Bad Company

Bad Company

The cult of the CEO

Gideon Haigh


Ray Williams, it is said, prided himself on his manly bearing, favouring smart, dark suits tailored to his tautened physique, and always greeting visitors with a firm, sincere, double-handed handshake. He preferred, too, to keep the wider world at a distance, buying the house of his Mosman neighbour for $5 million to preserve his privacy, and commissioning a private chapel for his walled Lake Macquarie retreat rather than expose his family to the prying eyes of a public congregation. That poise did not desert him last year when he became Australia’s best-known and most-maligned chief executive officer, at the royal commission investigating the collapse of the HIH insurance group which he had headed for thirty years. He seemed cool, detached, crisply laundered, oblivious to the media’s enfilade of enquiries, his thin, unparting lips shaped in a mirthless smile. His severe countenance belied the excess involved in HIH’s $5.3 billion failure in March 2001.

Justice Neville Owen’s report, released on 16 April 2003, begins with a Shakespearean flourish: “Beware the Ides of March.” History’s most famous unheeded warning, says Owen, “resonated eerily” throughout the commission, HIH’s “shambling journey towards oblivion” having begun long before. The reader braces instinctively for a story of cabal and conspiracy, of hubris and nemesis – and the judge comes to bury the CEO not to praise him, citing “blind faith in a leadership that was ill-equipped for the task”, in which “the hand and influence of Williams were paramount”. HIH, it emerges, spent tomorrow’s money today in order to satisfy its cravings for premium income, plunging headlong into the acquisitions of CIC in June 1995 and FAI in September 1998 as it also threw good money after bad in the United States and United Kingdom. And on these condemnations did the attention of journalists naturally alight, translating into damning headlines: “Blind faith, naked greed”, “HIH boss blamed for collapse”, “HIH chief faces jail” and, of course, in anticipation of the salutary smack of firm government, “Costello pledges justice for all”.

Yet what detains the eye in Owen’s report is what might be considered a corporate variation on Hannah Arendt’s “banality of evil”: the mundanity of mismanagement. HIH, says the judge, was “not a case where wholesale fraud or embezzlement abounded”, and “by and large the people who were involved were not inherently bad or in some way set upon being part of a corporate disaster.”After three decades in charge,Williams was unrivalled in “authority” and “influence”. But his control depended on there being “insufficient ability and independence of mind in … the organisation to see what had to be done and what had to be stopped or avoided”; failure was as much an outcome of “a culture of apparent indifference or deliberate disregard on the part of those responsible for the well-being of the company”. Justice Owen reveals an organisation that was “often flying blind”. Its electronic financial system provided incorrigibly incomplete and inaccurate information. Its general ledger had unreconciled accounts dating back to 1995. The reporting regime was lax, the audit committee misconstituted, the budgeting process misconceived, the preparation of financial information was being manipulated by lower-level managers; the judge worries explicitly that preoccupation with bosses and boards “may cause to be overlooked the reality of the necessarily greater part that executives and other employees play in the day-to-day running of many corporate businesses”. And all this occurred in an environment which was, from the mid-1990s, one of falling interest rates, lower investment returns, poorer premium rates, costlier underwriting losses and escalating claims.

By far the shrewdest reading of the report came from Trevor Sykes, our foremost connoisseur of corporate collapse, in the Australian Financial Review: “HIH was run so badly it is surprising it lasted as long as it did. If there were any fundamental mistake they did not make, it must have been an oversight.” Even with a vainglorious boss wielding unilateral power, a management heedless of the morrow, a riven board, avaricious associates, compromised advisers and a succession of destructive deals in hazardous commercial conditions, HIH took a long time to die; indeed, for much of its lifetime as a listed company, its share price was rising. This is not the stuff of headlines, but it is the stuff of this essay. Business failure is complex – and so is business success. If it sounds like a form of exculpation to imply that CEOs aren’t as bad as we are inclined to imagine them, then it also follows that they were not, are not and never will be as good as they and others pretend.

That CEOs have become our new hate figures is partly because our disillusionment stems from a prior faith. As little as three years ago, when we were still toasting the belle époque in equities, many figures who are now reviled were revered. And if we are not in thrall to business, we are certainly complicit in a model of the world it finds amenable. Business rhetoric pervades the language of our politicians, our professionals, our academics, even our athletes. Business customs have infiltrated schools, universities, the public service, even volunteer organisations. Business schools churn out newly minted MBAs. Bookshops devote whole walls to books with titles like How To Become CEO,How To Act Like a CEO, and CEO Logic: How To Think and Act Like a Chief Executive. Business leadership, publishers would have us believe, is a timeless art, practised since antiquity, even when its exponents – such as Jesus Christ, Sun Tzu, Alexander the Great, Sir Ernest Shackleton, General George Patton, Thomas Jefferson and Elizabeth I – were unconscious of their acumen.

It’s now almost a commonplace to assert that the well-being of a nation hinges on its corporations’ competitiveness, and thus on the vision and vitality of those running them. When Lou Gerstner was invited to restore the fortunes of IBM a decade ago, he was invited to regard it as his patriotic duty. “You owe it to America to take the job,” he was told by James Burke, Johnson & Johnson’s éminence grise. When WorldCom’s market value peaked at $us120 billion in June 1999, President Bill Clinton accepted an invitation to its Mississippi headquarters from founder Bernie Ebbers. “I came here today because you are the symbol of 21st-century America,” Clinton eulogised. “You are the embodiment of what I want for the future.” Exposed within a couple of years later to have overstated its profits by $us9 billion, WorldCom proved to embody something else entirely.

Corporate leadership as preparation for high office is also an idea whose time has come. Businessmen turned politicians are increasingly widespread: some succeed, like Silvio Berlusconi of Italy’s Fininvest; some are thwarted, like Hyundai founder Chung Ju Yung in South Korea. Some even blossom into statesmen: Kofi Annan, the secretary general of the United Nations, has a masters in management from MIT, and once ran the Ghana Tourist Development Company.

In the United States – where the phrase “chief executive” originated about 150 years ago to denote the president himself – the nexus is especially strong. Vice-president Dick Cheney (energy services group Halliburton), commerce secretary Don Evans (energy services group Tom Brown Inc.), labour secretary Elaine Chao (United Way of America), White House chief-of-staff Andrew Card Jr (American Automobile Manufacturers Association), treasury secretary John Snow (CSX) and defence secretary Donald Rumsfeld (General Instruments and pharmaceutical group G. D. Searle) are all former CEOs. Rumsfeld featured in Fortune magazine’s inaugural intake of “America’s Ten Toughest Bosses” in April 1980; The Rumsfeld Way (2002) suggests that he persecutes corporate bureaucracies as vehemently as any “axis of evil”. Though at the height of Gulf War II there were many dark mutterings about the malign influence of religion in the White House, the Bush administration is more of a CEOcracy than a theocracy, headed as it is not only by the first president to hold a Harvard MBA, but the first to have been investigated by the Securities and Exchange Commission. Whatever the US’s hegemonic pretensions in the Middle East, its leaders are restrained by fiscal rectitude: these days, even war has to come in on time and on budget.

In a society where we look one another right in the wallet, CEOs certainly stand tall: seldom in history have we elected to reward a caste so richly. When Graef Crystal published a wide-ranging critique of executive rewards in 1991, describing a twenty-year period in which American CEOs had hiked their own pay 400 per cent, he called it In Search of Excess. No one had to look far: CEO compensation in the US surged another 535 per cent in the 1990s. In part, this was a natural outcome of the increasing use of equity, in the form of stock options, as a component of remuneration. But only in part – the increase actually outstripped all conceivable correlatives. The value of the top 500 stocks increased about 300 per cent over the same period, profits about doubled, and average weekly wages grew only a third. In 1991, the standard big-company CEO in the US earned 140 times the pay of the average worker; the multiple is now nearer 500 times. CEO pay comes in many varieties, with a common shade of gold: golden hellos, golden handcuffs, golden handshakes and, should it come to that, golden parachutes, a severance package payable in the event of a change of control.

The recipients, at least, have encountered no difficulty in rationalising their rewards. A poll of Fortune 1000 CEOs last year revealed that 87 per cent thought their pay was just what they deserved, 11 per cent thought they were still underpaid, and only 2 per cent confessed to feeling over-rewarded. Others are uneasy. “The past decade has witnessed the greatest transfer of wealth from shareholders to workers in the history of the US economy,” remarked New Yorker’s James Surowiecki last year. “Unfortunately, the workers were almost all ensconced in the executive suite.” Some are downright hostile. In her new corporate j’accuse, Pigs at the Trough, Arianna Huffington envisions a suburb, CEOville, whose residents have subtly revised the Declaration of Independence to read: “All men are endowed by their creator with certain inalienable rights, that among these are stock options, golden parachutes, and the reckless pursuit of limitless wealth.” Though the figures aren’t so gross in Australia, nor the attitudes so brazen, they remain impressive. CEOs at our top 100 companies enjoyed salaries averaging $2 million in the last financial year – a 38 per cent annual increase. They now earn in a week roughly what the average worker collects in a year, even before their equity rewards are factored in. At least one CEO, Paul Anderson of BHP Billiton, was moved to remark that executive remuneration was “totally out of control” – just, mind you, as he was about to pocket $19 million for services rendered.

With higher pay, of course, have come greater expectations. “They [CEOs] have become personalities in a drama,” observed Michel Albert in his perceptive Capitalisme contre Capitalisme, “and they must live up to the script or disappoint an audience of millions.” Investors no longer keep disappointment to themselves either. In a survey of 2500 companies last year, consultants Booz Allen found that turnover of CEOs had increased 53 per cent between 1995 and 2001, while the number leaving office because of failure to meet performance criteria had grown 130 per cent. According to the corporate relations group Burson-Marsteller, CEOs entrusted with turnarounds will in most instances have only one chance to make a mark: the market allows about eight months to develop a strategy, nineteen months to bolster the share price, twenty-one months to improve earnings. If nothing has changed, or not enough, the process is repeated. The phenomenon, christened “CEO churning”, has some powerful proponents. Warren Buffett, the most sagacious investor of his generation, led the putsch ousting Doug Ivester in December 1999 after eighteen wretched months at Coca-Cola; and it was William Clay Ford Jnr, no less, who in October 2001 seized the controls at the corporation founded by his great-grandfather when its boss of less than three years, Jac Nasser, threatened to run it off the road.

At one time, Europeans would have deplored the wastage inherent in le capitalisme sauvage du modèle anglo-saxon.Yet attrition in their CEO ranks has recently been almost as great. In France, entertainment mogul manqué Jean-Marie Messier was sacked from Vivendi Universal for his thriftless ways. In Germany, Thomas Middelhoff lost his job at Europe’s biggest media company, Bertelsmann, after estranging its powerful Mohn family. France Telecom, Deutsche Telecom and Telecom Italia all churned bosses within eighteen months. Corporate comeuppance has even become a feature of Asian business with the indictments for accounting fraud in South Korea of senior executives at Posco, the world’s second-biggest steel-maker, and SK Group, the country’s third-largest chaebol. In Australia, meanwhile, ritual executive sacrifice has caught on with a vengeance: the average CEO now lasts about four years. A quarter of our top 100 companies have turned over their bosses in the last two years. Retailer Gerry Harvey has likened the Business Council of Australia to Alzheimer’s Disease: you’re always making new friends. Some departures have been spectacular: Colin Chandler fell fastest, leaving Open Telecommunication after six months; Paul Batchelor fell farthest, being defenestrated from AMP last September.

Yet this phenomenon concerns more than lavish tributes to success and severe penalties for failure. A disturbing perversity of the market over the last few years has been the ease, not to say the alacrity, with which failure has been rewarded, and the way deceit and dishonesty have not only been condoned but craved – a process involving the collusion of docile auditors, credulous analysts and supine shareholders, and exposed, as often happens, only by the interruption of a long-running bull cycle. An axiom of the securities market is that “a rising tide lifts all boats”. WorldCom, Adelphia, Qwest, Global Crossing, Sunbeam, ImClone and others have demonstrated the truth of Warren Buffett’s corollary that receding waters reveal who’s been swimming naked.

No corporate humbling has been quite so complete as that at Enron – the Houston energy dynamo that Fortune rated “America’s most innovative corporation” for six consecutive years. Its deepest well of innovation turned out to be the one from which chairman Ken Lay, CEO Jeffrey Skilling and chief financial officer Andrew Fastow drew their accounts. Enron’s balance sheet resembled one of those eerily perfected Hollywood bodies: assets toned, chiselled and always shot from the right angles; liabilities tastefully liposuctioned away. And Lay, Skilling, Fastow and their confederates charged a hefty price for this seductive illusion. In 2001, Enron dispersed $us680 million among its executive cadre: Lay alone pocketed $us67.4 million in salary, bonuses and stock options. These sums did not seem so vast in an organisation the seventh-largest in the US, with revenues of $us100 billion. But in November 2001, the effects of its concealment and profiteering finally took their toll. When a restatement of earnings resulted in a credit rating downgrade and the reconsolidation of off-balance structures increased debt by $3.9 billion, Enron’s credibility and counterparty status crumbled. Four thousand employees lost their jobs; within months, 85,000 at Enron’s accomplice, accounting firm Arthur Andersen, had lost theirs as well.

Of all the individual idols toppled in this recent executive Götter-dämmerung, meanwhile, none was grander or more graven than the corporate turnaround specialist “Chainsaw Al” Dunlap. He did not just seek profit at all costs – he preached it, sometimes irascibly, always impatiently, styling himself as an implacable enemy of paternalism, sentimentality and discretionary spending. Although Dunlap purported to tone flaccid corporate muscle, his traditional approach was to impose a crash diet based on sweeping austerities and redundancies. His chief triumph was an eighteen-month tenure at Scott Paper: the company’s stock price grew 225 per cent as it shed assets worth $us2.4 billion and 11,000 workers preparatory to acquisition by Kimberly-Clark in December 1995. “Did I earn that?” Dunlap asked of his $us100 million in equity spoils, earned at $us165,000 a day. “Damn right I did. I’m a superstar in my field, much like Michael Jordan in basketball and Bruce Springsteen in rock’n’roll.” He even presumed to improve on Harry Truman’s dictum that if you wanted a friend, you should get a dog. “I’m not taking any chances,” said Dunlap. “I’ve got two dogs.” On the cover of Dunlap’s 1996 autobiography, Mean Business, Stetson University law professor Charles Elson stated that Chainsaw Al had “sparked a revolution on the American corporate scene … by demonstrating that you can entrepreneurialise the large-scale public corporation”.

When Dunlap was called on to “entrepreneurialise” the appliance giant Sunbeam in June 1996, his formula proved as robust as ever – at first, anyway. Huge write-offs rinsed its balance sheet; huge lay-offs wrung $us225 million from costs; the share price quadrupled. This time, however, no bidders appeared. Dunlap fell back on the old-fashioned accounting trick of loading wholesalers’ shelves with product and booking the proceeds as revenue. The products did not sell, returns sent Sunbeam reeling, “increasingly desperate measures” to disguise the impact failed, and directors rebelled. Their leader: Charles Elson, seized by the zeal of the apostate.

The response to iniquity has been the usual mix of regulation and retribution. The US Congress rushed the Sarbanes-Oxley Act into law last July, requiring that CEOs and CFOs swear in front of a notary that their latest annual and quarterly filings contain no “untrue statement” and omit no “material fact”. The Australian Stock Exchange’s rules on corporate governance announced in April have set a premium on independent directors and further disclosure. And at present, there’s less interest in the kind of stocks we buy than in the kind used in conjunction with rotten fruit. In a new series on “family-friendly” Pax TV, Just Cause, an avenging paralegal is entrusted with “cleaning up America … one crooked CEO at a time” – at that rate, it could run and run.

But if there’s something amiss with our models of corporate governance, then we are all deeply implicated. We have placed our trust in commercial pragmatism – and a very particular form of it, for to speak of CEOs at all is to enfold an American idea of corporate command. As the Canadian organisational theorist Henry Mintzberg noted drily, what we call globalisation is more often simply “American management spreading round the world”. To understand our own discontents, then, it is on the evolution of this form of management that we must concentrate.


This is an extract from Gideon Haigh's Quarterly Essay, Bad Company: The cult of the CEO. To read the full essay, subscribe or buy the book.


Gideon Haigh has worked as a journalist for the Bulletin, the Guardian, the Australian, the Times and the Monthly. As an author he has written books on business, including Quarterly Essay 10: Bad Company – The Cult of the CEOThe Battle for BHP and One of a Kind: The Story of Bankers Trust Australia 1969–1999, and on cricket: Silent RevolutionsGame for AnythingThe Green and Golden Age.


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