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CEOs Need Mo
By william czander (about the author) Page 1 of 4 page(s)
http://www.opednews.com/articles/CEOs-and-Their-Need-for-Mo-by-william-czander-100916-457.html

For almost 20 years corporate America has resembled the Wild West. CEO's and their executives, Wall Street bankers, and others have been quietly engaged terminating millions of jobs, stealing pensions, breaking up companies, committing fraud, outsourcing, and engaging in incomprehensible risk taking, all for the purpose of outrageous personal gain. This is the second of three articles that will explore the cultural, psychological and psychodynamic motivations for this behavior.
(This is the second of a three part series )

Enter the Finance CEO's

All professions go through evolutionary change over time. Over the years disciplines were favored and valued among corporate boards. There was a time when engineers were valued, then marketing and then the finance people moved into the top positions as the discipline of choice among CEOs. As finance trained executives represented a new group of CEO's B-schools jumped on the bandwagon. Professors of economics and finance climbed to central positions in business schools and substituted the words of "self interest" and "incentive to profit" for "greed." The Ronald Regan concept of "trickle down" economics prevailed, and promoted the belief that allowing the wealthy to "have more" would be good for the economy, and if the rich got richer, their wealth would benefit the lower classes. In the face of such odds, more of the nation's pool of talented students decided there was no point in becoming a doctor or an engineer, when one could be a banker. During the heyday of business school growth, 1970 to 1990 Harvard graduates who entered finance career jumped from 5 to 15 percent while those going into law and medicine fell from 39 to 30 percent (Goldin and Katz, 1999).

Before 1980 one rarely saw an MBA in manufacturing and it was even rarer to find someone with an MBA in finance running a manufacturing plant. But in the 1980's and 90's things changed dramatically, as MBA's entered manufacturing, not as blue collar supervisors but as CEO's, with ties to banking, hedge funds, and Wall Street. These finance trained MBA's managed over a 20 year period; to destroy American manufacturing, severely injure retail and almost destroyed the economy.

How did they do it?

Scheiber (2009) uses the American automobile industry as an example of how they did it. He says that when they took over the reins, "these (finance) executives were frequently numb to the sorts of innovations that enable high-quality production at low cost." However, it was not numbness that led to bankruptcy. The failure was a function of a combination of greed, loyalty, and what they knew, their discipline. They followed the dictates of their discipline and the stockholders who hired them. Consequently they focused exclusively on increasing the "bottom line." The union leaders called them "bean counters" who were only concerned with the numbers. They had no investment in the company other than what it could do for those who hired them. Their loyalty was to the stock holders, hedge fund companies, banks and corporate raiders. In addition for these finance trained MBA's, numbers were their friend and people (employees) were their enemy.
Consider this- When the marketers, designers, and engineers ran the automobile industry their sails were full. They knew the market and what types of cars would sell. When the finance CEOs took over they put GM on the road to bankruptcy. Why? They did what they knew best, they followed this "bottom line" approach and they created the most cost efficient method to run their companies, it was called "spreadsheet management," and later on called "dashboard management." Roger Smith ran GM from 1981 to 1990 with an MBA and a heavy background in finance. Smith was categorized as the evil Iago in the documentary "Roger and Me." He was the first of the finance people sit in the catbird seat at GM. He showed little concern for the company, and absolutely no concern for its community or employees. He started the outsourcing and offshoring movement that led to the termination of 30,000 employees and the destruction of the once proud city of Flint, Michigan. Smith was followed by Rick Wagoner and Fritz Henderson both finance CEOs who made certain their stockholders and their executives got rich as they destroyed the company. This pattern was not unique to the automotive industry; financiers were a plague to all manufacturing industries.

With a combination of sophisticated compensation consultants, a background in finance and little knowledge of the industry they were expected to lead these CEO's focused on cost cutting: the termination of employees, closing of factories followed by outsourcing, and offshoring, and they avoided spending for R&D and long range objectives. It was their formula to get their stockholders, hedge funds, Wall Street bankers and of course themselves wealthy. At GM consultants designed compensation packages so that their clients; CEO's and their stockholders could reap short term bonanzas. According to Jacoby (2008), in the early 1990's after executive compensation was heavily tied to stock ownership and options the promised bonanza was delivered. Between 1996 to 2000 GM delivered more than $20 billion to shareholders, $13 billion in multiple repurchases and $7 billion in dividends. He maintains that if GM had used that money for research and development it would not be in bankruptcy in 2009. In the process GM's CEO, Rick Wagoner became a rich man. In 2007 he received a 42 percent increase in compensation, to $6.6 million and added $4 million to his retirement plan, while his company lost $38.7 billion. GM President Fritz Henderson received a 44 percent raise, and Vice Chairman Bob Lutz a 36 percent raise in compensation for 2008.

Before these guys looted the company GM sold half of all cars in the US, now it sells 20 percent (Lowenstein, 2008). But who really suffers as CEO's get rich? In July 2008 GM got the United Auto Workers (UAW) union, to eliminate health care coverage for salaried retirees over the age of 65. It planned a new wave of buyouts among its 32,000 salaried employees while freezing their salaries for the remainder of 2008 and 2009. Since 2000 GM has terminated 13,000 white collar jobs and 40,000 union jobs (NY Times, 2008 a). In July, 2008 another 1,760 workers lost their jobs as GM closed two truck plants (Vlasic, 2008). In the second quarter of 2008 GM reported a $3.3 billion buyout of 19,000 hourly workers. Despite losing $30.9 billion in 2008 Wagoner made over $14.9 million, $3 million in cash and $11.9 million in stock and options that plummeted to $682,000 in value as of March, 2009. Since 2006, Wagoner's company has lost $82 billion. Under Wagoner's leadership, GM lost tens of billions of dollars, took billions in taxpayer-financed aid, and cut tens of thousands of jobs, including terminating another 47,000 employees in 2009. He retired (fired by Obama) in 2009 and walked away with a retirement package of $20 million.

Since 2000 more than half of all American CEO's compensation packages consisted of bonuses and stock options. These CEO's saw their only objective as "maximizing short-term shareholder value" and then "get the hell out of Dodge." What these CEO's did not learn in B-school were the consequences of their cost cutting/short term strategy and the hurt they could inflict on men, women and children throughout the country.

Home Depot is another example of how "number crunchers" ruined a company while enriching themselves. Bob Nardelli a numbers executive from General Electric with zero retail experience was recruited by Board Director Ken Langone an investment banker. Nardelli's compensation package was negotiated by Dennis Donovan a lawyer and his long time GE compatriot. During Nardelli's five years at Home Depot he earned about $200 million in salary, bonuses, stock, stock options and other perks. When he was fired he received an additional $210 million to go away. Nardelli rewarded Donovan by making him the highest paid HR VP in history. Donovan also negotiated a contract for himself where "cessation of a direct reporting relationship with Mr. Nardelli" gets him $15 million to $20 million, plus retirement benefits, stock options and compensation already earned.

While Nardelli and Donovan were looting the company he gave his hourly workers salary increases that ranged between 10 and 75 cents an hour. During his 6 year tenure the company's stock fell 7.9 percent while the stock of its competitor Loews increased 188 percent. He was such a bad manager that during his tenure he managed a 100 percent turnover of all 170 of his top retail executives and then replaced them with ex-GE and military people. After Nardelli left, Home Depot continued to slide. In 2007 profits fell 24%, however, his replacement Frank Blake a GE alum received a $500,000 bonus, in addition to $8.28 million in compensation. Under Blake, in January, 2008, Home Depot announced a 10% cut in employees at its headquarters in Atlanta, Georgia. In April, 2008 he announced another cut, the termination of 1,000 in-store human service managers, and the closing of 15 stores and another termination of 1,300 employees as its revenue decreased 7.8 percent, same store sales dropped 8.7 percent and profits dropped 34 percent. In January, 2009 he announced an additional termination of 7,000 employees and he closed Expo and HD Supply and more stores and Home Depot stock dropped 34 percent, and guess what?--Blake gets a 29 percent increase in compensation.

Like Nardelli, Blake, and other CEO's they hire the best consultants to make certain compensation packages have reachable goals or targets that will enrich executives. There is wide spread belief among academic researchers and business writers that CEO compensation should be aligned to corporate performance however, the counter argument is this will reward short term profitability. Consequently I found that current compensation practice results in short term bottom line results (like GM's) where CEO's push their employees to take short-term risks with little regard for the long-term effects. This view became particularly visible during the crisis of 2008 and led to a movement by business writers, politicians and others to suggest that CEO compensation should be changed to consist of restricted stock and other forms of long-term compensation designed avoid rewarding short-term performance. But compensation consultants have made sure that this was a "toothless tiger." According to Cooper, Gulen and Rau (2009) this proposed system of compensation implies a positive relationship between long-term incentive pay and future firm performance. In fact they discovered the higher the CEO long term compensation the lower the shareholder returns. In addition, there is ample evidence showing that the pay of a CEO has little or no relationship to how well a company does. As a matter of fact I are beginning to see studies suggesting there is an inverse relationship between CEO compensation and shareholder earnings, that is, the higher the CEO's long term compensation the less shareholder return. In agreement Bebchuk (2009) found that more a CEO's compensation increases the lower the company's future valuation and market valuation. Other research concluded that CEO's who average $24 million in annual compensation left their shareholders poorer by an average of $2.4 billion a year. This means that compensation consultants and their lawyers draft complex contracts containing an array of metrics to legitimize outrageous compensation with an eye towards sweeping it by a board of directors who are often "asleep at the wheel" and where conflicts of interest are rampant. A sure sign that something is amiss is when the boards give their CEO's guaranteed bonuses.

Terminate Employees and Get a Raise

There are some writers who believe there is some special form of psychopathology at play with a CEO who makes millions, if not billions, as they engage in massive layoffs. They believe that there are very few people in the world capable of engaging in this work and then sleeping well at night. I doubt it. What these writers lose sight of are the bonds that exist among members within the executive constellation and the powerful culture that has been created over time. Collectively their B-school education, corporate training and preparation, and the actual climb up the corporate ladder creates a condition where the practice of "management" takes on a specific function. The truth of the matter is no one knows how to manage a corporation and leadership cannot be taught. What I do know is the field of management is beset by "best practices" and whatever is in vogue (go to the business section of any bookstore). I also know that executives are copy cats and they carefully study what other top or celebrity executives do. So where did this present form of "management practice" come from where executives came to believe it is acceptable and even good management practice to obtain a raise while terminating employees?