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.
Some high profile CEOs are taking action to support legislation to curb emissions that contribute to global warming. Like President Bush’s recent speech on excessive CEO pay, the subject of recent comment on these pages, it comes as a surprise to many.
In his Wall Street Journal column this week, where he praised the CEOs for taking the lead, Alan Murray asked “Why has the business community suddenly turned green?”. There are several reasons, of course, not the least of which is the hope of getting in on the ground floor to help draft the legislation they know an alarmed public and a Democratic Congress will demand. Some companies, like GE, where CEO Jeffrey Immelt is spearheading the move for new laws, stand to make huge profits from nuclear sales and other measures to stem emissions. But there is a larger issue to consider here before we go around handing out awards to CEOs for doing the obvious (which will probably be taken by some as another excuse for bigger bonuses). My comment responding to Mr. Murray’s piece is available at the Forum section of the Journal or below for those without a subscription.
Would we be wondering why Captain Smith slowed down when he had reports of icebergs nearby? Unfortunately, he did not. The rest is history. It was called the Titanic.
When disaster’s portents surround us, it is wise to act and not stand back and allow the unthinkable to happen. We hire leaders for their vision and ability to avoid calamity, not for their propensity to sound the alarm after catastrophe occurs. In that regard, it is a sad commentary on the quality of business leadership that we have to ask, “Why are they doing it?” when many less illustrious figures saw the dangers some time ago and have attempted to adjust their own conduct, and those of their policy-makers, accordingly.
It is not leadership these CEOs are engaged in by responding to the dire fears of climate change at this point. It is manning the lifeboats.
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.
One sees in this annual Alpine pilgrimage of Davos fragments of the grainy black and white movies showing the imperial families of Europe gathering in their toy soldier costumes and opulent surroundings, oblivious to the marshaling clouds of change and discontent that would bring their primacy to an end.
Fortunately, the annual spectacle known as the World Economic Forum at Davos has folded its tent for another year. It occurred not a moment too soon, as my supply of antacids was running dangerously low. There is, of course, nothing wrong or surprising about elites from business and government getting together. Having worked with these types for many years, I am well aware that many need constant reassurance and affirmation of their significance. Being among other CEOs or heads of government is the way these people remind themselves of their importance and remind the world that they are still running the show –even in en era of YouTube and WordPress. Such vanity is best taken with a large grain of Swiss salt, I suppose. As Philip Barry sardonically observed: “One of the prettiest sights in this pretty world is the privileged classes enjoying their privileges.”
What is galling is the pretense that these events are actually transforming the social and economic landscapes. It is the disguise of social gravity, the spin that seeks to turn global CEOs into crusading St. Georges slaying the world’s evil dragons, that makes these events so offensive. These forums have become the CES (Consumer Electronics Show) of CEOs –a gigantic trade show of, by, and for the self- impressed who visit one another’s booths to see how each measures up. Sure, there are earnest proclamations about the problems of the world. And everybody has to be seen embracing Bono. The Irish have that effect on people. Everybody loves embracing my Irish Setter, too. But real change requires constancy of effort, not candlelight and wine. What affronts the reasoned mind is the idea that this gathering actually makes a difference. Restating the obvious about the problems of the world does not make a difference. Talking about issues long ago advanced by others does not make a difference. Listen, if Davos actually had the level of influence it claims over CEOs and kings, presidents and dictators, the world would rightly be jumping up and asking who elected these people and how are they held accountable for their decisions. And if it doesn’t –which is my thesis– why do we, and especially the world’s media, encourage the pretense of these people by paying so much attention to them year after year?
Here’s an idea: Since so much discussion at Davos seems outwardly, at least, to center on issues of Africa and global poverty, how about a World Economic Forum that takes place in an impoverished region so that it can be experienced first-hand. True, there might not be the luxurious surroundings of Davos or the glittering parties, but surely that’s not really the purpose, as the organizers of the event take regular pains to point out. And if the growing economic divide is really as troubling as some Davos participants argue, how about the wealthiest CEOs at Davos volunteering to freeze their own pay for a few years as a sign of leadership and as a model for others? These things won’t happen because Davos is not really about correcting terrible wrongs. And it is certainly not about leadership. It is about contacts and connections, knowing the right number to call and how new deals can be won.
As German steel baron Jürgen Großmann admitted, “The spirit of Davos doesn’t just float around. You have to look for it in the conversations…Furthermore, we’re interested in wealthy clients. The richer our client countries are, the more stuff we sell them, especially cars and machines that Germany makes lots of.”
Of all the deficits and shortages in the world today, it is the lack of genuine character in so many leaders and the absence of truly transformative leadership that is the most striking. In this, Davos is an apt mirror. One sees in this annual Alpine pilgrimage to Davos fragments of the grainy black and white movies showing the imperial families of Europe gathering in their toy soldier costumes and opulent surroundings, oblivious to the marshaling clouds of change and discontent that would bring their primacy to an end. Those who are trying to make the world better are doing it anyway, regardless of Davos. And for those who are not so inclined, going to Davos won’t likely make any difference.
This year, Davos organizers attempted to make use of social media –blogs, videos, podcasts and the like- to bring ordinary people into the tent –but at a safe cyber-distance, of course. The effort bombed. Did they really think that people back on planet Earth would be impressed by the opportunity of clicking on the comment button of a blog in order to send back a short message in small font to some big poobah? YouTube can do many things. But making imperious titans more trustworthy or sympathetic as they schmooze or answer an amateur videographer’s questions on the fly are not among them. By the way, the really big players didn’t bother to post on any blogs. And very few mortals at the bottom of the mountain bothered to send any comments. This one certainly hits a note:
The Davos Conversation was a total failure. The end of a demagogue is when the mob pulls a no show.
And so the overfed princes and business potentates exited as they came, in a mist of mutual admiration and private jets, all the while lamenting the vexing issue of global warming –this year’s topic du jour. What is saddest about Davos is that these leaders have a chance to make a real difference. Some would argue, and I count myself among them, that they have a moral obligation to do so. Instead, they have become actors in a predictable side show of self-indulgence and extravagance –two vices which one might think would be incompatible with the ills they claim to be fighting.
Which is why the spectacle known as the World Economic Forum at Davos is the Outrage of the Week.
Several years ago, at the height of the scandals involving Tyco and Enron (WorldCom was still to come), President Bush gave a landmark speech extolling the importance of corporate responsibility and sound governance. Having been one of the relatively few voices in the business world for those concerns going back some three decades, I was astonished and frankly delighted at the time to see a president of the United States tackle these issues. Much more needed to be done than he proposed, and the final Sarbanes-Oxley Act was more hard-hitting than the administration first wanted. But at least George W. Bush voiced concerns on a subject that had not been heard from a president since FDR, when a previous crisis rocked confidence in American capitalism.
Yesterday, Mr. Bush sounded a reminder of corporate responsibilities on another contentious issue: CEO pay. Most of you will know this is a long-standing concern of mine. It is ten years since I gave a speech in which I called excessive CEO pay “the mad cow disease of the North American boardroom.” The President did not refer to the pay issue in exactly these terms, but at least his speech is another sign that this is a growing flashpoint among investors, employees and customers. It needs to be among boards of directors, too. Here is an excerpt of what Mr. Bush said in New York:
America’s businesses have responsibilities here in America. I know you know that. A free and vibrant economy depends on public trust. Shareholders should know what executive compensation packages look like. I appreciate the fact that the SEC has issued new rules to ensure that there is transparency when it comes to executive pay packages. The print ought to be big and understandable. When people analyze their investment, they ought to see loud and clear — they ought to be able to see with certainty the nature of the compensation packages for the people entrusted to run the companies in which they’ve got an investment.
Government should not decide the compensation for America’s corporate executives, but the salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders. America’s corporate boardrooms must step up to their responsibilities. You need to pay attention to the executive compensation packages that you approve. You need to show the world that American businesses are a model of transparency and good corporate governance.
Like his initial foray into corporate governance a few years ago, Mr. Bush’s moral exhortations are unlikely to be sufficient as a force for change. But it was the beginning of a new debate at the highest level of American policy-making, and once again, a most welcome surprise.
