The New York Times’s Nicholas Kristof visited the World Economic Forum at Davos last week and came back impressed by the idea of social entrepreneurship. As his column observes today:
But perhaps the most remarkable people to attend aren’t the world leaders or other bigwigs.
Rather, they are the social entrepreneurs. Davos, which has always been uncanny in peeking just ahead of the curve to reflect the zeitgeist of the moment, swarmed with them. . . .
Glad as I am to have such an accomplished and thoughtful writer as Mr. Kristof celebrate the concept of social entrepreneurship, I felt some clarification was in order as to its so-called Davos connections. I posted the following comment on the NYT web site earlier today. Since a Times Select account is required in order to view columns and post comments (they are experiencing a bit of a financial pinch as you may know), I have reprised my comment below. I will have more on the annual Davos spectacle later in the week.
It is unfortunate that the World Economic Forum at Davos was the catalyst for Mr. Kristof’s insightful column. Davos is not exactly the spiritual center of the social entrepreneurial movement, conventional wisdom notwithstanding. I first wrote about the idea of social enterprise in 1977 (that’s not a misprint), and it has been a continuing part of my venture capital activity for more than three decades. Mr. Kristof’s observation about Davos being “ahead of the curve” on this point is therefore somewhat amusing, though I am sure well intentioned.
One of the more interesting new dimensions to the social enterprise field are the knowledge innovators who are using the Internet and social media tools to help empower individual stakeholders in their dealings with business and government, which generally suffer from an imbalance of information, power and resources. Whether the goal is helping to make consumers better informed or citizens more efficacious in tackling issues from global trade to global warming, you can anticipate far-reaching changes in the way institutions function because of the work of these knowledge entrepreneurs in the years ahead. I suspect this will not be something the disciples of Davos will wish to encourage too strongly.
The fact remains that Davos attracts only a tiny portion of this amazingly transformative force in the world. Most are too busy or too modest to contemplate a trip up the mountain and would, in any event, feel uncomfortable, as many others do, with this annual display of overreaching ego and power. Davos has essentially become the CES (Consumer Electronics Show) of CEOs.
That’s not where self-respecting social entrepreneurs want to be.
I am always amused how each new generation of business leaders and thinkers acts like it just invented the concept of corporate social responsibility, a topic that is again making the rounds of think tanks, conferences and luncheon speeches by earnest voices. I suppose I was like that myself when I wrote a much discussed 5,000 word article on the subject in a respected academic journal in 1976. That kicked off a series of further articles, op-ed columns, media interviews, university lectures and speeches that has continued for more than three decades. In point of fact, thoughtful CEOs like Owen D. Young and respected legal scholars such as E. Merrick Dodd, Jr. were talking about this subject long before I was born.
More bewildering is the fact that many in business still regard the idea of corporate social responsibility as a subversive doctrine. Now, if you really want to see an example of boardroom socialism, look no further than CEO compensation, with its pay for showing up, pay for just signing up, pay for a change in ownership conditions, pay for being terminated, pay for leading the company into financial loss or scandal, pay for being Jack Welsh and because you had a board that felt you should be spared the harshness of paying for your own newspapers, cable TV subscriptions and flowers, and pay in the form of re-priced stock options when the performance of a stock dives and the CEO doesn’t want to buy it at the price normal investors must pay. These are the kinds of deals that would make Karl Marx blush.
But I raise the matter of corporate social responsibility because this time of year always brings back Dickens’ A Christmas Carol, and with it lessons that always seem to ring a bell. There is one particular scene where Scrooge recalls to the ghostly Marley that he was a good man of business. Marley responds with a chilling blast:
Business! Mankind was my business. The common welfare was my business; charity, mercy, forbearance, and benevolence, were all my business. The dealings of my trade were but a drop of water in the comprehensive ocean of my business!
It is a timeless reminder about the larger purposes of life –an enterprise in which we are all stakeholders and share common obligations and common dreams.
I will be off-line for a while, enjoying the blessings of family and friends at this time of year, and hopefully finding ways of making the season brighter for those with little of either. Loyal readers and boardroom luminaries alike can rest assured that the Finlay ON Governance Outrage of the Week will return to its normal slot in early 2007.
May I take this opportunity to thank those who have glanced over these pages in the past few months and to wish everyone a very Happy Christmas and all the best for the New Year.
Decisions about CEO compensation involve more than the marketplace working its magic or the immutable hand of economics writing its way. They affect the continued legitimacy of capitalism and its need for public respect if it is to function.
The huge bonus paid to Morgan Stanley CEO John Mack is not entirely surprising. In recent years, boards have been acting like giddy school children in awarding bonuses to CEOs. They approach the task, predictably as Adam Smith observed, with a sense of abandon that comes only when dispensing other people’s money. Now, if they were negotiating with the person who cuts their lawns or cleans their pools, there might be some tough bargaining.
The idea that Mr. Mack needed the $40 million bonus to be fully motivated, or that he would have been far less productive if he had received, say, a mere $20 million, is an notion that exists only in the minds of compliant directors or economists who have spent too much time in a windowless classroom. What is surprising is the reaction to the announcement. Take a look at it. Some of the comments on both sides of the issue are a little excessive themselves. But the overall impression is of a sense of rage that is beginning to boil over CEO pay. It is, as I have long suggested, symbolic of a greater illness in corporate America. In the years to come, as the rift in wealth become even more pronounced, people will see excessive CEO compensation as the emblem for the wider forces of economic polarization and social division. I fear a firestorm of resentment looming in the not too distant future that will re-shape many institutions in society if the problem is not addressed.
As the New York Times notes about reaction to record bonuses at Goldman Sachs:
In London, Goldman’s office cleaners threatened to strike. “Whilst bankers at Goldman Sachs will be splashing out on second homes, cars and polo ponies with their multimillion-pound bonuses, cleaners at Goldman Sachs are being squeezed by staff cutbacks,” Tony Woodley, general secretary of the Transport & General Workers’ Union, which represents the cleaners, told BBC News.
Driss Ben-Brahim, a top Goldman trader who according to press reports collected $98 million, was stalked by paparazzi outside his home in London. One of Goldman’s holiday parties was mocked for its lavishness when it was reported that some of its managing directors anted up $10,000 each to pay for it.
These are not earth shattering events to be certain. But some of the world’s seismic upheavals have begun with smaller eruptions. And there is no doubt that polls increasingly reflect a sense of public revulsion on the subject of CEO pay.
Decisions about CEO compensation involve more than the stockholders of any given company. It is not just about the objective marketplace working its magic or the immutable hand of economics writing its way. It is about the continued legitimacy of capitalism itself and its need for public consent and respect if it is to function.
As to Morgan Stanley’s role in all of this, once again we see directors who are supposed to be exercising independent judgment receiving stock options just like management. Two of Morgan Stanley’s outside directors, Laura D. Tyson and C. Robert Kidder, held more than 135,000 options between them as of the most recent 2006 proxy filing. Ms. Tyson chairs the governance and nomination committees. Mr. Kidder, in addition to holding the position of lead director, sits on the audit and compensations committees.
We set out our views on why directors ought not to be riding on the same options train as management recently here. There is nothing wrong with receiving shares in compensation for director duties, of course. But the idea of having a special incentive to run up share value in the short-term may well compromise and distort longer-term price stability. A policy that awards stock options to directors clearly disposes a board to a generous mindset regarding options to management. And once again, we see in Morgan Stanley a board that is more focused on compensation matters, accordingly to its most recent proxy circular, than audit-related issues. The compensation committee met 10 times. The audit committee recorded 8 meetings. Since rejoining the company in June of 2005, Mr. Mack has received more than $80 million in stock, bonuses and salary, including a gift of $26 million in stock his first day on the job. An eight figure gesture like that, for showing up and not performing a single task, demonstrates that the link between CEO pay and real results enjoys no consistency of thought in the minds of Morgan Stanley directors.
The company is also one of the holdouts in insisting that the CEO who reports to the board also heads the board to whom he reports. If boards have that kind of view about balancing issues related to power and accountability in 2006, its is unlikely their ideas about compensation have properly evolved beyond acting as a virtual ATM to the CEO of the day. You could make the case, looking at compensation figures for the previous CEO, that the board has been acting like this for some time. You could also make the case that the millions in fines, penalties and settlements paid out by the company over the past number of years suggests an inadequate attention to issues related to accountability and ethics.
CEOs enjoy jobs that are among the most prestigious and legacy rewarding of anything in the world. The notion that paying someone a few million is to be scoffed at and could not properly induce any results, that a CEO must be paid $50 million or $500 million to really get the job done, is one of the greatest hoaxes ever foisted upon the stakeholders of the modern capitalism. It is one for which we will all be paying over many years to come.
[UPDATE: Late today, Goldman Sachs’ board announced that it paid CEO Lloyd C. Blankfein a $53.4 million bonus in 2006, a record for Wall Street which, when added to his compensation for 2005, comes close to $100 million for the past two years].
Ousted NYSE head Richard Grasso ordered to repay millions in improper pay; directors chastised by judge for being asleep in the boardroom
Indeed, many members of the (NYSE) board testified that they did not know about the SERP and if they did, they did not know what the balance was.
This court also finds this affirmative defense of neglect to be shocking. That a fiduciary of any institution, profit or not-for-profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care. The fact that it was a liability to an insider (chairman and CEO) is even more shocking and a clear violation of the duty of loyalty.
–New York State Supreme Court Justice Charles Ramos in a decision ordering former NYSE CEO Richard Grasso to return millions of dollars in contested compensation.
Finally, the “slumber defense”, so often employed by directors who claim they really didn’t know what was happening, is beginning to offend the courts as much as it ought to offend shareholders.
Ironically, I covered this very point in a letter to the NYSE board a year before the Grasso scandal erupted.
The spectacle of Enron’s board pleading ignorance to the advancing dangers that brought down the company is a scene that has been played out repeatedly in the great corporate disasters of the past century.
I then went on to deal with the subject that would eventually lead to Grasso’s undoing, and the board’s embarrassment –oversized pay awarded in a climate of boardroom permissiveness and complacency.
Excessive CEO pay has been an indicator of the manifest deficit in ethics and values that has overshadowed too much of the business world. In the 1970s, the average CEO made about 43 times what the average worker made. In 2001, that gap had widened to 500 times. This phenomenon, representing the largest transfer of wealth from owners to a small class of hired professionals in history, interestingly coincides with the greatest decline in respect for business and its leaders, the largest loss of shareholder wealth and the longest parade of disgraced CEOs since the Great Depression. It symbolizes more than a dysfunctional system of compensation. It stands as an emblem of the failure of directors to live up to their ethical and legal responsibilities and tarnishes the moral authority of capitalism.
The judge has given directors and CEOs across America and elsewhere plenty to think about.
A nuclear North Korea; a superpower’s foreign policy in tatters show why sound governance really matters.
And so it comes to this. After the most colossal bungling of foreign policy in more than a century through a misguided and deceitful quest for nonexistent weapons of mass destruction in Iraq by the United States, the free and civilized world must now rely upon a totalitarian dictatorship in China to deal with a North Korea that openly displays its nuclear ability. And the West can take further note that its addiction to cheap consumer goods from China, North Korea’s most prominent sponsor, has helped to finance Kim Jong-Il’s nightmare nuclear ambitions.
Not that it was needed, but all this is just more evidence that Winston Churchill really has left the building. Where once giants strode on the world stage, we are now saddled with a collection of smaller than life actors whose reputation and soundness of judgment seem to be receding with each passing day. And so we lurch from maculation in Iraq, where there was no threat to civilization, and chaos in Afghanistan, where the blood of too many Canadians is being spilled to make that country safer for the drug lords who reap a harvest of hypocrisy from record poppy production, to the mishandling of the psychopaths in Pyongyang, who pose one of the most real and present dangers the world has ever known. Because of its ineptitude in Iraq and other manifestations of a discredited and ineffectual foreign policy elsewhere, the United States has become much smaller in influence and standing at the exact moment when its strength and credibility are desperately required. The world saw the benefits of that strength and credibility during times of crisis in the eras of Roosevelt and Kennedy. We cannot yet foresee the full extent of the damage brought on by America’s ongoing misdirected course, but a further collision with reality seems almost certain. The West’s having to delegate its peace and security to another communist dictatorship –and no amount of patio umbrellas and sneaker exports will change that fact– clearly demonstrates that some serious changes have taken place in the geopolitical landscape without much thought or discussion given to their consequences.
Entrusting power to others, which is what is meant by our system of free markets and democratic values, carries with it a duty to hold its custodians to account for its proper use. Power is provided in the form of votes, public expressions of approval or the absence of it, and in the kind of purchases we make and with whom we do business. The truth is none of us can afford to take a vacation from the stakeholder responsibilities we all have as citizens, consumers and investors, and when we do, the results can be chilling.
