Every few years, business needs to come up with a new savior. If only we had zero-based budgeting; if only we were driven by the search for excellence; if only we could stick to our knitting or follow the seven habits of seven successful people. If only… The newest addition to this grand litany of salvation seems to be the arrival on the scene of huge private equity funds and their ability to rescue publicly traded corporations from the curse of public shareholders. We have discussed this subject, and our reservations about the trend, on a few occasions previously.
So often it seems there has to be a crutch to explain away failure or a magic elixir that will solve all the problems. Rarely will management admit that it dropped the ball or that a company’s difficulties were the result of limited vision or poor judgment. You never see complacency, which is often the real culprit in boardroom misadventure, booked and fingerprinted as an accomplice to underperformance. Spend a few hours with senior managers, as I have done on thousands of occasions over some 30 years, and you will quickly see that arrogance, denial and a stunning disconnection from the real world of customers and markets are too often the overriding characteristics of their style and the seeds of their folly. As I have long contended to rather stunned audiences of business students and corporate executives alike, if businesses were actually run by well-grounded managers with a true sense of vision, a genuine appreciation of the people and stakeholders who shape corporate success and an ability to be governed by sound judgment, many companies could improve their performance by between 20 and 33 percent. Too often, it is the over-paid, game-playing manager with the Napoleonic power complex, the one who will cut corners to look good in the short run, who places himself ahead of all others and lacks an understanding of the contribution of employees and other stakeholders —and then looks for scapegoats when his plan fails— who is at the helm today.
Which brings us to the Chrysler-Cerberus deal. Look at these words carefully:
We’ll be able to run it the way we want to run it and not worry about quarterly numbers or what somebody might think on the outside. We’ll do what’s best.
—Chrysler CEO Tom LaSorda, May 15, 2007
To suggest, as Mr. LaSorda has, that Chrysler’s investors, or the fact that its stock was traded on the New York Exchange for the better part of the past century, prevented the company from being run the way they “want to run it,” or that they were hampered from doing “what’s best” during this period, shouts of a disingenuousness that will not serve the company well. Why not blame the full moon? At least it has some effect upon the Earth’s reality.
Chrysler performed unsuccessfully because of a number of factors —high production costs, poor image, quality problems and the fact that Japanese makers seem to get so much more right. The company was looking for a crutch when it merged with Daimler nine years ago in another deal that many, myself included, thought ill-advised. (Is it not curious that, during this time, the Mercedes-Benz division also experienced a marked deterioration in the quality and reputation of its cars, along with a significant slump in sales? As a three time Benz owner, I can attest to the fact that cars being built during much of this period were nothing like the ones built in the pre-merger days, which is why I have a new Japanese-brand car today.)
Chrysler is looking for another crutch with Cerberus. Many depend upon Chrysler, especially its 88,000 employees and 111,000 retirees and their families, so it is natural to hope for the company’s success —if one views success as restoring Chrysler to a point where it is optimizing its assets and its capacity for innovation and advancing the well-being of customers and stakeholders.
I am skeptical that the Cerberus deal will do that, however. Chrysler was a great American icon — a business institution that had a distinct culture and history. It was the master of its own destiny for generations. That will change with its new owners. Cerberus makes money, not icons and institutions. It does so secretly and behind closed doors, not as a transparent corporation with pubic investors. There’s no roster of executives or board of directors on its web site. There’s no code of ethics that is held out to the public governing the way they do business. You don’t get to see who is behind the company and from where —and what countries— the investing dollars are coming. If you believe that accountability and transparency are indispensable attributes of success, and that they are necessary characteristics of great power in a complex society, as I do, you might have some misgivings about this deal.
Ultimately, what is likely to happen is that much of the company will be dismantled and the American public will be saddled with a large part of the pension and health care liabilities facing Chrysler. Cerberus can play hardball with unions, governments and others, and not care much about what people think. They can hire—and already have— platoons of lobbyists to advance their case, which will invariably involve whatever enhances their profits —the profits of a select and unknown few. It can become a troubling matter when concentrations of wealth and power become untethered from the discipline of public opinion. Because it is not a publicly traded company, it is said Cerberus doesn’t need to be worried about how it is perceived by the public. J.P. Morgan and his cronies thought the same. Then there were those pesky hearings in the House of Representatives headed by Arsène Pujo in 1912 that changed some of the ground rules under which the likes of Mr. Morgan operated. The power and privilege which today’s cabal of private capital is accumulating, and the troubling issues of responsibility, lack of transparency and social impact it raises, will, I predict, one day see a similar burst of legislative involvement.
The myth that removing the company from what some now regard as the shackles of quarterly statements will make all the difference is just one of the ironies in this deal. Cerberus, like the other members of this secretive club of private funds, is known neither for its patience nor its altruism. When you move from the cold of the storm into the mouth of the whale it may seem warm and quiet. But it’s only a short-term feeling.
You’re still in the mouth of the whale.
Now that Magna’s Frank Stronach has made his bid for Chrysler official, the more fundamental question for investors and other stakeholders is whether the assets of this icon of American capitalism will be well-served in the hands of a mercurial figure who claims that money has no heart, “no soul, no conscience, no homeland“, and who has made his disdain for the labor movement no secret. There is a world of difference between operating a profitable but relatively low profile Canadian-headquartered company like Magna and one of America’s corporate giants. It would be unthinkable for a CEO of an historic American company like Chrysler to boast that, with $52 million in compensation, he was underpaid, as Mr. Stronach did a few years back.
Global companies like Chrysler, for all their economic problems, are still complex institutions with enormous power in society. They carry comparable social responsibilities. It is unclear that Mr. Stronach understands that concept to the extent that Chrysler’s leadership would require, or that he would be prepared to adapt to all the constituencies who have a claim on Chrysler’s decisions and, most decidedly, an influence upon its success or lack of it.
One more thing. If you are looking for an example of progressive corporate governance and board structure, you will not find it at Magna. To the contrary, with Magna’s system of dual class shares, its history of related parties and insiders as directors and its all-male board, the Stronach style of governance is not encouraging. He even chairs Magna’s nominating committee, which is a considerable departure from accepted corporate governance standards.
When Frank Stronach is involved, power is concentrated in Frank Stronach. Would his style work at Chrysler? It’s worth thinking about.
Remarkably, too many women see, hear and speak no evil in the face of the male-dominated executive suite
Since the 1970s —that’s right, for more than 30 years— I have been arguing in speeches, lectures, appearances in the media, op-ed columns and in high-level meetings in boardrooms and in the councils of government that business needs to draw more of its top talent from the ranks of women. A report published by Catalyst shows that in Canada, at least, not that much progress has been made. Women held just 5.4 per cent of the top jobs at Canada’s 500 largest companies last year, up from 4.5 per cent two years earlier.
Overall, women remain largely excluded from the key jobs that signal corporate power and influence, despite comprising nearly half of the Canadian labour force and more than a third of all management roles,” said Deborah Gillis, executive director of Catalyst Canada.
Why has the pace of advancement been soooooooo slow?
Short answer: Too many men and women are prepared to turn a blind eye to it. In the 1990s, when Canada’s Toronto Stock Exchange was reviewing its corporate governance practices for publicly traded companies, I appeared before the committee and urged it to adopt language that recommended more women be appointed to corporate boards. Just the use of moral suasion, you understand, nothing too onerous. They refused. A similar plea was made to Canada’s Senate Banking Committee, where I have appeared as an expert witness on several occasions since 1994, and most recently, in 2003. They, too, declined to make such a recommendation. As far as I am aware, The Centre for Corporate & Public Governance, on whose behalf I was appearing, was the only group to call on these bodies to encourage the promotion of more qualified women. I heard not a word from any advocacy group at the time. I did hear from a number of my male colleagues in the corporate sector who expressed resentment over the proposal and made it clear that kind of talk would not be appreciated at the cozy club or in their boardrooms. Such feedback is helpful. I don’t believe backwards thinking should be rewarded in business and I always like to know what companies I should avoid as a consumer and investor; the list grows rather longer each year, unfortunately.
Fast-forward to one of the world’s most recognized names in cool telecommunications equipment: Research In Motion, makers of the iconic BlackBerry. It’s a brand used by many women, a number of whom also have stock in the company. But I don’t recall a note of criticism from any women or advocacy groups or by so-called enlightened pension funds about the fact that, since its inception as a publicly traded company and until several months after Finlay ON Governance first brought it to public attention last year, RIM had no women on its board or on its top executive team. It was an outrageous situation for any company that seeks the use of other people’s money, but all the more so for one whose co-CEO, Jim Balsillie, takes considerable credit for founding and heading the board of a non-profit think tank (supported with public funds) dealing with international governance issues.
Many are quick to decry the absence of more women in the executive suite and in the boardroom. And there are members of both genders who would like to see the workplace made more productive by tapping better the formidable talents of nearly half the labor force. But a remarkable number appear to regard this as a theoretical issue, and between the idea and the act they fall into T.S. Eliot’s shadow. When it comes to the real world where their voices and actions might make a difference —like with RIM for instance— too many still see, hear and speak no evil.
Capitalism can be a marvelous machine for advancing individual prosperity and social progress. But like any machine, it needs to be soundly governed and faithfully attended. When it runs amok or ceases to have the steady hand of conscientious stewardship and good judgment at the controls, when it falls into the clutches of the greedy and self-obsessed and works to the primary benefit of a select few, it sets itself on a perilous course of almost certain mishap and painful misadventure.
There was much that caught the eye of our high-priced panel of outrage experts this week, especially the ones with four legs and floppy ears. There was the kidnapping of British sailors by Iran; the tainted food poisoning of dogs and cats whom owners have entrusted to pricey brands like Iams and Eukanuba; and the repeated spin and rinse performance by Attorney General Alberto Gonzales over the firings of U.S. attorneys, which has to make you wonder if Alberto Culver might do better in the job. Then there was yet another hurtin’ song by Barry Diller who just wants to be able to pay himself $295 million for a year’s work and not have to see any comment about it in the press. Anything less, to Barry, is “almost criminal.” The Ontario Lottery and Gaming Corporation came in for big criticism by that province’s ombudsman over the payment of millions of dollars in lottery winnings to fraudulent retailers and for turning a “blind eye” to allegations of criminal activity for many years. Allegations of corruption in the handling of the RCMP’s pension fund and of stonewalling at the highest level of the force during an internal investigation, made before a committee of Canada’s House of Commons, were especially disturbing and have all the earmarks of a major scandal.
In the end, three significant betrayals of the great institution of capitalism stood out for this weekly slot at Finlay On Governance.
ITT
The first was the action of giant defense contractor ITT, which this week pleaded guilty to criminal charges of unlawfully selling classified information to foreign countries, including China. (ITT has a history of being accident prone when it comes to dealing with governments, as its involvement in ousting the Allende government in Chile reminds.)
You have to wonder what kind of breakdown of ethics and compliance oversight, especially at the level of the board, would have permitted this scandal. The company dragged its feet and fought the allegations for several years before its guilty plea this week. Its directors now preside over an admitted corporate felon. This is another illustration of a board that undervalued the importance of upholding a culture of ethics and integrity and failed to take steps necessary to ensure that the organization was properly alert to potential wrongdoing. ITT betrayed its investors, its employees and American military personnel in the process. It is an example of the dark side of capitalism —the willingness to profit at any cost —even treachery. The $100 million penalty ITT agreed to pay the government doesn’t begin to make restitution for the scale of the crime. There is no indication that the directors and senior officers who were responsible for overseeing ITT during the time of this offense plan to contribute to the penalty from the compensation they received.
Circuit City
The second is the announcement by Circuit City of its plan to fire 3,400 of its better paid full-time employees and offer to rehire them —after several months off the job and without income— as part-time, lower paid workers with no benefits. The company’s CEO received a salary and bonus payment of approximately $1.5 million last year and has been given a generous long-term compensation plan, including a $3 million award of stock. Circuit City is apparently taking its cue from Wal-Mart, that other model of enlightened corporate responsibility in America.
One of the more noble features of modern capitalism over the years, and especially in the period after World War II, has been that it allowed people to advance their lives by working hard at their jobs and moving up. It was under that social contract that the middle class was created, the suburbs were built and the vast infrastructure of schools, hospitals and social legislation to protect children, workers and consumers was developed. It was, in many ways, the idea of the great society forged by members of the greatest generation. Are we beginning to see the unraveling —even reversal— of that proposition to a situation where workers have to give up and give back in order just to survive? And how productive can an organization be that is filled with people who feel betrayed and have lost so much of what they worked hard to achieve? Did the company’s board even consider that question before embarking on what will surely be a public relations, if not larger business, disaster?
Companies are made productive and innovative by the quality and morale of their employees —not just a very well paid CEO at the top. When we begin to lose that ethic in our major corporations, capitalism —and society— will have lost one of their most important attributes of success. Which brings us to our third betrayal this week.
The Widening Wealth (and Responsibility) Gap
It was announced on Thursday that the top 1 percent of Americans received their largest share of national income since 1928, according to 2005 tax data.
As the Times noted:
The top 1 percent received 21.8 percent of all reported income in 2005, up significantly from 19.8 percent the year before and more than double their share of income in 1980. The peak was in 1928, when the top 1 percent reported 23.9 percent of all income.
So now, despite all the efforts to improve education and the advancements that have taken place in business, government, and the tax system over the past three-quarters of a century, in one important respect America is back to where it was before the Great Depression. We will leave it to others to explain how this happened. But if you look at the tax reduction policies of the Bush administration for upper incomes and the tremendous wealth explosion in CEO pay alone over the past decade, you will quickly see that the ground has been carefully laid for this reversal in social progress. There can be no doubt that many at the top will care not at all about this development. They would be content to ride the current wealth wave as far as they can and give absolutely no thought to the human —or broader social— consequences.
Capitalism has experienced these kinds of episodes in the past —the Gilded Age from 1865 to 1901 and the “malefactors of great wealth” that sparked the fury of Theodore Roosevelt and his promise of a “square deal” in a fledgling 20th century come to mind. The results produced considerable upheaval. One of the more turbulent periods was the aftermath of the Great Depression, when the hope of a “new deal” began to resonate with displaced workers who rode the rails in search of work. It is not encouraging that we are seeing a return to the milestone of 1929 in 2007.
Yet it seems that even with the benefit of history, there are few at the top who understand that capitalism needs its stewards as much as its zealots. It is a system that depends on its champions of integrity and public consent as much as it does on its contrivers of non-compete payments and backdated stock options. How long will this gap be tolerated? How much wider can it grow before serious divisions erupt in society? I have a feeling that neither the LBO kings at Blackstone and elsewhere nor the hedge fund titans and Wall Street wizards that dominate today’s financial landscape have given the slightest thought to that question or to the tide of resentment that is brewing against them. Neither had J. P. Morgan or any of the other giants of early 20th century capitalism back into whose spiritual embrace 21st American capitalism seems to be returning —vanishing middle class and all. So many of these grand figures of the past —and present— seem only in it for the moment and all that they can get at the time. They are the masters of the big transaction and the generators of an ever escalating succession of zeros on the end of the fee paying check. Their egos, their paydays, their mansions, their limousines and private jets —everything about these Caesars of financial triumph is big except the respectability of the legacy that many are leaving or their enduring contribution to the evolution and legitimacy of modern capitalism.
Capitalism can be a great machine for advancing individual prosperity and social progress. But like any machine, it needs to be soundly governed and faithfully attended. When it runs amok or ceases to have the steady hand of conscientious stewardship and good judgment at the controls, when it falls into the clutches of the greedy and self-obsessed and works to the primary benefit of a select few, it sets itself on a perilous course of almost certain mishap and painful misadventure.
Revelations this week demonstrate that there is not enough attention by the leaders of capitalism to its responsibilities, and to the ultimate destination of social progress for all that it must serve if it is to survive, which is why we have chosen these examples as the Outrage of the Week.
It is a number that haunts the human conscience at any time: 18,000 children die every day because of a lack of adequate food, according to James Morris, the retiring head of the U.N. food agency. But to have this tragedy happening in a time when the world has never known as many billionaires, and Wall Street is enjoying record bonuses at the top, the figure is almost too difficult to comprehend. The equivalent of a medium-size town in the U.S. or Canada disappearing. Every day. Filled with 18,000 young people. Dying. Day after day
There are many wonderful individuals and groups struggling to right this terrible wrong. They do so at great sacrifice and personal risk. They see things in Darfur and other parts of Africa that are incomprehensible in their horror and sadness. Yet the problem persists.
Here’s a thought: As noted on these pages earlier this week, Goldman Sachs announced its co-presidents received a total compensation package of $106 million between them. The company announced that it had awarded $54 million to its CEO late last year. That’s just the tip of the bonus iceberg throughout the investment industry. As the Wall Street Journal reports: “Overall, Wall Street will pay a record $23.9 billion in bonuses this year, according to an estimate released by New York state.”
Why doesn’t Wall Street, which is making the fattest profits in its history, set for itself the task of alleviating this problem? It takes money, for sure. But it also takes leadership and organization. It takes computers and logistics and the purchasing of large commodities. These are things Wall Street does well. Most of all, it takes the determination of intelligent men and women to do something about an intolerable problem. There would be no better way for Wall Street to re-connect with Main Street—the ultimate source of all its fees and investment income. And that’s where the real values of America are tested and set.
Wall Street could do it. It seems to be able to do anything it sets its mind to. The rest of the investment community in Canada and Europe would likely follow its lead on this, as they do with so many other things. And the vast constituency of individual investors, mutual fund holders and pension plan members who have made the investment community so wealthy would be enormously proud and grateful. It would be a demonstration of responsible capitalism at its finest from a land where stakeholder capitalism has become a driving force.
Record bonuses and billionaires. Eighteen thousand children dying every day from malnutrition. It doesn’t need to be this way. Every week this is tolerated in a world of luxury and plenty, is indeed, 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.
