the successes of the past that it becomes inconceivable for them to contemplate failure in the future. In a business organization this means unconventional wisdom or countervailing thoughts seldom venture into the room. The result can be, well, General Motors or Ford as they are today. Jobs and shareholder value can suffer. But in a government, where dissenting views are stifled or dismissed, such as the case with intelligence analysis that did not conform to the administration’s predetermined views about Iraq prior to the invasion (as Richard Clarke and other insiders have documented), the result can be measured in untold human tragedy and national treasure.
The ability of CEOs to see the world with fresh eyes and from a realistic perspective, and to encourage others to do likewise, is not only a test of leadership but it is also often a determining factor in long-term success. In my many years trying to sort out the problems of major companies, it was the myopic chief executive, and companion complacent directors who were similarly lacking in vision, that were the most common factors in troubled organizations. They would flail about cutting costs, blaming others and looking for magic solutions, all the time not realizing they were standing at ground zero of the problem. Having been the bearer of the bad news that nobody else would convey in such situations, I can report from personal experience that Pharaonic egos do not take kindly to any suggestion that they may somehow be complicit in their own organization’s shortcomings. The reaction I often observed reminded me of the line attributed to Mafia mastermind Meyer Lansky who once cautioned someone to whom he was proposing a “business” arrangement, “Remember, I don’t take rejection very well.”
The fact is, as I have long suggested, in too many cases we have the wrong type of person in the CEO’s chair –individuals not fully formed emotionally or possessed of a broader understanding of the world and their mission in it. We have too many CEOs who confuse being sheltered and remote as a symbol of success and too many who still surround themselves with self-serving sycophants. Nothing reflects these shortcomings more than CEO pay, where American boardrooms have become dominated by those who are obsessed with their own personal gain and are oblivious to the pain they are demanding of others. This was the message of the abuses in executive compensation at Enron, WorldCom, Tyco, Nortel and Hollinger, among others. It was the more recent message in Home Depot’s excesses involving former CEO Bob Nardelli.
Yes, I am still pleased that Mr. Bush made that speech. But I am disappointed that I and so many others were taken by surprise over something that was clearly called for a long time ago. The reaction says a great deal about the failings of his presidential leadership. We expect a leader to be among the first to recognize and speak out about impending threats, whether to society or to capitalism. We should not be content when they are among the last to join the chorus. When we emote surprise over our leaders speaking out about the obvious, it says as much about us and our choices as it does the leaders themselves.
President Bush is a CEO whose “shareholders” now see him as synonymous more with failure than with success. Many are defecting to the competition in the form of the Democrats. It is perhaps, more than anything, his inability to look forward to the consequences of actions, to be guided by a sense of skepticism about conventional wisdom, to ask perceptive questions and his failure to show an awareness of a problem until it arrives on the Whitehouse doorstep, that are the most defining qualities of Mr. Bush’s leadership and management style.
Last week, the U.S. Senate’s failure to pass a bill to increase the federal minimum wage promoted a considerable reaction on these pages. Late today, it voted overwhelmingly to increase the minimum wage for the first time in more than a decade. Finlay ON Governance takes no credit for the change of heart, but it is difficult for us to hide our delight. Senator Ted Kennedy called the bill “a victory for the American people.” We couldn’t agree more.
