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.