The Investor

The Sweet Stench of Success

How bad were the Nineties?

By 3.3.02

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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.

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About the Author

Michael Craig is a writer in Scottsdale, Arizona.