The trial of Conrad Black and its wider significance in the annals of business leadership and corporate ethics has occupied some considerable space at Finlay ON Governance. We advanced no position on Mr. Black’s guilt or innocence while the matter was before a jury. But since the verdict in U.S. federal court in July, it is fact, not speculation, that Mr. Black is a convicted felon. Our attention in that respect was focused recently not so much on Mr. Black as on Canada’s National Post, where he was once controlling shareholder. While Mr. Black is unable to lawfully return to Canada even as a temporary resident, he has apparently no problem returning to his place at the Post as an opinion maker.
With great fanfare on the front page of its Saturday edition, the paper trumpeted the reappearance of Mr. Black’s column. Perhaps we are a little old-fashioned, but the idea of a convicted felon proffering opinions just weeks away from being sentenced on three counts of fraud and one count of obstruction of justice seems a bit bizarre. Allowing Mr. Black to ponder on the excesses of the retail habits of wealthy south Floridians is equally perplexing. Talk about Black calling the kettle….
One has trouble imagining the New York Times giving space to former WorldCom CEO Bernie Ebbers, currently residing in federal prison for accounting fraud, or the Washington Post welcoming back Sanjay Kumar, one-time head of Computer Associates. We do not recall the Daily Telegraph allowing Lord Kylsant of Carmarthen, also convicted of fraud in connection with the running of a publicly traded company, to pen his views on the case with that legendary ink in 1931 (Lord Black was the first British peer since Lord Kylsant to be so convicted). A felon’s corner in newspapers would certainly have no shortage of contributors and no doubt every embezzler and purse snatcher would tell their own special tale of injustice. We think that’s not exactly what readers are looking for from the icons of print journalism. What is also disappointing is the fact that the editors and publishers of the Post felt no obligation to explain their reasoning for this unusual move. They simply acted as though nothing had happened to Mr. Black in the past few months.
One might reasonably wonder what exactly the criteria are for selection of Op-Ed columnists at the National Post. This murky area of journalism, which this writer too once inhabited, operates in shadows and secrecy. As noted on these pages before, I wrote in the Op-Ed section of the Financial Post periodically over the course of two decades. When Mr. Black bought the newspaper, I was among its first casualties (the column was quickly picked up by the Globe and Mail). The fact that I was one of the few who dared to criticize Mr. Black’s corporate governance practices at Hollinger or note publicly his role on the boards of prominent failed companies may, of course, have been entirely coincidental.
Like Conrad Black, I also learned some lessons from my late father. It was his habit to review the commentary pages of half a dozen newspapers on a daily basis. The ritual was frequently accompanied by the instruction to his children that the opportunity to put forward views that shape and influence society is a privilege for any writer. For newspaper publishers and editors, the guardians of such intellectual real estate, it is a trust. Is giving a platform to fraudsters and felons consistent with that trust? I raised those questions in a letter to the editor of the National Post earlier this week after Mr. Black’s column appeared. It was never published. Nor did any letter from anyone else who was critical of the decision. What a surprise.
For Conrad Black, it seems, things are not the same as they are for you and I. His friends at the National Post clearly think he should continue to be treated differently. Their tough stand on law and order, long an editorial hallmark of the Post, apparently does not apply to one of their own.
What happened to Conrad Black, as we have noted before, is not something that those who have known him and looked up to him will take any satisfaction over. For him, it is life altering. For his family, it is tragic. Still, it is a fate delivered by his own hands. But when a respected institution such as the National Post also begins to slip from the standards and expectations which it has espoused, appears blind to the legitimate findings of the American legal system and is prepared to act as though nothing really happened, it is even more troubling. It is why we have chosen the actions of the National Post in permitting the return of Conrad Black’s columns the Outrage of the Week. Our unpublished letter to the editor is reprinted below.
To the Editors of the National Post
Re Conrad Black
As a believer that important newspapers such as the National Post serve their readers and society best when they adhere —and are seen to adhere— to the highest journalistic standards, I am at a loss to understand the basis for Conrad Black’s return to the Opinion page (Living beyond our means, September 22, 2007). It raises the question: Is it appropriate for a convicted felon to have a by-line as one of the Post’s columnists? We know that Mr. Black and other directors were unbothered by having shopping centre magnate A. Alfred Taubman on the board of Hollinger International after his conviction on criminal charges of price fixing. But the well documented misjudgments and failings of Mr. Black and his fellow directors in that company are a dubious model to follow.
The fact is neither an experienced reporter nor a junior copy editor in the National Post would long be retained if they were convicted of a criminal offence. Experience also teaches that Op-Ed contributors have been dropped for a variety of lesser reasons. My periodic columns, for instance, which appeared in the Financial Post over some two decades and dealt frequently with corporate governance and business ethics, (and were occasionally critical of Mr. Black’s governance practices as CEO of Hollinger) were terminated, without explanation, as soon as Mr. Black took control of the newspaper.
Also apparently escaping editorial scrutiny is Mr. Black’s commentary on the excesses he has discovered while temporarily living in Florida. By what stretch of reason would one recently convicted on three counts of fraud be deemed a credible and reliable authority regarding such observations?
Whether the publishers of the Post like it or not, Mr. Black does not hold the same stature now that he did when writing there as a columnist prior to his conviction. The reality of his fate may be regrettable, even tragic. But the National Post does a disservice to its reputation and to the intelligence of its readers by acting as though the last several months in Chicago never mattered.
J. Richard Finlay
From the stock market watchdogs who permitted the premature listing of the company to the cops and regulators who were unsuccessful in bringing even a single fraudster to justice, Bre-X was a colossal failure at every level.
It’s not surprising that the Ontario Securities Commission has decided not to appeal the acquittal of John Felderhof, the only person ever to be charged in the infamous Bre-X fraud. Frankly, there have been so many strange twists and remarkable disappointments with this case that there is really little left to be astonished about. As we noted here with chagrin even before this recent setback, the OSC is clearly losing its appetite for criminal prosecution, partly because it has been doing so badly in that regard and partly because it has a leadership culture that prefers to retreat to its less aggressive era. This was pretty much reflected in a statement by OSC chair David Wilson, who told Macleans recently that the agency’s priority was “not to beat the drumbeat of more criminal cases.” As we observed previously, there were many problems with the case, and where it was heard at Canada’s lowest court level, that were beyond the OSC’s control. But if you look at the length of time it took to have the case tried (seven years), the three- year-long motion and appeal interval where it was trying to have the judge removed, and the full year it took for the judge to write his decision (there was no jury in this case) the outcome was probably as predictable as the bewildering process that gave birth to it.
So it is that the largest mining fraud ever has now become the biggest bungled case of its kind in history. From the stock market watchdogs who permitted the premature listing of the company on the prestigious TSE 100 without due diligence to the shut-eyed independent directors, credit rating agencies and analysts who saw only the glitter of fools gold and eventually to the cops and regulators who were unsuccessful in bringing even a single fraudster to justice —and now have given up entirely— Bre-X was a colossal failure at every level. It might also serve as a cautionary lesson to today’s old line boardroom stalwarts who argue that too much emphasis has been placed in recent years on structure and that there is no connection between the architecture of corporate governance and corporate performance. I will have more to say about the confused logic and selective memory of those who would move the boardroom back to the future in another posting. But it would be hard to find a worse example of corporate governance than Bre-X — unless of course you were looking at Hollinger Inc. during Conrad Black’s era or Research In Motion more recently or the nearly 25 percent of companies listed on the TSX Venture Exchange that do not comply with even the minimum disclosure regarding their own boardroom practices which is required as a condition of listing by that exchange.
In the entire decade since the scandal unfolded, not a single agency, regulator or individual has admitted even the slightest responsibility, however indirect, for this calamity. No apology has ever been made to the investors who lost billions or to the larger investing public which has an irrefutable stake in the integrity of the capital markets and the institutions that guard them. No criminal has ever been convicted. You would almost think Bre-X were an inexplicable act of nature for which no mortal can be held accountable. At least not in Canada.
If the Bre-X fiasco occurred elsewhere, and certainly if it happened in the United States, outraged legislators and congressional committees would be in full flight holding hearings to find out why the company went so far beyond the arm of justice. They’d call aggrieved shareholders as witnesses and demand that stock market officials, regulators and justice department chiefs appear before them. They’d want to know if this case was symptomatic of any larger problem and whether such a travesty could happen again in the form of another memorable name. But in Canada, where it is hard to imagine a more dysfunctional system of securities regulation and boardroom crime policing, the biggest disaster in mining history ends with barely a whimper. And the politicians go back to sleep.
Exactly ten years ago, in an Op-Ed column in the Financial Post, I first brought to public light a number of the corporate governance failures that allowed Bre-X to happen. As we close the book on this sad saga, I thought it would be interesting to reprise the article that in many ways foreshadowed all the other failures that came to be associated with that scandal.
Bre-X Was A Failure of governance
J. Richard Finlay
Originally published in the Financial Post, August 1997
Continuing denials of culpability by former directors of Bre-X Minerals Inc. and securities regulators show once again that there is a predictable rhythm to corporate governance issues in the wake of disaster. In what has become the corporate version of line-dancing, academics and the media stamp their feet in demands for reform, regulators scurry for cover from the descending wrath of shareholders, and directors pirouette in elegant assertions that things will change. But when the revivalistic music stops, exhausted directors too often slump back into their boardroom seats, returning to their customary somnolent ways. The ritual is recurring in the Bre-X debacle.
Bre-X was a massive fraud to be sure. But it was also a massive failure of corporate governance. And the failure occurred on a number of fronts. With its insider board, dubious disclosure record, curious insider trading patterns, ever-expanding boasts about ore deposits and confusion about who owns them, Bre-X was a time bomb waiting to go off. But those who could have defused it heard only the siren song of fast money and not the tick, tick, tick, of impending ruin.
Of Bre-X’s board of six, only two members qualified as independent directors. The TSE’s guidelines for publicly traded companies call for a majority of outside, independent directors. This did not appear to bother many institutions or funds. When directors began to engage in heavy insider trading, regulators and advisors should have seen the signs and looked deeper into the details of the operation. Previous problems about licensing and ownership should have provided clues. Few followed that trail. When directors made ever-exaggerated claims about the size of the Busang find, regulators and investment advisors could have demanded more details. None did.
At its height, Bre-X had a market capitalization greater than Imperial Oil, Bombardier, Inco and Molson combined. And that was without any sales or profits. That alone should have prompted major financial institutions and pension funds, to say nothing of regulators, to take a closer look at the company. It never happened.
Another board that should also be doing some soul-searching is the TSE’s. The TSE’s guidelines on corporate governance raise an interesting question: Why does the TSE itself not comply with them?
Of the TSE’s board of 14, only four directors qualify as being independent. That’s far from a majority and far short of its own guidelines on corporate governance. Would a board composed of a majority of independent directors who are unaffiliated from member institutions have been more cautious about Bre-X? Would it have been more wary about putting Bre-X on the blue chip composite index when the company had no track record and when there were so many unanswered questions? Like many things about this scandal, we may never know. But we do know from the past, and from the TSE’s own study, that independent directors make for better boards. And better boards are motivated by the longer view, not necessarily the fastest buck.
Modern corporate governance practices, as every regulator and investment advisor has been taught, have grown out of disasters like Bre-X. The collapse of Great Britain’s Royal Mail Steam Packer Company in the 1930s (which, like Bre-X, also had a board of six directors) and Robert Maxwell’s empire, the S & L scandal in the United States and the demise of Confederation Life and dozens of other financial concerns in Canada all have involved failures of corporate governance. Had those lessons been applied in the Bre-X case, the fraud likely never would have achieved the level it did because institutional investors and regulators simply would not have endorsed a company that failed to practice even the most elementary standards of good corporate governance.
Directors, regulators and investment advisors are paid to read the signs of disaster as well as the portents of profit. The investing public is still waiting for an explanation as to why they failed in their duty over Bre-X.
Seventy–six years ago, the business world was rocked by another sensational trial involving corporate fraud and the scamming of investors with a prominent baron at the centre of the scandal. It did not end well for Lord Kylsant of Carmarthen. The uncanny similarities are not encouraging for Lord Black of Crossharbour.
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Considerable speculation is gathering about what will become of Conrad Black in light of his four-count felony conviction earlier this month. In that regard, the past provides a useful and rather unexpected guide. Corporate governance, which I think factored significantly in the outcome of the case against Mr. Black and his colleagues and set the stage for their eventual downfall (I will have a further posting on this in light of the verdict) actually has a history, though most of its champions don’t bother to study it.
Two decades ago, I came across a case involving boardroom misfeasance by another British baron. I found it interesting when I first learned about it, but thought it was from a different and by-gone era. I had no idea it would someday spring from my archives and take on a totally modern face. Today, in the wake of recent developments in U.S. federal court in Chicago, it is truly fascinating for its uncanny similarities to Hollinger’s demise and for its instructive value as to what might lie ahead for Mr. Black. It is not a pretty picture.
Owen Philipps, who became Lord Kylsant of Carmarthen in 1923, was born to great wealth and a prominent family, like Lord Black of Crossharbour. His ancestry could be traced back to the nobility of post-Roman Wales. And like Lord Black, Lord Kylsant attracted early praise for his business acumen. He commanded enormous respect in commercial and political circles and was then, as his baronial counterpart is today, viewed as a larger-than-life figure. At six feet seven inches, he was straight out of central casting for that role. Like Lord Black, Lord Kylsant began to assemble an empire, not of newspapers, but of ships. An admirer of Bonaparte like Lord Black, Lord Kylsant became known as the Napoleon of the seas for his tenacity in making deals and expanding his empire and for an almost single-handed domination of his company. You have to wonder what this fascination of ill-fated business tycoons with the likewise ill-fated emperor, who was given to such monumental lapses in judgment, is really about. Perhaps they should have studied more Wellington and less his conquered opponent.
Lord Kyslant and Lord Black received their titles largely because of their business successes. Some good connections no doubt helped in both cases. Lord Kylsant’s huge ego —he, too, did not suffer mere mortals gladly— was illustrated by the equally oversized “K” which he scrawled on memos and company orders to signify his approval. Lord Black is known for signing his name to emails in all capital letters. And the two men held rare honors: Lord Kylsant was a Knight of the Order of St. John of Jerusalem; Lord Black is a Knight of the Order of St. Gregory the Great.
In 1926, the Royal Mail Steam Packet Company, which was publicly traded on the London Exchange and headed by Lord Kylsant, bought the White Star Line, which also owned the Titanic prior to its catastrophe-destined maiden voyage. The Royal Mail was essentially a holding company for various shipping entities, which continued to operate under their own corporate flag. Like Hollinger, the Royal Mail financed many of its acquisitions by taking on enormous amounts of debt, which later proved difficult to service. By the early 1930s, the company began to fall behind in its payments to the White Star’s former owners. Soon, investors were publicly questioning the Royal Mail’s accounting practices and whether the true state of its financial health was being disclosed. Lord Kylsant, like Lord Black, initially bristled at any suggestion of irregularities in his stewardship. But under mounting pressure, and in a move that presaged Lord Black’s own actions some seventy years later, the baron responded by agreeing to the creation of a special committee to investigate the company’s affairs. The highly respected Sir Josiah Stamp —the Richard Breeden of his time— eventually submitted a devastating report that showed the alarming extent of the company’s financial deterioration and found that investors had been misled.
Lord Kylsant soon took a leave of absence from daily management of the company. Still, a criminal investigation followed and, in a move that rocked both Britain’s financial community and aristocratic society, he was arrested and charged with two counts of fraud. The mirrors of history form an uncanny reflection of the proceedings in U.S. federal court against Conrad Black. In June of 1931 a trial began in London’s historic Guildhall. The country was spellbound. The courtroom was packed. The press from around the world followed every word, along with the comings and goings of Lord Kylsant and his family in their limousines. The best —and certainly most expensive— legal minds in England, perhaps even rivaling Lord Black’s fabled team of the Two Eddies (fabled, that is, before his four-count conviction), were retained by Lord Kylsant to marshal his defense. Hundreds of boxes of documents were introduced into evidence. Prominent directors testified —as they so often do in such cases— that they were not aware of what was really happening in the company. Lord Kylsant’s lawyers mocked their testimony and asserted the board was fully informed and approved of all financial transactions and disclosures. Sounds familiar, doesn’t it? A jury of ten men and two women (Lord’s Black’s was composed of nine women and three men) did not buy that line. The central issue was that Lord Kylsant deliberately hid the true state of the company’s finances from his board of directors and the shareholders. The verdict acquitted Lord Kylsant on one count of fraud and convicted him on the other. A sentence of one year in prison was imposed.
There was great speculation at the time, as there is today with Lord Black’s conviction, about the success of an appeal, which was launched immediately. Many assumed a prominent titled member of the aristocracy would do well before similarly privileged appeal court judges and that what were asserted by the baron’s supporters to be relatively minor infractions would not be deserving of incarceration. They were wrong.
When her husband’s appeal failed, Lady Kylsant, a much remarked about figure at the proceedings, broke down and embraced the emotional baron in his last moments of freedom. The sentence was upheld and ordered to commence immediately. And so it was that this lord of the oceans who commanded one of the largest fleets of British commercial ships to sail the seven seas was dispatched into the company of petty thieves, small-time criminals and household robbers. He never set foot in the House of Lords again. He was never entrusted with other people’s money again. All of Lord Kylsant’s significant honors, including the previously noted Order of St. John of Jerusalem, were rescinded in the months following his conviction. Struggling with public disgrace and social ridicule, not just because of his crime but also the legacy he squandered, he died a broken man in 1937. The Royal Mail sailed into virtual extinction, and the financially troubled White Star Line, which even the greatest calamity of the sea could not sink, was brought down by a scheming boardroom baron who plotted his misdeeds among mahogany tables, leather chairs and every privilege his country could bestow upon him.
The shareholders of Hollinger Inc. and Hollinger International may themselves be struck by the parallels in the demise of Lord Kylsant’s empire and the hollowed-out remains of what not long ago was the world’s third largest newspaper owner.
If, on a Christmas Eve in the late 1990s, before the twin vices of greed and miscreance had settled on Lord Black’s mind, the ghost of Lord Kylsant had been able to visit him, as Marley appeared to Scrooge in the Dickens tale, one wonders what he would have said. Would he have warned his modern equivalent to change his ways? Would he have counseled him that it profit a man nothing to gain a few dollars more only to lose his priceless freedom and precious reputation? Could anyone have persuaded an uncommonly determined man who rose from The Bridle Path to a British peerage to take a less ignoble path? Is it always the curse of larger-than-life men to surround themselves with smaller figures of little courage and a never-ending sense of obliging service? Or are there just so few men and women who will stand up to hold back the destructive tide of hubris and unquenched ego? Looking at the examples from as far back as the Royal Mail and as recent as Hollinger, a long series of rather remarkably ineffectual boardroom players, distinguished more by the outcome of their carelessness than by the product of their diligence, seems to lead to that conclusion.
It is perhaps not just Conrad Black who needs to reflect upon the events that have taken him to this regrettable point in his life. The experience carries valuable lessons for how we all deal with such titanic figures in the future, whether they be noble barons or just common variety CEOs who think they should be paid a king’s ransom.
Conrad Black is the only member of the House of Lords to be convicted of criminal charges involving a publicly traded company since 1931. It did not end well for Lord Kylsant of Carmarthen. One wonders what history will finally record in the case of Lord Black of Crossharbour.
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If Conrad Black is a great businessman, what and where is his legacy? Is it a thriving corporate empire, or is it just a Napoleonic ego exiled to some kind of legal Elba?
As Conrad Black awaits his fate at the hands of a federal court jury in Chicago, one can only hope that he and his colleagues will receive a just outcome. While I have a sense of what that outcome will be, I have declined to speculate about it for public consumption on these pages. It is a serious matter to have one’s freedom hanging in the balance, as Mr. Black and his co-defendants have. Neither the dignity nor the effectiveness of the process is assisted by pronouncements from armchair courtroom spectators.
There is a surprising interest, however, in the wider implications of what has been learned from the issues raised in the trial. I deal with the corporate governance aspects, and the failure of the guardians, watchdogs and gatekeepers, in Part 1 of this overview. As for Conrad Black himself, it is impossible to escape the public and media fascination with a man who has dominated the landscape for so many years and has done so with uncompromising zeal. Mr. Black’s trial has provided a convenient lens through which many have sought to gain a fuller picture of the person behind the headlines. He has encouraged the public curiosity by writing about the legal and human issues surrounding his case in his periodic columns in the National Post. (For nearly 20 years, my occasional Op-Ed columns were carried in the Financial Post. They never appeared again after Mr. Black took control of that newspaper.)
There will likely be little dispute that Conrad Black is one of the most interesting and intellectually gifted individuals ever to appear on the business scene. He was intriguing as a young fellow who lived in a Don Mills-area mansion, whom my chums and I would bicycle over to see from time to time in the 1950s, always feeling slightly dumber for the experience after we left. He remains fascinating half a century on. In a world where many CEOs are challenged to write coherently three successive sentences on their own, and seem to believe that the beginning of history coincided with their own birth, Mr. Black has written several sizeable historical volumes of scholarly acclaim. Most CEOs rarely have an original idea. Mr. Black has a whole closet full to which he adds on a regular basis the way Imelda Marcos added shoes. Most CEOs are rather one dimensional —or perhaps 2D, if you count their obsession with golf. Mr. Black is a multifaceted figure who has had the wisdom not to tempt that thief of time masquerading as 18 holes on nicely tended lawns.
But for all that I have admired about his larger than life presence, there is also larger than life disappointment. Mr. Black was afforded every opportunity at an early age, including the alacritous assistance of the all-connected and the impressively powerful. Yet, in the end, so much seems to have been squandered.
He was given every advantage —titles, position, money and the gift of a powerful intellect. He was awarded some of Canada’s highest tributes, including an almost unheard of elevation for a non-politician or government official to Canada’s privy council. That comes with the right to be called “the honorable,” which Mr. Black used to the hilt prior to his peerage reward, and a special passport which is claimed to smooth one’s way past snarly customs officials —or haughty head waiters.
Few had his connections or were set upon such a promising path paved by friends, relatives and mentors. He inherited a coveted place at the table of the Canadian establishment. Some might say he eventually took possession of the establishment. But if Conrad Black is a great businessman, what and where is his legacy? Is it a thriving corporate empire, or is it just a Napoleonic ego exiled to some kind of legal Elba?
The jewels of Argus —Massey Ferguson, Dominion Stores, Canadian Breweries, and even Orange Crush— have vanished. Mr. Black’s private holding company, Ravelston, the creation of E.P. Taylor, Eric Phillips and Wallace McCutcheon, is an admitted corporate criminal now controlled by a court-appointed receiver. He bought iconic newspapers like the Telegraph — he did not create them. They are gone from his empire. The one newspaper he takes credit for founding, the National Post, one might argue, has as much to do with the legendary Floyd Chalmers of Maclean Hunter as it does Conrad Black. Mr. Black bought the Financial Post long after it had been turned into a respected business institution by others and built the National Post on that foundation. It’s gone from his hands, too. Even the Hollinger name was the product of others. For many years it was a mining company controlled by Argus. Now it has shrunk to being little more than a check writing machine —for everyone except the shareholders. Lawyers and post-Black executives are making huge sums supposedly for reviving a debt-laden Hollinger. Even the company’s new CEO, someone by the name of Wesley Voorheis, is being paid nearly a million dollars a year from a company that is losing money while the stock languishes at an embarrassing 78 cents —and that’s on a good day.
That spinning sound you hear is the founders of Argus twirling in their graves over such ignominy. The ultimate symbolic indignity was the sale of the landmark Hollinger headquarters at 10 Toronto Street, long the seat of power for Mr. Black and his Argus forebears. Hollinger International also set about to create distance between Mr. Black and its principal asset, the Chicago Sun-Times. The company is now called Sun-Times Media Group, and they didn’t ask for Mr. Black’s permission.
Not all of these events can solely be attributed to Mr. Black’s failings. Some certainly can be. He has been at the helm of this empire for many years and there were, at the very least, doubtless turns in course he might have taken in order to avoid the legal and financial collision that has occurred. Sound judgment has not always been the most active part of Mr. Black’s character. Even his Canadian citizenship slipped through his overreaching hands as they preferred to clasp on to an honorific post offered by another land in a throwback to a by-gone era.
And, if it is shown that he is totally innocent of the charges against him, he has had to have set a Guinness record for bad luck. His personally selected directors have been the laughing stock of the boardroom world as a result of their courtroom performance at his trial. His long-time closest business colleague, David Radler, is an admitted felon for his criminal dealings at Hollinger. Even his private holding company, Ravelston, as noted above, pleaded guilty to a criminal count of mail fraud in U.S. federal court.
There were endless honors and awards for Conrad Black. But in a Black universe of boundless gifts, the potential of great and enduring accomplishment always seemed to be eclipsed —and defeated— by a larger sense of personal entitlement and a preoccupation that others were out to take advantage of him. He and his colleagues had to live in “a certain style,” as he called it, even while incurring the wrath of shareholders —however belatedly. Hollinger was his company, as he put it, an attitude which finally led to his ouster as its head. His obsession with having the noble title of another country caused him to give away his Canadian citizenship, which he now longs for and may wish he had before all is done. There were the Hollinger investors, whom he described as “ingrates.” A few years ago, it was all the shoplifters among the customers and employees of Dominion Stores who were nibbling away at his earnings. Servants (of whom he has many), he declared, were “a notoriously unreliable group, as any experienced employer of such people knows.” Then, of course, there were those pesky “corporate governance terrorists” of whom Mr. Black claims to be a “victim.” It is a self-image that recurs on a number of occasions in Mr. Black’s musings.
I believe Conrad Black has asserted he is a follower of the doctrine of Darwinian capitalism. Have you ever noticed that those who espouse a view of the survival of the fittest are generally those who have survived by starting out at the top? For one born to a mansion and who becomes the early protégé of one of Canada’s most prominent titans (Bud McDougald), who has every connecting door opened and every posh board seat reserved, it would take a special kind of talent to blow the establishment’s version of assisted living. Is this the Darwinian theory of which Conrad Black speaks?
This view of the world is not unique to persons of great wealth like Mr. Black. Charles Dickens wrote about them at some length, and the early 20th century produced a whole succession of such characters. It is nevertheless one of the more disappointing sides of those who hold themselves out to be champions of capitalism. It makes them smaller than they need to be in order to successfully fill that vital role.
Whoopi Goldberg once said Americans will forgive anyone for almost anything —except arrogance. The fact is that those who behave like sultans, whether from Brunei or The Bridle Path, are quick to attain the curiosity of the public but rarely, if ever, garner its respect and affection. Those might be attributes Mr. Black would wish to enjoy in the eyes of the 9 women and 3 men who now hold his fate. He may also hope that the jury will be more meticulous and attentive than his handpicked directors, as evidenced by the testimony of Hollinger’s breathtakingly inept audit committee members.
Whether he is acquitted or convicted, Mr. Black’s more historically enduring offense will be that he failed to live up to the extraordinary potential that fortune, family and providence showered upon him. He could have done so much more. He could have been an illuminating force in a time when people yearn for leaders who are smart, ethical and imaginative. That, in its best sense, is one of the important roles the aristocracy —a class with which he so clearly identifies— is supposed to serve. Instead, Mr. Black chose a path less bright. He seemed to thrive on attacking others with the sneering polysyllabic broadside that became his emblematic signature. There are occasions, of course, when healthy criticism is warranted, and we dispense our share at Finlay ON Governance. We are also on the receiving end of some. But one likes to think that powerful leaders can rise above the petty temptation to clobber others just because they are possessed of a superior vocabulary and have access to the public megaphone.
Mr. Black, it seems, has difficulty distinguishing the decidedly significant from the stupidly annoying. As a follower of some of the best military strategists in history, it is surprising that he never learned the first lesson of the successful general: to differentiate a trivial skirmish from a decisive battle. Greatness in a leader is measured as much by what he chooses not to do as by what he actually does. Restraint has always been a defining hallmark of power. It has been an irregular guest in Conrad Black’s life. He has mocked, chided and insulted virtually every party connected with his current legal woes, from the objecting shareholders and the SEC to the prosecutors at his criminal trial. And, even while they are deliberating on his freedom, he has been unable to resist imparting a sarcastic jab at the jury about their request for an exhibit related to non-compete payments.
Mr. Black’s career, as it relates to the handling of other people’s money in a publicly traded corporation, is, for all practical purposes, at an end. Who would entrust funds to someone who has articulated such a contemptuous view of the role of shareholders and acted in such a high-handed fashion when it comes to leading a board of directors? His actions have also poorly served the institution of capitalism of which he has spoken with glowing admiration. It will, of course, survive Conrad Black. But will it survive the era of excess which he has come to symbolize? It is a time which also coincides with the greatest concentration of wealth at the top in America since 1929. The danger is that the cumulative effect of these forces of greed and acquisitiveness, of which his trial has made Mr. Black such a well-documented example, may spark a backlash similar to the political intervention that reshaped the corporate and economic landscape of the 1930s.
One of the more amusing anomalies that seems to afflict so many of these self- proclaimed champions of capitalism is that their deeds often prompt conditions that stifle and undermine the freedoms of the very system they espouse. The public’s ire over perceived abuses at the hands of the privileged can ignite a firestorm of political action determined to redress the misconduct. Sometimes, it overreaches the target. Still, one rarely finds the objects of the concern willing to moderate their behavior. I suspect this is because they are less the genuine advocates of capitalism they claim to be than they are apostles of personal greed and self-interest —regardless of the consequences. They are content to have others pick up the litter they leave behind.
Mr. Black’s own words and actions create an unavoidable impression of the man. His Louis the XIV style pronouncements (“But I’m not prepared to re-enact the French revolutionary renunciation of the rights of the nobility”), his Nixonesque email moment (“Nor will we accept directors that we do not have confidence will be loyalists, by which I mean conscientious, responsible, thorough, but well-disposed, like the incumbents, though obviously, I didn’t say that”), his stinging contempt for investors and his inability to tolerate criticism — all lead to the inevitable judgment that he is one more tycoon in the grandiose march of the garishly puffed up into the New Gilded Age, one more self-absorbed boardroom titan who had no time for corporate governance and then spent all his time dealing with the casualties of that miscalculation, one more celebrity for whom the public eventually tires of their tedious displays of self-indulgence and overweening ego. However his legal travails turn out, the inevitable conclusion is that, in many ways, the Conrad Black saga is another chapter in the widening sense of betrayal people feel about those whom they have admired, and even trusted, but who ultimately leave them feeling terribly let down.
Whether his fate is that of a free man or one faced with forced confinement, Mr. Black will soon begin to recede from the sphere of influence he craved and the media was happy to facilitate. One does not have one’s boardroom antics and backroom designs (“Dear Donald: Could I ask a rather esoteric favor?”) opened up to the rest of the world without consequence. Exile from the high councils of business and public life would seem a distinct possibility, as is the prospect of legal action of a different nature on the part of the Securities and Exchange Commission and the Ontario Securities Commission, regardless of the outcome of the criminal trial.
Napoleon, it is said, reflected from afar on some of the forces that brought an unexpected end to his career. He attributed his fate not to the strength of opposing armies but to something within his own character. “As soon as I made my debut,” the dethroned emperor is said to have confided to Las Cases, “I found myself rich with power, and circumstances and my strengths were such that, as soon as I was given command, I no longer knew either masters or laws.”
The curse of hubris and a misguided sense of personal invincibility has seen the downfall of more than a few emperors, presidents and, perhaps, an occasional press baron. Having arrived at this doubtlessly unanticipated point in his life, one wonders what, if any, insights into his own character Conrad Black is capable of assessing —or whether he will be content to leave that to other historians.
Whatever else it may be, the Hollinger saga has been another valuable lesson in how not to run a company —and in what kind of company investors should avoid.
Even before the outcome is known in the trial of Conrad Black and other former officers and directors of Hollinger International, the verdict of public opinion seems to have arrived at a number of conclusions. One is that corporate governance matters.
As we have observed before, under the Conrad Black style of rule and Hollinger’s Black-dominated system of dual class shares, Mr. Black occupied the all-powerful positions of chair and CEO of Ravelston, Hollinger Inc. and Hollinger International, as well as chair of the latter’s executive committee. An unusual number of insiders, some of whom are currently standing trial, sat on the boards of both Hollinger Inc. and its Toronto-based parent —a situation, again, that runs contrary to modern corporate governance principles. Had investors heeded these and other signals, they would have known that Hollinger was a corporate governance train wreck just waiting to happen.
Hollinger’s example makes another compelling case for separating the positions of CEO and board chair, with a strong independent director holding the latter slot. One might have thought when you have a CEO talking about corporate governance “terrorists” on the one hand, looking for the company to pony up more for his butler on the other and announcing, just for good measure, that he was “not prepared to re-enact the French Revolutionary renunciation of the rights of nobility” as Mr. Black did, it would have been time for independent directors either to make some major changes or take a walk.
Hollinger had a further problem, however: a board of apparently disengaged directors. It’s not that they were just asleep at the switch —they didn’t even appear to be on the Hollinger train. They met infrequently and asked few questions. Most directors did not seem to understand, or even care about, the role of Ravelston, the Black-controlled private company to which Hollinger shareholders were paying tens of millions of dollars every year. At least one director, Henry Kissinger, rarely, if ever, showed up. Alfred Taubman was actually re-nominated to the board after his criminal conviction for price-fixing.
Given their inattentiveness and the laxness of their oversight, it is hard to believe that Hollinger directors ever intended to act like a real board. They seemed content to be bit players, and rather unconvincing ones at that, on a stage where Conrad Black had the only voice and the leading part. They appeared to enjoy basking in the glow of the Black empire and its connection with the high and mighty, and seemed to view the boardroom as little more than a fitness club for the exercise of grandiose egos. Unfortunately, they were not unique. There are too many underperforming boards today that are hypnotized by their CEOs in the same way Hollinger directors were apparently captivated by the Black magic of his lordship’s spell.
Here was a company where audit committee members didn’t read this, or missed that or just skimmed something else, and had a chronic inability to ask meaningful questions about the multi-million dollar payments they were approving. It was a level of performance in the boardroom that wouldn’t be tolerated in the mailroom.
This episode should give directors everywhere pause to think about the extent to which they might be placing their own reputations in the hands of a faulty system that could eventually be the cause of major embarrassment. The question is: Will it? There have been plenty of instructive disasters over the years. Hollinger’s bumbling directors might have learned from a whole slew of them —but apparently did not.
There will be some observers who argue that Hollinger is so far off the map that no lessons can be drawn from the trial. This would be a mistake. The same boardroom drama of complacent directors and power-hungry CEOs has been played out many times before. It will be again. All you have to do is look at the huge number of companies where compensation committees are still awarding their top executives with insane levels of pay which often bear no resemblance to reality, where fleets of private jets whose interior luxury would make a sultan envious are routinely provided to the travelling CEO, and where a never-ending list of perks —from lifetime million dollar annual pensions to corporate condos in Manhattan— come as standard boardroom equipment. Most boards don’t even want shareholders to have an advisory say on pay. So you have to wonder who is actually running the show in most boardrooms and how different they really are from Hollinger.
Through the extraordinary prism of criminal proceedings in U.S. federal court, we have been given a view of the inner workings of a corporation that is almost never afforded ordinary investors. The alarming thing is that what you had at Hollinger was not unknown or inexperienced directors, but some of the leading names in North American business and public life. Several of them are still serving as directors of other major companies. When they come off as confused, as inept and as comprehension-challenged as they have in this trial, you have to wonder what else is going on and what other scandals and disasters are just waiting to happen in the companies that still welcome them as directors. Hollinger also shows the workings of the boardroom club. Once inside, you are usually in for life —even if you mess up big-time. It is a very cozy arrangement and one that continues to embrace directors who have lurched from disaster to disaster.
Whatever the outcome of the proceedings in the Dirksen federal court building, what cannot be disputed is that there was something terribly wrong at Hollinger. One of its directors (Alfred Taubman) was a convicted felon. Another key officer and director (David Radler) became a convicted felon. The private holding company that Black and Radler controlled, which featured so prominently in the trial, is an admitted corporate felon, having pleaded guilty in U.S. federal court to mail fraud. Hollinger directors paid out more than $50 million to settle shareholder lawsuits. Canadian heavyweight law firm Torys LLP agreed to pay Hollinger $30.25 million to settle allegations that it provided bad advice in connection with the sale of newspapers. It was the largest settlement of its kind by a Canadian law firm.
Corporate history, such as it is, will have a well-documented case in which to assert its rightful opprobrium against this cast of players. But for Conrad Black, the central figure in this drama, to emerge unscathed from the company he controlled with an iron hand in every possible way, in the face of such astonishing occurrences, would make him the Houdini of the American boardroom. Still, it is possible.
As I have long contended from seeing them in action at many levels over several decades, there is more fiction than fact, more mirage than miracle about the superhuman abilities so often attributed to those at the top. Publicity machines engage in amazing acrobatics to churn out a constantly expanding litany of superlatives and adjectives in describing their clients, but reality — which serves no one’s bidding or generous retainer— often tells a different story.
In this trial, we have had a rare glimpse into the performance of many who have long operated in an Oz-like fashion behind the curtain that prevents public scrutiny, preferring to project from afar the image of their self-claimed greatness. But when they take center stage, the lawyers, the directors, the audit committee members, the executives —all reveal what poor actors they really are, leaving the audience who once viewed them with a mixture of fear and reverence feeling cheated for the shabby performance that was delivered. Sadly, it is a drama that is played out time and again in the world of business and high places. We just don’t get to see it played out under oath very often.
Between the Abbott and Costello performance of Hollinger’s directors, the feebleness, failings and shortcoming of its gatekeepers and the Louis XIV-style email utterances of Conrad Black, the image of capitalism and public confidence in the workings of the boardroom have taken quite a hit.
I don’t know whether Mr. Black and his colleagues will be convicted or acquitted. That’s for the jury who heard the evidence. What is beyond reasonable doubt is the damage that has been inflicted upon the reputation of business and the sense of betrayal that many will once again feel about those who lead major corporations. Even before this trial, there was a widening belief that too many in business are only out for themselves, and that the concerns of ordinary stakeholders have long since vanished from their considerations.
Whatever else it may be, the Hollinger saga has been another valuable lesson for students of business and sitting directors in how not to run a company —and to potential investors in what kind of company to avoid.
We will have some thoughts on Conrad Black and his legacy in Part 2.
In too many ways, the primacy of the ordinary individual —as citizen, employee and investor— which has long been the backbone of modern social progress, is being left to disappear amid an onslaught of privileged special interests, civil rights-invading bureaucrats, unwatchful corporate guardians and greedy financial contortionists.
In Canada, it was the no-fly list, which the Harper government created to ban certain individuals from flights inside or leaving the country. In the United States, it was the no-sue list, which directors, executives and corporations now find themselves on courtesy of the Supreme Court’s 8-1 decision raising the bar for shareholders to commence litigation in respect of civil fraud. While they may seem unrelated, these two decisions share a common connection with an unsettling trend in the exercise of corporate and government power.
In too many ways, the primacy of the ordinary individual —as citizen, employee and investor— which has long been the backbone of modern social progress, is being left to disappear amid an onslaught of privileged special interests, civil rights-invading bureaucrats, unwatchful corporate guardians and greedy financial contortionists. We call this the Vanishing Stakeholder. Left unchecked, it is a trend that threatens to undermine the fabric of our society, our prosperity and our freedoms.
The U.S. decision, which was handed down this week, imposes standards that most investors, because they do not have the power to subpoena documents or to interview corporate parties such as directors and executives, can never meet. As a result of the Court’s ruling, investors must show “cogent and compelling” evidence of intent to defraud. Some, including Justice John Paul Stevens who dissented from the decision, believe the standard being set for this kind of civil litigation is as high as, if not higher than, that applied in criminal prosecutions. The decision pleased Bush administration officials and a large platoon of business lobbyists who have been moving toward a general loosening of post-Enron era reforms of the kind found in the Sarbanes-Oxley Act of 2002.
Under the Canadian program, which came into force this week, the government will identify people who pose “an immediate threat to aviation security” and place them on its no-fly list, without due process or prior notice. They might be part of a terrorist group, or, as Senator Ted Kennedy found himself after the U.S. introduced its version, someone with the same name as an embargoed passenger. They will only find out that they are on the list —or that they have been confused with some other person of the same name— just as they are about to board a plane. And the onus rests upon innocent people improperly placed on the list (has there ever been a major government effort that has not been bungled by bureaucratic incompetency or twisted by the vanity of some power drunk official?) to prove their innocence while being interrogated by law enforcement officials at the airport, in a closed room and without legal counsel. We thought that only happened in authoritarian regimes and in George Orwell’s fictional world.
But in the world that is becoming all too real for the treatment of individuals, shareholders are regularly seen as an inconvenience who need to be treated like annoying children instead of the owners of the corporate enterprise which they actually are. Citizens are viewed as suspects and potential lawbreakers in a time when even the library reading habits of young children cannot escape the alarmed and ever watchful gaze of law enforcement officials.
No sensible person wants to make it easier to clog the courts with frivolous lawsuits or for terrorists to plot their evil plans. But there has been a rising tendency of late to allow big corporations and big governments to become even more powerful and to make more difficult the ability of ordinary stakeholders to hold them to account. When that happens, fewer individuals, whether investors, employees or citizens, are inclined to stand up and assert their rights. Many fear the fix is in and that it is impossible to challenge the excesses and abuses of either government or business.
Last month, the U.S. Supreme Court made it more difficult for workers to sue in cases of pay discrimination under Title VII of the Civil Rights Act of 1964. In a 5-4 opinion, the Court held that such lawsuits —which almost invariably involve lower paid women— must be brought within 180 days of the initial alleged discriminatory act, not when the worker discovers it. And finding out what others in a factory or office are paid is not the easiest thing. Workers should not have to become pay stub sleuths in order to ensure that they are being fairly treated.
Ordinary investors, like average workers, are also getting the back of the hand from those in charge. Just look at the number of shareholder resolutions that have failed to win a bare majority in recent months when boards and management have opposed them —even resolutions like say on pay, which would have had only an advisory influence upon compensation committees. As for shareholder lawsuits —frivolous or otherwise— they are hardly an epidemic. Their numbers are considerably down in the years since Sarbanes-Oxley.
An equally disturbing trend is seen in the swallowing up of North American and European business icons by the elusive and expanding private equity whale. The stake that individuals have had as investors, and the benefits that come from being able to witness transparently the use of economic power and how it is wielded, seem now to be regarded by many commentators as only a passing fad in the natural evolution of a more concentrated form of capitalism —concentrated in fewer and richer hands, that is.
The current model of the publicly traded, widely-held, corporation, and its espoused link to the well-being of individuals, developed over a considerable period of time. Symbolized by the huge American flag that drapes the facade of the New York Stock Exchange, the motivating idea was that individuals could be something more than cogs in the wheel of capitalism; they could be the owners of its engines as well. Under this vision of the capital markets system, Wall Street and Main Street were inseparably linked. This idea was taken even further in the aftermath of the attacks of 9/11 with the posting of military personnel around the New York Stock Exchange. An attack on Wall Street was generally considered to be an attack on the financial nerve center of America itself.
Corporate leaders have consistently expressed the view that individuals have a genuine stake in American business —through pensions funds or mutual funds or as direct investors—and that such roles create a level of harmony between what’s good for most folks and what’s good for the modern corporation. As more and more companies begin to be taken over by essentially anonymous actors, or become absorbed by entities controlled by a few multi-billionaires, those interests may be starting to diverge. Indeed, there is some concern now as to exactly what role countries like China, headed by a dictatorial and communist regime, will have as their level of investment and alliance with private pools of corporate gobbling capital expands. Is this in the long-term interests of either democracy or society? Are policy makers and business leaders even pondering these kinds of questions? Again, the role of the individual in these new equations of commerce and capital seems essentially overlooked, if not regarded as entirely disposable.
The trend in this regard is paralleled by another significant phenomenon in the United States: widening economic division as reflected in the fact that the top one percent of households controls more wealth than at any time since 1929. As we have noted previously, it was a gap that ended abruptly –some might say catastrophically– at that time. There is little evidence that those at the top today are giving much thought to the impact of the current trend or exactly how much further it can be permitted to advance before serious damage is done to the social contract that has existed between the class of ordinary individuals and those in the upper tier of power and wealth. The average stakeholder has been just as absent from the cares of the corridors of privilege as he and she has been from participation in the income gains enjoyed in recent years. And, as we have documented repeatedly on these pages, few inside major corporations, much less the wider workforce, have seen anything approach the soaring level of pay advancement or galloping annual increases that CEOs and senior executives have received over the past decade.
Bear Stearns’s $3.2 billion bailout this week of a troubled hedge fund, and the sudden decline in the Dow Jones average as a result, is just one more in a series of telling reminders of how dependent individuals are on the guardians of capitalism and the watchdogs of sound business practice, including the credit rating agencies that seemed to miss the red flags. Recent testimony at the trial of Conrad Black from the high profile directors on Hollinger International’s audit committee, who admitted under oath that they did not read documents put before them, provides a vivid illustration of how boards so often fall short in their duties as stakeholders’ sentries. We would not be surprised to see further disturbing developments over the next several weeks as the world discovers (again) that the hedge fund kings and Wall Street wizards have not entirely rewritten the laws of market physics and may not be quite the extraordinary wonders their publicity departments or their huge fees would suggest.
As the Outrage of the Week prepares to take some time off for the summer, we think it is appropriate to leave on the larger note of concern for what we see as the receding role of the individual in society. We view this trend, where leaders in business and government are a little too quick to trample on a right here or remove a benefit there because it is the expedient or profitable thing to do when it comes to dealing with average stakeholders, as emerging on too many fronts to ignore.
Some of us actually believe that we live in a democracy. We like it that way. We take its freedoms and responsibilities seriously, including the idea of a market economy where individuals ultimately control even the mightiest pools of power. We are mindful of the continuing sacrifices made by men and women in countless battles around the world who have made our freedoms possible. If we wanted a different system, we would be living under any number of regimes that do not share a respectful belief in the role of the individual and who take a dim view of the rights of citizens or investors when they are exercised. The worry is that too many entrusted with power here are apt to forget that under our concept of democratic government and accountable markets, they are answerable to the people, not the other way around.
The Outrage may drop in from time to time, but will otherwise return to its regular weekly slot in early September. In the meantime, we thank our readers —affectionately known as our Outrangers— for your many suggestions for this well-read feature at Finlay ON Governance. We understand it is a frequent topic of conversation around the water cooler and at the kitchen table and has caught the eye of a few tycoons and political shakers on more than one occasion.
We wish them and everyone a safe and pleasant summer. There is much in the use and abuse of power and leadership that properly warrants our indignation. But there is also a good deal in the world around us among families and hard working people and in the wonders of nature that commends itself to our admiration and our gratefulness.
We hope you all have a chance to experience the latter to the fullest over the next several weeks, and that our many readers in the southern hemisphere have an equally pleasant winter.
