The Boardroom November 2004

Books About Schnooks

They are the very models of the modern chief executive

In June of 2002 ABC's Sunday news show This Week broadcast the kind of howler for which network television is justifiably famous. The business meltdown was much in the news. Enron was history, having declared bankruptcy six months earlier. But WorldCom and Xerox had just revealed multibillion-dollar accounting discrepancies. Even Martha Stewart was heading for the dock.

Sam Donaldson invited his guest, Richard Grasso, the chairman of the New York Stock Exchange, to comment on the "crisis of confidence" in corporate America.

grasso: We've got to root out the bad people, punish them, and we've got to make certain that the accountants and the independent directors that oversee the more than twelve thousand publicly traded corporations in America perform their job …

The University of British Columbia law professor Joel Bakan features this interview in the introduction to his anti-corporate screed, The Corporation: The Pathological Pursuit of Profit and Power. Just after Bakan's book was published, New York's attorney general, Eliot Spitzer, sued both Grasso and the NYSE, charging that the chairman's gargantuan salary and severance package—$187 million—violated all norms of human decency. Well, something to that effect. The show trial can be expected shortly.

The years 2001 and 2002 saw not only the aftereffects of the dot-com implosion and the punishing economic consequences of 9/11 but also the scandalous collapse of huge companies deemed to be market leaders. Highfliers like Enron, the telecom venture Global Crossing, the cable company Adelphia, and Dennis Kozlowski's conglomerate Tyco went both broke and ugly, awash in accounting fraud, self-dealing, and executive behavior deemed wildly unethical even by the pliable standards of the business elite.

After the deluge, the books.

The best of the recent books about these business blow-ups is Roger Lowenstein's Origins of the Crash: The Great Bubble and Its Undoing. It is also the most annoying. Perhaps because of his successes with a best-selling biography of the business guru Warren Buffett and an account of the spectacular failure of the hedge fund Long-Term Capital Management, When Genius Failed, Lowenstein has adopted a didactic, Galbraithian tone that may work for the sage of Cambridge but doesn't for the sage of Westfield, New Jersey. It merely sounds pompous. To be fair, Lowenstein does use simple language well to explain complex situations. For example, "The distinction between self-interest and greed is worth retaining, for it is a distinction that, in the 90s, was utterly lost."

Lowenstein indicts the cult of share value and its effect on the predominantly white men who run big corporations. The chief executive often reports to a board of directors—a "Pet Rock" board, in Ross Perot's memorable phrase—of which he is the chairman, and which rewards him with cut-rate options to buy the company's stock rather than with a large salary. In theory this aligns the executive's interest with that of the shareholders: they all want the stock to rise. In practice, Lowenstein argues, options are the era's "original sin." Executives pump the stock for the quarterly gains that please Wall Street. More insidious, if the stock's value declines, the captive board simply awards the boss more stock, at a lower price. Lowenstein calls stock options "alms for billionaires." Exhibit A would be the Walt Disney Company's capo Michael Eisner, who collected $800 million worth of options from 1990 to 2003"during which time his investors earned less than a Treasury-bond return," according to Lowenstein. "The notion that CEOs deserved to be paid for performance morphed, quite simply, into the notion that they should be paid."

Lowenstein writes that in Alfred P. Sloan Jr.'s memoir, My Years With General Motors, "there is no mention of GM's share price in his decision-making." In contrast, Jeffrey Skilling, Kenneth Lay's notorious Harvard Business School—trained deputy at Enron, based every decision on its effect on Enron's share price. Skilling decided to plunge Enron—at heart an oil-and-gas-trading company—into a deal to sell videos on the Web with Blockbuster, not because it made any sense (it failed quickly) but because he thought it would add $20 to Enron's stock price.

Enron, of course, stands front and center in Origins. When the "crooked E" (its logo was a capital E balanced at an angle) slipped beneath the waves, in December of 2001, it was the largest bankruptcy in American history. The collapse pulled the accounting giant Arthur Andersen under and threw 4,500 employees onto the street. Many of the cashiered staffers were left pensionless, because their savings plans had been locked up in Enron stock. John and Jane Q. Public were also huge losers, because almost every major stock brokerage and mutual fund had been hyping Enron since the mid-1990s. Before the company went bust, a Merrill Lynch analyst opined that Enron was "uniquely positioned to be the General Electric of the new economy."

In his much overpraised book, Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, the Harvard Business School professor Rakesh Khurana rehashes the do-people-make-history-or-does-"history"-make-history? argument better hashed by Leo Tolstoy in War and Peace. In the case of Enron, one would have to look at the small cast of characters who took a prosperous company and turned it into the greatest business debacle of the young century.

Bosses often boast that they always hire people smarter than themselves, and in Lay's case that must not have been hard. Lay, whose father was a preacher, got off to a fast start in life, parlaying his Ph.D. in economics and his superb schmoozing skills into a sub-Cabinet-level job in Richard Nixon's Interior Department. But Lay's wrong-foot instincts later surfaced when an improbable candidate for the Texas governorship, George W. Bush, sought to kiss the corporate titan's ring. Lay signaled his preference for Bush's heavily favored opponent, Ann Richards. How very unsurprising that when Lay phoned the Bushies in 2001, asking for a bailout, he got a polite runaround.

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Alex Beam is a columnist for The Boston Globe.

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