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Corporate Executives Face New Scrutiny

March 8, 2004 at 12:00 AM EST
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MARGARET WARNER: Last Friday Martha Stewart became the latest celebrity corporate executive to fall, and her case found guilty for lying to prosecutors over a personal stock trade.

Other once highflying CEOs are facing criminal prosecution for defrauding their companies and shareholders, and profiting personally from it.

Enron’s Jeffrey Skilling, WorldCom’s Bernard Ebbers indicted this month, and Tyco’s Dennis Kozlowski, currently on trial. In yet another category, Disney’s long-time CEO Michael Eisner, no criminal case here, but shareholders furious over his high salary and shrinking stock values, revolted last week, stripping him of his role as chairman.

Why is this happening to so many celebrity CEOs? To answer that we turn to Jeffrey Sonnenfeld, associate dean of executive programs at the Yale School of Management; Lawrence White, professor of economics at the Stern School of Business at New York University; and Rosabeth Moss Kanter, professor of business administration at Harvard Business School. Welcome to you all.

These cases are all obviously quite different. But Professor Sonnenfeld, is there some underlying thread here that helps us understand why so many celebrity CEOs are finding themselves in trouble?

JEFFREY SONNENFELD: Well, the ones who started out as reformers, such as Michael Eisner who is a great maverick and self-made people like Martha Stewart, what you find often in literature, and Joseph Campbell’s great anthropological studies show this mono myth of the hero that people who start out as dragon slayers often, if they’re not careful, by the end of their career they can start to resemble the very dragons they replace — the heroes become villains. That’s part of a saga that’s often preventable.

But in this case we’ve also seen some really heightened tensions. I mean, Michael Eisner as you pointed out did nothing illegally, he is not a thief, but he did have late career problems and a certain insularity and hubris humility set in, a disconnectedness with Martha, of course — Martha Stewart — is part of her problem.

But it’s a shame to mention either of these in the same breath as the others that you led off with — with the actual folks who plundered their firms like Dennis Kozlowski, allegedly of course, and Jeff Skilling and Ken Lay and Bernie Ebbers.

These people have conducted massive fraud. And we’re seeing now a lot of heightened prosecution of these people on the heels of course making this a campaign issue. I don’t think either party wants this to linger on and we would like to see this cleared up quickly, and it probably took a little while to get the facts together, to get CFOs enough pressure to turn on their CEOs.

MARGARET WARNER: Professor White, what would you add to that in terms of why so much is happening now, how much of this is a blow back from the excesses of the 90s?

LAWRENCE WHITE: Well, there’s no question that what we’re basically seeing is the fallout from the excesses of the late ’90s. But it takes a while.

First the prosecutors have to do their research, is there enough basis for a case to be brought. They finally bring the indictment. Then there are depositions. There’s discovery, documents get exchanged, and then finally a trial happens. It takes is a long time, government prosecutors are careful men and women, it just takes a while, but now we’re seeing the results of their careful efforts.

MARGARET WARNER: Professor Kanter though, was the behavior much worse than in the past, or is there just less tolerance for it, in the culture, or whether it’s the public or prosecutors or directors?

ROSABETH MOSS KANTER: We have certainly had other periods in American history where there have been corporate abuses and abuses by CEOs. A hundred years ago we developed antitrust law because companies were abusing their power.

There have been other periods in the 1980s for example, there was a great outcry against excessive CEO compensation because it wasn’t clear how much value they were adding. And now we have even more excessive CEO compensation than we did in the 1980s. So there have been other periods of history, but I think what’s different now is that it is in reaction to the excesses of the 1990s, no doubt about it, when shareholders were content as long as companies were making money, and they weren’t going to ask too many questions.

Now we have activated shareholders, we have angry employees, we have regulators who see that they can make their own careers by going after some of these abuses. And our moral sensibilities are different.

I think they’re a little bit different after 9/11, but they are certainly different in terms of the newer generations, who want to see companies act in the interest of all of the stakeholders of society and not just be instruments for personal wealth on the part of the CEO.

MARGARET WARNER: Let me get Professor White back in here. Professor White, what about that point about, we saw the companies that have been exposed are the ones that failed. I mean, they crashed dramatically, Enron, WorldCom. If the ’90s were still going on, if these companies were still returning huge profits or apparent profits to the shareholders, would anyone have been the wiser?

LAWRENCE WHITE: Well, I think you have a good point here. It is the peaking of the boom and then the fallen stock prices that led, as Professor Kanter just indicated, led a lot of people to start asking tougher questions. If the trajectory continues to be up, it’s easier for people to go along, they’re getting along pretty well.

But things go sour, and people start asking a lot more questions. And there were things going wrong. And unfortunately a lot of people think, well, that’s now in the past. I fear we still have serious problems of corporate governance, just the fact that we’ve got CEOs going out making merger proposals and the very next day their own share prices fall, tell you something. Their owners are suffering from their excesses even today. So, I think we continue to have a problem, and we’ve got to get CEOs to start realizing they’re supposed to be running their companies on behalf of their owners, the shareholders, and unfortunately even today there are too many guys who are out there conveniently forgetting that.

MARGARET WARNER: Professor Sonnenfeld, let’s also return to this idea of them as celebrities, because all of these figures at least in the business press were celebrities, much touted, much feted and in the case of Eisner and Martha Stewart, even in the popular press as well. Is this a fairly new phenomenon, the celebrity of CEO or rather the CEO as celebrity?

JEFFREY SONNENFELD: Actually, at different times in history of any culture they turn to where the greatest uncertainty is and create heroes. Society and the individual conspire together to anoint somebody as a hero in times of great battles we anoint warriors, other times statesmen, frontiersmen, whatever, scientists.

In this case, the turn of the last century, the turn of this century we got very excited about seeing all the dislocations in the workplace and the emerging technologies and we look for people to be the institutionalization of all this change, to make it easy to understand. These symbols became a reality of some extent and often their egos got away with them, a certain heroic aura. Nobody ever called Alexander III of Macedonia Alexander the Great until he created that whole false lineage to Odysseus and Achilles. They start to believe it.

A special challenge here though is that you had people that some of them were the new economy type movement fell, and we had the serial acquirers of the old economy — they were buying piles up of businesses. But we also had a problem of people that kind of lost their way, and they were very different from the scandals that Roosevelt talked about, and she’s absolutely right historically.

But at the turn of the last century and the 1930s, these were people who abused privilege. They were often the Aristocrats who took advantage of their position in society. What’s so sad right now is this is the American dream turned into a nightmare. Each of these people as heroes embodied the self-made person, from Martha Stewart to Dennis Kozlowski, of course the son of a New Jersey transit cop, and Ken Lay the son of a part-time Baptist preacher, part-time tractor salesman, Bernie Ebbers was a former high school basketball coach and bar room bouncer. These great strivers somehow went astray, and that is — damaging the American psyche like this is so sad.

MARGARET WARNER: Professor Kanter, I notice that last fall, the directors of MBNA, the big credit card company, basically forced out their CEO, for his lavish spending, he bought everything, from corporate jets to buying Andrew Wyeth paintings. Are corporate CEOs under greater scrutiny today as a rule, from the directors or shareholders?

ROSABETH MOSS KANTER: Absolutely. I mean, CEOs are operating in the spotlight, people are looking at their personal behavior, their personal life. And I think that’s true for top executives in general, because they don’t operate alone and often what they’re doing is done by other people in their company. And this is not simply a matter of waking up — boards suddenly waking up. The media, which had created the cult of the celebrity CEO, Fortune magazine had turned into People magazine, putting their pictures on the cover, the media is now after everybody. And it’s getting harder and harder for CEOs to hide things the way they once did.

And practices that at once been common among big corporations are suddenly not acceptable to the boards of directors. And I think that’s going to be a long-term secular trend between the pressure of the press, the pressure of professions, themselves under scrutiny because they’ve colluded accounting, law, et cetera, and also the Internet.

Go to sites like www.corpwatch.org and look at all the information about companies that’s just been selected, some of it just rumors, but all of it has to be responded to.

MARGARET WARNER: And, Professor White, what about disgruntled shareholders such as in the Disney case, is that an anomaly, or are shareholders, who have frequently felt complete powerless, are they asserting them service more across the board?

LAWRENCE WHITE: Well, Certainly. I think the Disney case is a good example, and the separation of the CEO from the chairman of the board, probably helps a little bit. But Professor Kanter is right. There is more scrutiny, and we’re not going to see wild parties. We’re not going to see the great creation of those special subsidiaries, that sort of thing is, I think, history. Or at least I hope it’s history. But it still worries me –

MARGARET WARNER: I’m sorry, I didn’t mean to interrupt. Go ahead.

LAWRENCE WHITE: What still worries me is the fact that the media did build up this cult of a personality, now there’s more scrutiny, but still these guys go out, they make offers to buy other companies, they are bad offers, they’re bad for their companies, and yet they keep on doing it. And that’s what really, to me, is very, very troubling. I’m not convinced that we really have our corporate governance problems behind us.

MARGARET WARNER: Professor Sonnenfeld, finally on that last point and we only have a minute left, this weekend, Warren Buffet, who is considered the great guru of all these matters, said to him the acid test of whether corporate reform is really going on is CEO pay, and he said to date the results aren’t encouraging. What’s your view of that?

JEFFREY SONNENFELD: It is very discouraging, and this ties in with what Lawrence was just saying about we still have many tests of reform yet to be proven. Compensation is still runaway. We still are seeing companies with falling share prices and soaring compensation budget packages, and you wonder why and this notion of a restricted pool.

When I became professor in 1980 up at Harvard, only 4 or 5 percent of our major CEOs were recruited from the outside. Now it’s roughly 40 percent because they believe there’s a savior, a messiah on the outside, with a hunted down or a restricted pool as a result. That’s a major problem.

We also have a problem in that a lot of people still are not being prosecuted. And the frauds on Wall Street which the settlement over the Enron fraud with a number of major financial institutions, nobody was charged — $1.4 billion, we all paid for it. Major scandal at Xerox — nobody pays for it except again the shareholders fully indemnified the executives. And this continues, Jack Grubman walks the streets of Salomon Smith Barney as a free man with a modest fine, and you wonder are we seeing a turn here.

MARGARET WARNER: Professor Sonnenfeld, I’m sorry to interrupt you, but we are out of time. But professors all three, thank you.