Tag Archives: shareholder value

A Quibble Over Robert Reich’s “CEO” Statesman

JDZellerbach

J.D. Zellerbach

One of the posts on this blog with consistently high traffic is The First CEO, which was my first attempt to track down the earliest instances of the acronym “CEO.” With a little help from the people at Webster’s Dictionary and the Harvard Business Review, I found that those came in the 1970s. In subsequent posts on this theme, I tried to make some historical sense of the literary evidence I’d uncovered.

So I have a quibble with Robert Reich’s polemic in The American Prospect (and elsewhere; he’s syndicated), comparing the CEOs of today and their “shameful,” self-serving silence in the face of Trumpian authoritarianism to the “CEOs” of the 1950s:

I’m old enough to recall a time when CEOs were thought of as “corporate statesman” [sic] with duties to the nation. As one prominent executive told Time Magazine in the 1950s, Americans “regard business management as a stewardship,” acting “for the benefit of all the people.”

That prominent executive, held up here as a model corporate statesman, was pulp and paper executive J. D. Zellerbach. Zellberbach was not a CEO — he could not have been in the 1950s — but the President of Crown Zellerbach. Reich is using the term “CEO” loosely, then, but in this piece that seems to prevent him from thinking historically about the CEO as an institution.

Perhaps he should have instead asked whether the institution of the CEO in the 1970s represented a rejection of “socially-conscious” business leadership for which he’s calling.

Remarkably enough, in Saving Capitalism, Reich himself quotes Zellerbach’s statement to Time Magazine just before he discusses the shift from the benevolent managerialism advocated by industrialists like Zellerbach to “a radically different vision of corporate ownership” that set in during the 1970s (and brought with it, among other things, the institution of the CEO). It’s worth reading this passage to the bitter end:

In the early 1950s, Fortune magazine urged CEOs to become “industrial statesmen,” which in many respects they did—helping to pilot an economy generating broad-based prosperity. In November 1956, Time magazine noted that business leaders were willing to “judge their actions, not only from the standpoint of profit and loss” in their financial results “but of profit and loss to the community.” General Electric, noted the magazine, famously sought to serve the “balanced best interests” of all its stakeholders. Pulp and paper executive J. D. Zellerbach told Time that “the majority of Americans support private enterprise, not as a God-given right but as the best practical means of conducting business in a free society….They regard business management as a stewardship, and they expect it to operate the economy as a public trust for the benefit of all the people.”

But a radically different vision of corporate ownership erupted in the late 1970s and early 1980s. It came with corporate raiders who mounted hostile takeovers, wielding high-yield junk bonds to tempt shareholders to sell their shares. They used leveraged buyouts and undertook proxy fights against the industrial statesmen who, in their view, were depriving shareholders of the wealth that properly belonged to them. The raiders assumed that shareholders were the only legitimate owners of the corporation and that the only valid purpose of the corporation was to maximize shareholder returns.

This transformation did not happen by accident. It was a product of changes in the legal and institutional organization of corporations and of financial markets—changes that were promoted by corporate interests and Wall Street. In 1974, at the urging of pension funds, insurance companies, and the Street, Congress enacted the Employee Retirement Income Security Act. Before then, pension funds and insurance companies could only invest in high-grade corporate and government bonds—a fiduciary obligation under their contracts with beneficiaries of pensions and insurance policies. The 1974 act changed that, allowing pension funds and insurance companies to invest their portfolios in the stock market and thereby making a huge pool of capital available to Wall Street. In 1982, another large pool of capital became available when Congress gave savings and loan banks, the bedrocks of local home mortgage markets, permission to invest their deposits in a wide range of financial products, including junk bonds and other risky ventures promising high returns. The convenient fact that the government insured savings and loan deposits against losses made these investments all the more tempting (and ultimately cost taxpayers some $124 billion when many of the banks went bust). Meanwhile, the Reagan administration loosened other banking and financial regulations and simultaneously cut the enforcement staff at the Securities and Exchange Commission.

All this made it possible for corporate raiders to get the capital and the regulatory approvals necessary to mount unfriendly takeovers. During the whole of the 1970s there had been only 13 hostile takeovers of companies valued at $1 billion or more. During the 1980s, there were 150. Between 1979 and 1989, financial entrepreneurs mounted more than 2,000 leveraged buyouts, each over $250 million. (The party was temporarily halted only when raider Ivan Boesky agreed to be a government informer as part of his plea bargain on charges of insider trading and market manipulation. Boesky implicated Michael Milken and Milken’s junk bond powerhouse, Drexel Burnham Lambert, in a scheme to manipulate stock prices and defraud clients. Drexel pleaded guilty. Milken was indicted on ninety-eight counts, including insider trading and racketeering, and went to jail.)

Even where raids did not occur, CEOs nonetheless felt pressured to maximize shareholder returns for fear their firms might otherwise be targeted. Hence, they began to see their primary role as driving up share prices.

The First CEO: A Political Revolution?

I’ve been associating the cultural icon of the CEO with big changes in America, most of which were well underway in the 1970s, when the acronym “CEO” first comes into wide use: the collapse of manufacturing, the financialization of the economy, the emergence of the neoliberal order. David Graeber offers yet another way to characterize these changes: “total bureaucratization.”

An excerpt from Graeber’s new book in the latest issue of Harpers lands us in familiar territory:

What began to happen in the Seventies, which paved the way for what we see today, was a strategic turn, as the upper echelons of U.S. corporate bureaucracy moved away from workers and toward shareholders. There was a double movement: corporate management became more financialized and the financial sector became more corporatized, with investment banks and hedge funds largely replacing individual investors. As a result, the investor class and the executive class became almost indistinguishable. By the Nineties, lifetime employment, even for white-collar workers, had become a thing of the past. When corporations needed loyalty, they increasingly secured it by paying their employees in stock options.

What Graeber at first characterizes as “a strategic turn” and the merging of the corporate and financial sectors, he then goes on to call “a political revolution”:

At the same time, everyone was encouraged to look at the world through the eyes of an investor — which is one reason why, in the Eighties, newspapers continued laying off their labor reporters, while ordinary TV news reports began featuring stock-quote crawls at the bottom of the screen. By participating in personal-retirement and investment funds, the argument went, everyone would come to own a piece of capitalism. In reality, the magic circle only widened to include higher-paid professionals and corporate bureaucrats. Still, the perceived extension was extremely important. No political revolution (for that’s what this was) can succeed without allies, and bringing along the middle class — and, crucially, convincing them that they had a stake in finance-driven capitalism — was critical.

The parenthetical affirmation — “(for that’s what this was)” — asks us to pause and really take the point. Having read only this excerpt, I don’t know whether Graeber goes on to explain why what he elsewhere calls a “shift” or “turn” counts as a “political revolution,” or how exactly he thinks this overturning of the political order was brought about. No doubt there was fraud, collusion and conspiracy, and “everyone was encouraged” to believe they were included; but the passive verb here leaves way too much unsaid. For one thing, the triumph and establishment of  the new order at home and abroad was really not so bloodless as Graeber (here, at least) makes it out to be.

The celebration and glamorization of the CEO — as a leader, a rule-maker and a rule-breaker, the agent and steward of shareholder value — was one of the things that duped ordinary, middle-class Americans into thinking “they had a stake in finance-driven capitalism.” It deserves a chapter in the story Graeber’s out to tell. The acronym “CEO” itself belongs to what Graeber calls the “peculiar idiom” of “bureaucratic techniques” and meritocratic myths — a language with origins in self-actualization movements of the 1970s, “full of bright, empty terms like ‘vision,’ ‘quality,’ ‘stakeholder,’ ‘leadership,’ ‘excellence,’ ‘innovation,’ ‘strategic goals,’ and ‘best practices.’” It’s good to see this language held up for scrutiny, especially since, as Graeber rightly points out, it still “[engulfs] any meeting where any number of people gather to discuss the allocation of any kind of resources.” To the victors go the spoils, and that’s not likely to change as long as we are speaking their language and playing by their rules.

Has Management Become Significantly More Incompetent?

I don’t really have a dog in the Lepore-Christensen fight. Lepore’s strongest point, that Christensen’s theory of “disruption” is both a flawed theory of history and itself an artifact of history, seems to have gotten lost in the fray. Lepore overreached in her New Yorker piece, and now Christensen’s adherents and acolytes have come out in full force. There hasn’t been much room for careful discussion of Christensen’s theory as a discourse or artifact of post-industrial social collapse — which is, I suppose, what interests me most about it.

Still, I’m following the controversy, and yesterday, John Hagel offered a welcome, level-headed contribution to the discussion. Here, I simply want to paraphrase the comment I left on his post, because it touches on some themes I’ve written about in connection with the rise of the CEO (notably here, here and here.)

Hagel wants to move the discussion of Lepore-Christensen away from intramural antagonism and the clash of personalities and disciplines to look at “fundamental and systemic trends.” Clearly, he says, “something very profound is happening — and it’s largely escaped notice.” One measure of this bigger shift: “the topple rate at which US public companies in the top quartile of return on assets performance fall out of… leadership position.” That rate, he notes, increased 40 percent between 1965 and 2012.

There are lots of possible explanations for that wild increase. It seems safe to say there must be some great historical forces at work. Otherwise, Hagel writes, “one would have to believe that management is becoming significantly more incompetent over time”; and I guess nobody would seriously believe that. Here, at least, we’re meant to pass over the thought with a knowing smile: of course management has not become significantly more incompetent over time. Right?

I didn’t seriously entertain the thought of growing managerial incompetence again until I arrived at Hagel’s concluding paragraph. There, he offers a few suggestions on how incumbent players might “more effectively respond to these disruptive approaches (short of resorting to regulation and other public policy measures).” One suggestion is that management find ways to take the long view: incumbent players need “to find ways to expand the horizons of their leadership team beyond the next quarter or next year.” Myopia is always dangerous, and more dangerous now than ever before.

At the same time, short-sighted management has a history, and as I’ve suggested in my posts on the rise of the CEO, the most interesting chapter of that history starts right around the time the topple rate increases, in the 60s and 70s.

Around 1965, as profit rates in manufacturing fall and as the postwar boom yields to post-industrial reality, new ideas of management take hold. One of them is what Jack Welch once called “the dumbest idea in the world”: the doctrine of shareholder value. As this doctrine becomes boardroom religion, we see the rise of the “CEO” as corporate savior (in Rakesh Khurana’s phrase) and cultural celebrity.

Short-termism and, in some cases, risky financial manipulation become the name of the game. Compensation packages reinforce bad habits. Strategists and management consultants take their cues from the C-Suite, and tailor their offerings accordingly.

I’m not saying the rise of the CEO, the doctrine of shareholder value, or the promise of sustainable competitive advantage in the 70s and 80s explain the increase in the topple rate, but clearly they should be taken into account here; and we should give growing managerial incompetence its due. Bad ideas about what counts as business success — and misguided actions by business (and political) leaders — certainly make businesses more vulnerable to the kind of disruption that interests Hagel: the loss of leadership position.

Big scary historical forces may be overtaking us, but if competence in the face of those forces is what we’re after, then failed ideas of corporate purpose and failed models of corporate leadership ought to be called out, questioned, and radically altered or just dropped.

In Michigan, Mining Makes An Asset of A Community

John Kivela just can’t stop thanking people, it appears. Last week, at a ceremony held under a tent at Humboldt Mill to mark the transfer of ownership of the Eagle Mine from Rio Tinto to Lundin Mining, State Representative Kivela was effusive in his praise of officials from the two multinational mining companies and, above all, grateful. According to a report in the Mining Journal, Kivela gave a shoutout to outgoing Rio Tinto Eagle Mine President Adam Burley (who will be moving to Rio Tinto’s offices in Salt Lake City, Utah, which is now North American HQ for one of the biggest mine disasters in recent history — the slide at Bingham Canyon); and then, it seemed, Kivela was unable to hold back any longer. He spoke from the heart:

Adam and the folks from Rio, thank you for your commitment to the community. Thanks for providing opportunities for Michiganders to employ themselves. Thanks for running a safe, clean, environmentally sound operation. That means a lot to the folks here. To our good friends from Canada, welcome to the community. Thank you for your investment. Thank you for taking a chance in Michigan and in the United States in this operation and I wish you all the best.

It was just folks gathered under that tent at Humboldt Mill — “folks” from Rio Tinto, “folks here,” who live in close proximity to the Eagle Mine operation, all just folks who belong to the same “community” — and how gracious of Kivela to extend a warm welcome on behalf of that community to these new arrivals, strangers to the Upper Peninsula but already “good friends,” no, “our” good friends, from Canada! Kivela must have generated enough warm friendly feeling under that tent at the Humboldt Mill — a brownfield site from the last round of mining — that everyone could forget, just for that one sweet moment, that most of what Kivela was saying was just obsequious, ingratiating nonsense.

The ceremony was held at the mill, not at the mine, and for obvious reasons: the Eagle mine is built on ground sacred to the Ojibwe people and construction of the mine is proceeding apace without their full, prior and informed consent (as required by the UN Declaration on the Rights of Indigenous People). Many in the community are glad to see Rio Tinto go but are not ready to welcome Lundin, and Lundin has done very little to reassure them that things are going to be different at Eagle. There are folks within the community Kivela represents who don’t share Kivela’s confidence that Rio Tinto has run “a safe, clean, environmentally sound operation.” Charges of corruption and incompetence hang over the entire permitting and environmental impact statement process around Eagle Mine. And, according to a recent report, the investment made first by Rio Tinto and now, Lundin Mining is likely to have a distorting effect on the economy of the Upper Peninsula, and will not contribute to the area’s long-term prosperity.

As for Rio Tinto’s commitment: it lasted only as long as Eagle strategically suited the global mining giant. Eagle rapidly went from being a “commitment” to a “non-core asset”; and that’s where Lundin came in: they saw a valuable asset where Rio Tinto no longer did. “Adding a mine like this to our asset base is really formative for our future,” said Lundin President and CEO Paul Conibear at the ceremony. “We’ve been looking very actively for two years now to rejuvenate our asset base to bring on a high-quality new base metals mine.” Conibear could be Canada’s answer to Ponce de Leon, with all his talk about searching far and wide for sources of rejuvenation. Eagle Mine may not be the Fountain of Youth, but its mineral riches will be “formative for the future” of Lundin’s “asset base.”

That is why Lundin has made its investment: it really has very little to do with Michigan, or the community, or friends or folks at all. The Eagle Mine is an asset. The land and the water and the trees, the minerals in the earth, the friends and communities around the mine, all the things that people in the Upper Peninsula know and love, have already been set down on a balance sheet alongside Lundin’s other assets. (It’s interesting, by the way, that on this occasion, as on others, Conibear talked about Lundin’s mines in “Portugal, Sweden and Spain” and neglected to mention the company’s substantial share in the controversial Tenke Fungurume Mine, where Conibear served as Chief Operating Officer, then President and Director before he helped bring about the merger of Tenke and Lundin Mining.)

The community of friends gathered under the tent at Humboldt Mill doesn’t even appear to have entered into Conibear’s thoughts, or at least he does not mention them in his remarks as reported by the local press. Instead, Lundin’s CEO told a story of courage in the face of doubt, and of making tough choices: he acquired Eagle Mine “when metals prices are at a 5 year low” and when shareholders were asking whether this is the “right time.” These are the things that are most on Conibear’s mind: metal prices and market timing. He needs to placate skeptical shareholders, or prove them shortsighted. He seems confident that he will, and eventually they will thank him for adding this sulfide mining operation on the shores of Lake Superior to Lundin’s asset base.

People living around the mine, and all around Lake Superior, may not share their gratitude.

Newmont, Nonsense and Good Faith

I’m concerned that my earlier post about John Ruggie’s Just Business may have given the misleading impression that Newmont Mining’s troubles in Cajamarca had been resolved, or that the company’s publication of a study called Listening to the City of Cajamarca had softened local opposition to Newmont and its Minas Conga project — a $5 billion project to build one of Peru’s largest gold mines. Events of this past week were a reminder just how far apart the company and the campesinos remain, and just how much work it will take to bridge the distance between them.

Water remains the central issue in Cajamarca. Protests this week focused on the mining company’s so-called Water First plan. Water First involves draining Lake Perol, one of several alpine lakes in the region around Cajamarca, to build four reservoirs. Newmont and the Peruvian government promote Water First as a socially responsible effort to increase water capacity year round throughout the region, where water supply is now subject to seasonal variation. But Wilfredo Saavedra, President of the Environmental Defense Front of Cajamarca or Frente De Defensa Ambiental de Cajamarca, says Water First puts the needs of the mining company above the rights of local communities: “The mine needs water for its project and it’s going to give us polluted water,” he told Reuters. “We want them to leave us alone with our lakes, which are enough for us.”

By Tuesday, protesters were throwing stones at police and police responded by firing rubber bullets — or, if you follow the police account, one rubber bullet. Local groups plan to occupy Lake Perol starting June 17th. It seems things in Cajamarca are about to escalate again.

A popular assembly at Lake Perol in November, 2011. Photo credit: EFE/Paolo Aguilar

A popular assembly at Lake Perol in November, 2011. Photo credit: EFE/Paolo Aguilar

In the midst of these fresh troubles, and partly due to them, Zacks, an investment research firm, issued a note downgrading Newmont to the status of underperformer. “Newmont may continue to face headwinds due to increasing mining and non-mining costs. Moreover, its production may be affected further due to geopolitical risks.” The company’s troubles in Peru and elsewhere are starting to chip away at market reputation and shareholder value.

Newmont has tried to smooth things over. In response to the violence in Cajamarca, the company issued a statement calling for the protesters “to embrace good-faith dialogue”. That is not likely to happen anytime soon. Yesterday, Marco Arana Zegarra (who has come to know the mining company over the years) said Newmont was just “playing the victim.” Overcoming skepticism and establishing good-faith dialogue in Cajamarca is going to require much more than a short exercise in public relations.

For starters, Newmont will need to repair the damage done by Roque Benavides, CEO of Buenaventura, Newmont’s partner in the Minas Conga project. On Thursday, Benavides dismissed objections to the Water First plan, pointing out that the company has not yet begun draining Lake Perol and saying the current protests make “no sense.” This is worse than insulting: it’s saying that the protests are devoid of meaning, that they are nonsense. People’s concerns and worries, their anger and their fears, the lives and the established ways of life they are trying to protect, the myths, memories and meanings they associate with Lake Perol — all of that is meaningless and without value. Now there is gold to mine.

If “Water First” puts an Orwellian twist on the mining company’s plan to appropriate the water resources of the Cajamarca region, Benavides’ statement takes us to the other side of the looking glass, where it makes more “sense” to drain a mountain lake in order to mine gold than to live, as people have lived for centuries, around the lake, making use of its waters according to the seasons.

Benavides has been a bit of a loose cannon. He infamously said that he “hates” the idea of business having to gain social license and that “he does not understand” what social license means. The remark was widely criticized, not just because it seemed callous, but also because it is tantamount to saying that in Cajamarca, Newmont, Buenaventura and their cronies in government can do as they please. Where is the good faith in that?

It’s surprising, then, that in the current situation no one at Newmont has advised Benavides — or implored him — to remove himself from the conversation and refrain from making public remarks about the situation in Cajamarca. Good-faith dialogue is only possible if both parties have an equal chance to discover and create new, shared meaning, together. There can be no dialogue, and no good faith, if one party claims all rights to do as it wishes simply because it is mighty, and rejects the position of the other as pure nonsense, simply because it is meek.

Are the Seventies Finally Over?

Adam Nagourney had a piece in yesterday’s Sunday Review about the changing political allegiances of the Sunbelt and how those changes might signify “an era’s end.”

The Republican Party has grown used to having “a lock” on the region stretching from Florida through the south, and to Western states like Arizona, Colorado Nevada and California; but with the nomination of Frostbelt candidates Mitt Romney and Paul Ryan, the region looks up for grabs.

“Pummeled by the collapse of the housing market,” the Sunbelt suburbs have “soaring” poverty rates; and that, according to Harvard’s Lisa McGurr, “will transform the ability of the Republican party to appeal to suburbanites with private, individualistic solutions.”

What’s more, the Sunbelt’s demographics are changing – to illustrate, Nagourney mentions Latino and Asian “enclaves” in Orange County, and Latinos moving in large numbers to Texas and Arizona – even as Republicans have been pushing an anti-immigrant agenda.

If this week’s Republican convention marks the end of an era, it’s the end of an era that began in the 1970s. Then, a demographic shift from the industrialized Frostbelt to the Sunbelt precipitated the political realignment now on the wane. The northeastern liberal elite lost its exclusive hold on power; the liberal state came under assault. And when the barbarians arrived at the government gate, we gleefully let them in. All across the country, Americans were fed up with taxes, had lost faith in government, and began to disengage from public life. By the end of the 1970s, writes Bruce Schulman:

Americans not only accepted that markets performed more efficiently, but embraced the previously outlandish idea that they operated more justly and protected freedom more efficiently than government. The entrepreneur became a national hero, and suspicion of business, a mistrust of unregulated corporations that had anchored American politics since the 1930s, all but vanished from American political discourse. (The Seventies, p. 249)

Those were the days when Milton Friedman assured us that business had no greater obligation to society than to “maximize shareholder value”. This doctrine went hand in hand with Friedman’s hostility to the liberal state, his contempt for the inefficiencies of government, and his contention that free enterprise, unfettered by regulation and unburdened by taxes, would deliver political freedom and prosperity. What’s most striking is that by the end of the Seventies the majority of Americans had enthusiastically came around to that point of view. We all but abandoned the commons:

The slow march of privatization had pervaded the entire Seventies. It complemented all of the decades’ changes in attitudes: impatience with taxes and centralized authority, experimentation with new forms of community [including self-taxing private entities like homeowners’ associations and Business Improvement Districts, which supplanted and suborned municipal governments], Sunbelt self-reliance, and the fiscal crises that deepened municipalities’ reliance on private funds. (249)

The push toward privatization and “Sunbelt self-reliance” in the Seventies was also a retreat from the idea that we rely on each other – a retreat from the idea of “society” itself.

Hurricanes like Katrina or the one bearing down on the GOP convention this week don’t just threaten Sunbelt serenity; they are crises that heighten and exaggerate the shortcomings of the Sunbelt ethic. The same could be said for the financial tsunami that overtook us in 2008, and forced many people in the Sunbelt from their homes. (Foreclosure rates are high throughout the region.)

Despite the impending hurricane and the financial storm most Americans are still weathering, it’s unlikely anyone on stage in Tampa this week will speak about the limits of Reaganesque self-reliance or the things markets cannot do. But we have obligations to each other markets sometimes threaten, and sometimes simply cannot help us meet.

I’d at least like to think that with the Sunbelt’s eclipse more than the electoral votes of a few states are in play. Maybe, just maybe, the Seventies are finally coming to an end.