Greed Wasn’t So Bad
Maybe we shouldn’t have been so hard on Eighties bad guys Mike
Milken, Charlie Keating, Ivan Boesky, and Robert Campeau. These
guys are pikers next to the growing Rogue’s Gallery of the
Nineties, and the current generation represents The Establishment,
not the rogues and outcasts who rose to prominence before flaming
out during the Greed-is-Good Decade. Recessions, like those giant
waves off Lake Michigan that occasionally bring in metal filing
cabinets and trunks with corpses, unearth a lot of bad
business.
This didn’t just start with Enron’s bankruptcy. Lucent
Technologies vaporized three Enrons worth of market value
between 1999 and 2001. Remember Nineties disaster stories Cendant,
Conseco, Waste Management, and Sunbeam? We’re still unearthing the
mess at former high-fliers WorldCom, Global Crossing, and Tyco
International. These all involved conduct ranging from negligence
to accounting irregularities to recklessness to fraud to criminal
behavior. If two of the biggest, best companies in history, GE and
IBM, are offering greater corporate disclosure in the wake of
criticism that they manipulated results to keep pleasing Wall
Street, who could possibly be immune?
Blame It on Lee Iacocca
Our culture has come to reward success so extravagantly, and punish
failure so swiftly, that a Bull Market is guaranteed to create
excessive behavior. And we got this way through the best motive:
the profit motive.
In 1979, Lee Iacocca became CEO of Chrysler. Bankruptcy was a
real possibility and Iacocca paid himself $1 per year (plus options
to buy millions of shares at its then-depressed price of $3 per
share). He saved the company, the stock skyrocketed, and cashing in
those options led to a dynastic fortune. No one who owned the stock
at the time could complain.
Michael Eisner, likewise, saved Disney after taking over
leadership in 1984, and made a nine-figure fortune for his efforts.
If CEOs didn’t get the hint that further riches were out there,
their critics practically forced them to take big hunks of
compensation in stock options. The corporate raiders of the era
claimed American corporations were stagnating because its managers
weren’t owners. The survivors of that period took options as a way
of telling investors “we’re all in the same boat.”
A Nation of (Short Attention Span) Investors
The Bull Market made all those CEOs rich, along with the growing
investing public. The rising stakes, however, made everybody
impatient. With more money pouring into the market, ever more
desperate to get in on the party, stocks rocketed on the
possibility of future growth, and plummeted even when companies
announced good results that were somehow not good
enough.
It wasn’t enough for the company to grow. It had to keep
growing, and keep growing a lot. This isn’t even possible once a
company reaches a certain size, but these CEOs and their managers
— for the money, for the acclaim, for the success — had to make
it happen — for the shareholders, for Wall Street. The game became
so sophisticated that CEOs learned to create lesser expectations,
only to have analysts develop a “consensus estimate” and a “whisper
number,” reflecting the predicted margin of exceeding
expectations.
Even the worst of these excesses were accomplished with a
certain amount of idealism. Ken Lay, I guarantee you, did not
think, when he walked past his receptionist, “I hope I can make her
retirement money disappear.” In just about every one of these
stories, you start with very smart people becoming very successful.
To perpetuate the success that our culture has turned into a drug,
they lose sight of the rules, as the results —immediate results —
become the focus. Sometimes, this means empowering liars or
becoming a liar. Other times, it involves creating an environment
conducive to corner-cutting or deceit. But it all came from the
same place: free markets, rewarding whatever makes money for
investors.
So what should we do about this? A lot less than Congress
thinks. It is unfortunate that a bad market reveals the excesses of
the good times and creates dislocations. But our system is the best
way imaginable to get good corporate leaders and encourage people
to provide the capital to keep growing American business. Maybe we
despise Ken Lay and Jeff Skilling, and aren’t thrilled that Lee
Iacocca and Michael Eisner continued to pull down nine-figure stock
option gains after they ceased providing shareholder value. But
where would Chrysler and its investors be — not to mention
hundreds of thousands of workers — without the 1979 model of
Iacocca? And where would Disney be without the first release of
Michael Eisner?
Sure, we have to punish the wrongdoers, get investors some of
their money back, and make big-company operations a little easier
to understand (something which, by the way, will not occur
as a result of all this attention). The best solution is for us to
regulate ourselves a little better, staying away from companies
with operations and stocks that seem to defy gravity, or which
claim to make money without exactly explaining how. More important,
we have to resist the urge to jump on the populist bandwagon
whenever Congress announces its scoundrel of the week. This is a
bad way to make laws, especially with a system that has many more
merits than excesses.
