Restoring Corporate Credibility

"How can companies regain credibility in the face of greed and corruption?," Reuters magazine wanted to know.

Good question. In 2002, dramatic ethical scandals rocked the business community and shook the very foundations of the free enterprise system. "Millions of people," as Reuters correspondent Alan Elsner put it , "have seen their retirement funds slashed, their savings decimated, their dreams trampled on...in the wake of the high-profile accounting scandals" and "the trend of executive impropriety."

Reuters asked Don Blohowiak of the Lead Well® Institute for his perspective and advice on how to "rebuild investor and employee confidence after such damning revelations."

Here is the transcript of ten tough questions from the magazine, and ten no-holds-barred responses from Don Blohowiak, for the piece, "Who's Sorry Now?," appearing in the November 2002 edition of Reuters magazine.

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Why the Bubble Burst

REUTERS: Where in your opinion does the blame lie for the development of the stock market bubble of the 1990s? Was it irresponsible government regulators, greedy small investors, CEOs obsessed with short-term stock performance, complacent accountants with conflicts of interest, compliant boards willing to go along meekly with whatever the CEO wanted, stock analysts in the pockets of companies, boosters in the media as personified by CNBC, or all of the above. How would you share out the blame between the various parties.

Don Blohowiak: The two fundamental causes underlying the market's severance from reality—before its inevitable and hard return to it—reflect no less than human nature itself, at least in a capitalist society.

The first fundamental force: frenzied hope and optimism over an unanticipated and profoundly promising business opportunity—the Internet "revolution." Remember, at the time virtually every pundit with a pulpit proclaimed that the Internet "changed everything." That euphoria spurred the second factor, a mix of our rawest, basest emotions: fear and greed. Incessant sirens from all quarters blared warnings to "Embrace the Internet or Die." Not surprisingly, everyone scrambled to even the flimsiest lifeboats hoping to ride the swelling wave and avoid obliteration by the forecasted techno-tsunami.

No one wanted to be left behind. Or, more accurately, everyone in business wanted to at least appear they would not be left behind. Old line companies rushed to erect evenly poorly functioning web sites to support their defensive-sounding claims that they were Internet-savvy.

Meanwhile, young upstart companies, with little more than a fuzzy high-tech sounding idea, or hiply inscrutable name, drew millions in venture funds or public offerings. Companies with no revenue, no product, no management—no nothin'—exploded in market capitalization that eclipsed well-established "old economy" stalwarts that lumbered through the capital markets lugging the unfortunate baggage of a decidedly unsexy history of slow growth, long-time customers, and steady profits. How passe!

The mass stampede over the dam of reason by nearly everyone in business released torrents of greed throughout society. It was as if we all simultaneously rushed to thrust an arm down the throat of the Golden Goose in a desperate attempt to grab every golden egg at once.

The problem, of course, was that both the high-tech goose and its eggs were no more reality-based than the fable that supplies this tortured metaphor. In December 1996, Alan Greenspan, the venerable chair of the U.S. Federal Reserve Board, termed the wildly escalating and baseless share prices as the product of "irrational exuberance."

Was Mr. Greenspan a curmudgeonly Luddite, or prophetic, or the one guy who had the sense to point to the naked emperor, or merely lucky in his characterization? No matter, he was right. Dead on. Given the momentum pushed by hope, optimism, fear, and greed, even unfounded share prices quickly and continuously inflated. Until they burst.

If there is an identifiable villain in this sad drama, he is us.

CEO Superstar

REUTERS: How far has the image of the CEO as hero and superstar been dented by the events of the past two years? Will the cult of personality return? How much of the success and failure of a company is bound up in the performance of the CEO? Has this been overrated?

Don Blohowiak: The Superstar CEO is a destructive myth fueled by—if I may now bite both hands that feed me—an eager business press looking to tell True Tales of Heroes & Villains, and the Executive Class trying to justify aberrant, to immoral, compensation packages.

Let's be blunt. The modern multinational corporation is too big and too complex for one person to control or magically rescue. Conversely, and more importantly, no organization is too large for an omnipotent individual to destroy. What I mean is this: One person cannot craft enough brilliant strategies, make enough inspired decisions, or change enough fundamental policies to single-handedly right a huge and listing ship. Or rebuild it at sea.

But one ego-intoxicated megalomaniac can, by the power foolishly vested in him, punch enough holes throughout the organization so that it sinks itself. Can you say, Albert J. Dunlap?

Centralized selfishness or stupidity, or heaven help us, both, magnifies, intensifies, and accelerates organizational self-destruction.

Commit this law to memory: Absolute power in one absolutely disempowers all others.

All that said, the CEO is hardly irrelevant. One competent person of vision and values with a commitment to building a healthy organization can wield tremendous influence and make an extraordinary contribution that evokes the word legacy.

Running a major corporation is not a solo sport, a platform for personal aggrandizement, or a means to instant wealth. The head of the table in a major corporation is a place of awesome responsibility best suited to individuals of competence, conscience, and perspective on the humbling limits to what anyone person can either control or contribute in our complex, interdependent world.

Executive Compensation

REUTERS: CEO compensation in the United States now averages 531 times that of the average worker. In 1980, it was only 41 times as high. Is this healthy? What would be a more realistic ratio? If the differential continues to rise, what might be the effects, if any, on worker morale and loyalty? If a CEO cuts the wages of the workforce, should he or she also cut their own compensation packages?

Don Blohowiak: It might surprise some readers but a great many front line workers, just like many investors, do not begrudge top executives their borderline-obscene compensation. There is only one catch: The suits in the C-Suite better deliver the goods, and all the attendant trickle-down-to-the-masses goodies, to justify their pay.

Unreal pay naturally yields unreal expectations. But here's the real problem: When you pay an executive an unjustifiable salary, he—they nearly all have external plumbing—feels he has to earn it! So what's wrong with that? The need to justify the boat loads of comp leads to unilateral behavior worthy of a Master of the Universe. And has nothing to do with teamwork, power distribution, deference to field managers, and the like.

This may have been best described by Jim Collins, author of "From Good to Great," who termed the heroic CEO phenomenon as "The Genius with a thousand helpers." The water-walking genius is the rarest exception and therefore cannot be the expectation. That is precisely why an entire industry has grown up around the mythology of GE's recently retired CEO Jack Welch. He has written exactly one book about himself—titled with humility, "Jack"—and inspired countless other tomes trying to capture his elusive elixir for management magic.

CEO pay, like investor expectations, eludes logic, common sense, and all defense. Especially those provisions that guarantee a no-lose deal worth millions.

Wouldn't we all love a comp package that goes like the CEO variety: Do great things, make millions; screw-up horribly, make millions—even if it costs thousands of fellow employees their livelihoods, and financially destroys millions of retirees and investors who had zero culpability in the company's decline.

One more thing. For all their trappings and power perqs, CEOs and their top lieutenants, doing the CEOs bidding and waiting for him to stumble just enough so they can ascend to the seat of supreme power, are merely employees. They're not gods, members of a special social class, or otherwise imbued with supramortal powers.

Profits, Loyalty, and Shareholders vs. Employees

REUTERS: How do companies plan for the long term in an age obsessed with short-term profits and results? How do they develop and train employees for the long term, retain employee loyalty and morale in an environment where workers fear termination at any moment for reasons unconnected with their performance? How do companies balance the needs of shareholders and of employees?

Don Blohowiak: These, of course, constitute the Holy Grail issues in contemporary business. In addressing them, we need to challenge the premises upon which they rest.

On Constant/Instant Profits 

It is not that companies cannot plan for the long-term, it is that management has impotently surrendered to hour-by-hour trader expectations for profits—not merely every year, or even every quarter, but every minute. This is an impossibly deep hole that managers and investors have unwittingly jointly dug themselves into. We need and will benefit from a time-out from this mad game we're all playing.

Managers and investors need to reset the board and re-state the rules. Or we'll all lose. Managers must honestly set expectations for likely performance results—which will likely vary in a dynamic world. Investors must adjust their expectations for both returns and valuations that simply cannot perpetually rise like rockets. Until the reality-check, which may be going on now, is complete, the revolving door to the C-Suite will continue to spin wildly, and drive investor returns that are erratic and sporadic.

Competent, Loyal Employees

The basic deal for most employees changed, as we all know, some two decades ago. Company executives should, therefore, stop the pretense that they offer stability and security in return for one-way loyalty. Employees know they are expendable; older workers have all been downsized—perhaps several times, and all the young workers have watched both mom and dad endure the kicked-off-the-payroll-for-no-good-reason nightmare.

Everyone should take a cue from professional sports, construction, and movie making. In those worlds people work hard and competently on a team or project with no illusion that it is anything close to permanent. People are selected for their roles based on their fit with the needs of the sponsoring organization—at this time. It is, of course, nothing but glib to prescribe such an assemble/disband model for large enterprises. But the wise organization will be one that is honest with itself and its prospective associates that it A) selects the best fitting talent for current needs, B) cannot promise sustained security. Therefore, the company C) suggests to its employees that they plan accordingly.

Adopting this approach will, over time, mean fundamental shifts in compensation, home ownership, health insurance and retirement benefits, competence training, and the like. We've already seen the rise in the U.S. of highly specialized temporary employment agencies handling everything from clerks to physicians to chief executives, and Professional Employer Organizations. PEOs employ workers only to lease them to another corporation for which they actually work full time—until they move on to another semi-permanent assignment.

Shareholders vs. Employees 

The interests of shareholders, the kind that actually hold a stock for more than a few minutes, are not at odds with employees. An enlightened shareholder recognizes that the health and viability of the company they own in part is inextricably tied to a competent and motivated workforce. To expect management to treat employees as fungible parts is folly because it is self-defeating.

Stock Analysts

REUTERS: Comment on the role of stock analysts post Enron and WorldCom. What has their role become and what should it be? Do they have a role?

Don Blohowiak: The too cozy, winkie-wink relationship between a brokerage's captive, in-house, analysts (read: promoters) and the investing public is one that ranges on a continuum between strained credulity and outright fraud.

A crude American aphorism captures investors demand of brokerage analysts: Don't pee on my shoe and tell me it's raining. There certainly is nothing wrong with the brokerage firm wanting to distinguish itself on its acumen for recommending profitable stock trading predicated on unique research, sharp analysis, and keen insight born of insider access.

At the same time, analysts should have zero financial interest in their employer's underwriting activity and should not be advisors to companies they, uh, independently evaluate.

Assessing Directors' Roles

REUTERS: Much has been written and spoken about giving more clout to boards of directors. Is this really feasible? Should there be limits on the number of directorships and individual should hold or rules regarding who could become a director? How do directors remain independent in the face of powerful and charismatic executives?

Don Blohowiak: "Corporate governance" and "outside auditor" have both become unfortunate oxymorons. Boards of directors do have an important, if often neglected, oversight and questioning role. Investors, especially large, powerful institutional ones, can and should insist that directors a) be truly independent representatives of shareholder interests, not merely country club cronies or marquee former government officials; b) not act as senior management's passive lap dogs, but rather devil's advocates, hiring managers, and if need be, executioners.

A parallel in the public sector: a judiciary charged with reviewing and ruling on the work of other government officials is neither credible nor useful if its only purpose is to proffer rubber stamp approvals so as to keep the pairings intact and pleasant on the links. Directors should expect to do the work of grownups.

As a general principle, there is nothing wrong with a director serving on multiple boards—and, arguably, exposure to more than one inner sanctum can help one bring broader and deeper perspective to each board assignment. The caveats: no conflict of interest, either on board assignments or significant distractions from other endeavors.

One CEO I knew was active on the boards of more than a dozen not-for-profits in addition to trying to run his multi-billion dollar enterprise. Was he overextended? Of course. And his company, which should have been his first priority, reflected his fragmented attention in the frustration of its confused and neglected division heads, and, ultimately, its anemic results.

Bottom line: the director must 1) be held accountable by shareholders (as a matter of principled practice, I always vote on my proxy to reject internal candidates for board posts); 2) earn his or her keep; and 3) not strive to please or bond with management.

Restoring Investor Trust

REUTERS: How deeply has the trust of ordinary investors in the stock market been shaken by the events of the last couple of years? How can it be put right and how long might this take?

Don Blohowiak: Fortunately, the memory of the public is nearly as short as its self-interest is deep. A couple of quarters of rising share prices and it will be, "I simply must shift more assets into the market! Pssst. What's hot?"

The Bush administration is fond of repeating the refrain that the fundamentals of the U.S. and broader Western economy are sound. They are correct. The languishing stock valuations are legitimately pressured by, what consultants love to call, "rationalization"—that is, the alignment between price and earnings, justifiable valuation, and most importantly, what real people call "the smell test."

Free markets, as anyone older than 35 should know, go through cycles. Dips are not crises; upswings are not permanent.

Old Habits & New Rules

REUTERS: What do you think of the new legislation on corporate governance recently signed by President Bush? Did it go too far in any of its provisions? Were there any notable omissions? How effective might it be in restoring confidence? How do you rate the Bush administration's performance in managing business affairs?

Don Blohowiak: True crooks are happy to break one or three or a thousand laws. So one could not craft a law, that a reasonable judge would enforce, that would stop the outright intentional fraud committed by someone determined to do it.

That said, the recently enacted law serves two useful purposes. First, it put consequences for corporate fraud into the headlines and made some (albeit modest) movement toward restoring investor confidence. Second, it makes every top official at a publicly held company think long and hard about the numbers.

And in gaining perspective on this issue, it is important to note that the egregious acts of fraud or irresponsible accounting were committed by but a handful of companies that we can all quickly name. It is not a problem of epidemic proportions and we should not be alarmist in reacting to it. The new law in the U.S., like all laws, falls short of a panacea, but it will help.

Defining Corporate Responsibility

REUTERS: How do you define the concept of corporate social responsibility? What should a corporation's core values be that drive its work both internally and externally? What part should corporations play in the community?

Don Blohowiak: Enlightened self-interest is a time-honored principle for injecting a broader sense of responsibility to "community" into an entity that, by definition, exists to serve itself. What is "community" to a large corporation? After all, history is littered with the sad stories of morally ambivalent corporations that, in times of war or social conflict, placed expansion and profits above principle and people—only to endure and prosper.

On a smaller, more local scale, what is the role of company in its immediate-to-its-operations communities? Is a company that buys uniforms for local youth athletic teams an integral part of the community? What if it buys them while either laying off the little competitors' Moms and Dads, or refusing to contribute to the drive to build a more modern hospital, or to help purchase land for a new park?

As an executive, one of my many responsibilities included making such decisions for my Fortune-500 employer (now defunct, I should add). The charities and causes begging for a bit of corporate benevolence lined up and extended as far as the eye could see and the heart could bear. I was not wise enough to discern the relative merits of all the apparently worthy causes. So I followed a very simple, philosophically satisfying (to at least our shareholders) rule: I authorized corporate largesse only when there was some, preferably demonstrable, return to the company from which I drew my salary.

My feeble reconciliation of this philosophical conundrum is one apparently shared widely. That is why it is easy to spot pharmaceutical and cosmetic companies sponsoring fund raisers for breast cancer research, or home repair chains sponsoring charities that build homes for the poor, and so on.

One thing worth noting on this issue: Well-meaning corporations can be too good a citizen thereby creating unhealthy dependencies in the towns where they operate. As of this writing, a good case in point is a legal wrangle between the trust that substantially owns Hershey, the chocolate and candy maker (and de facto owner of the town in Pennsylvania bearing the same, company founder's, name) and state government. Essentially, government officials are trying to force continued corporate generosity to a town and its charities by prohibiting a transfer of ownership in the company.

Personally, I could be persuaded that a corporation could make its best contribution to its communities if it were allowed to pay no taxes directly and made no direct contributions to causes. Rather, the company would pay its employees and shareholders more so those individuals could invest in their towns and the worthy causes of their choosing. Or, as many companies do now, pay their employees while they do do-gooding work, of their choosing. in their communities.

Companies have enough to do in order to compete in an intense market, please demanding customers, attract top talent, comply with well-founded regulations, and the like, all without assuming social roles outside their business expertise.

Back from the Future

REUTERS: When historians look back on the late 1990s before the market dive, what features do you think they will highlight above all? Will history treat us kindly or will we all be derided as greed-ridden fools who closed their eyes to the coming fall in blind pursuit of cheap personal profits?

Don Blohowiak: Social scientists should seriously study the forces that led otherwise intelligent people to pay ludicrous prices for shares of nascent, ill-conceived companies with little to no likelihood of success.

They'll likely find that logic and reason were trumped by runaway hopeful expectations of a great and far-reaching change in the social and economic landscape. (Redux: The Internet changes everything!) In obtuse, passive, and preposition-ladened phrases, they'll likely determine that wild enthusiastic speculation, slick commercial promotion, and fevered mob psychology all converged to shape those giddy, immature times of the late 1990s.

Perhaps some wag with the common touch will label them the Gay '90s. As for greed and foolishness, they were neither born nor buried in the late '90s of any century.

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