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GP16Feb05: It’s Not Carly’s Fault

“You have been weighed, you have been measured, and you have been found wanting.”  (From A Knight’s Tale [200].) 

Fallen Giants.  Once upon a time, when our hearts were young and gay, American Telephone and Telegraph Corporation, Hewlett-Packard Corporation, and International Business Machines Corporation were great companies that greatly contributed to the commonweal.  Not one of them is ten feet tall today, and the fact that their names have been shortened into meaninglessness (e.g., AT&T, H-P, and IBM) aptly symbolizes their decline into short-sighted, hapless midgets.  AT&T once provided affordable universal phone service that actually worked to all America and was home to the lab that invented America’s technological future.  Now the phones work worse and cost more.  AT&T is about to be chewed up for breakfast by one of its undistinguished offspring (i.e., SBC apparently will snare it for $16 billion).  IBM has forsaken its machine roots, having most recently peddled its personal computer unit to the Chinese and often lost ground in its mainframe and server business, in order to become a gigantic Arthur Andersen type consulting house, an outsourcer, and a semi-software colossus.  It no longer sets the direction of computing in the world.  H-P, once the emblem of all that’s good in engineering and research, now is a digital supermarket without a strategy that is probably headed towards breakup.  We must ask why America’s biggest and best have fallen into moral disrepair and economic disarray, no longer legacies to enrich our lives.  It’s a great sadness. 

Big Stories of the Week.  Two big stories hit the papers last week.  First came  the rapprochement between the new Palestinian leader, Mahmoud Abbas, and the very tough Ariel Sharon, prime minister of Israel, leading to a truce and the bare hope of lasting peace in this the worst battle in the Middle East’s enduring, hopeless, fratricidal psychodrama played out amongst all the tribes of the region.  Ariel and Abbas, posed at the abyss, have managed, as one-time Mayor of New York Ed Koch used to say, to “make nicey nicey” since their survival depends on it.  Two battle-hardened leaders have acted rationally and done the unexpected. 

We had that ray of hope for breakfast on Wednesday morning.  As if that were not enough news, Thursday brought us the forced resignation of chief executive Carleton S. Fiorina from H-P where the Board had long been trying to chip away at the free hand it had previously given her.  Marriage in the Middle East; divorce in Silicon Valley. 

On Wednesday and Thursday these were big enchiladas.  But if you look at the front pages of the Main, Business, or Week in Review sections of The New York Times on Sunday, you will find no mention of them.  Instead you will be treated to chatter about another expensive, tiresome Christo art escapade in Central Park; 67 frozen bodies in the tanks of Alcor Life Extension of Scottsdale which holds out the hope to us that someday Ted Williams and other stiffs will come back to haunt us Lazarus-style; or a tepidly witty essay on how wonderful it is that Camilla Parker Bowles finally got her man (Prince Charles).  It’s not that Carly and the two “A” leaders didn’t make it into the Sunday paper: they are just buried inside where they can be safely ignored. 

This is only worth mentioning, because it is proof positive that our media has a 24-hour attention span—at best.  The media is disconnected, no matter how wired.  We think this lack of focus might have a great deal to do with the decline of great companies and venerable institutions, of education, and of democracy.  No big story gets aired long enough and broadly enough for a citizenry to reach actionable conclusions.  The same attention deficit problem comes up in our legislatures which mistakenly feel that they’ve had a good day when they have created a stew of new laws.  In the nineteenth century we understood that their central task was really parliamentary inquiry—to bring light in to dark corners.  

A Short History of H-P.  Hewlett-Packard came about in the mythic Silicon Valley fashion.  A couple of engineers put it together in a garage, and it grew into a benevolent monopoly in the instrumentation business that also nurtured, along the way, a skillion research projects each tended by a covey of engineers who paid no heed to corporate needs or whatever else might be going on in the company.  This free-form R & D was all right until the company decided to become a factor in the computer business where it was only a minor league participant at which point it needed to get more bang out of its research.  Additionally, in businesses where it was small potatoes, it needed alliances outside the company in order to exchange ideas with other players who simply knew more.  However, it was hard for its engineers to work together and to go outside the front gates for wisdom, something we learned about when we were chatting with the R & D people there a couple of decades ago. 

Still and all, H-P managed to become a very profitable leader in the computer printer business and an also ran with possibilities in a number of other areas.  Five and one half years ago the board brought in Mrs. Fiorina from AT&T/Lucent, where she had been a marketing star, to make sense of the whole mess.  What she did was to confuse things yet more and  purchase  troubled  personal computer maker Compaq from then-CEO Capellas, who today is trying to sell some equally dicey merchandise (MCI) to the highest bidder (Verizon) in the telecommunications game.  She bet her career on the Compaq acquisition, much against the wishes of family members of the Hewlett-Packard dynasty who knew that a sound strategy rather than flawed acquisitions would create value and save the company’s soul.  Very soon after her hiring, smarties around the Valley  told us that H-P had lost its way, perhaps forever. 

The board, incidentally, thinks H-P’s problems stem from Mrs. Fiorinia’s weak operating style, not from the lack of a real strategy.  In fact, the new chairwoman, Patricia C. Dunn, the head of Barclay Global Investors, believes that the company will stay the course with its present strategy, whatever that is, and maybe even make another acquisition or two. One would question whether an asset manager, no matter how clever, could possibly have either the acumen or instincts to guide a global technological enterprise, and her pronouncements so far lend little comfort.  As Pogo might say, the board has not grasped that it has met the problem, and “it is us.” 

What Went Wrong.  Six years ago, maybe even decades ago, H-P had the wrong board and the wrong governance process.  Mrs. Fiorina, though obviously hugely talented, had not been properly groomed for a major chief executive slot.  And a smart board would not, in any event, have picked somebody out of AT&T.  As we like to say in our game, Ma Bell had the wrong gene pool and it had been blighted by all sorts of mediocrity at the top.  H-P might have gone to a GE or some other giant blessed with management depth and proven capability for getting on with the right issues.  With de-regulation and less than evenhanded treatment by the federal government, AT&T long before had lost its stride, and it has never recovered.  A fallen giant is not where you go to find a CEO that can reshape a wonderful technology company around the realities of a global marketplace.  It did not help, of course, that the board did not have the remotest idea of where H-P should be headed.  

None of this insight into the real story has come out in the long but superficial 24-hour journalism that has followed on the demise of Mrs. Fiorina.  Though the press and the pols mostly think corporate governance is simply a ritual of purification and a rule-following mandate for boards and senior executives, it has a broader, vastly more important meaning.  Today it is the process by which companies come to grips with a brutally competitive, out-of-control global marketplace, a free-for-all which all our pundits should be exploring and facing up to.  Transparency is not the problem; horsesense about the way of the world is.  What we require of boards is not a makeshift adaptation to the present but a determined push into the global future. This governance is lacking at AT&T, H-P, IBM, and many more. 

The Failure of Sarbanes-Oxley.  Instructive here is the utter failure of Sarbanes-Oxley, a terribly mistaken piece of corporate governance legislation signed into law on July 30, 2002.  We won’t belabor all the things that are wrong with it both conceptually and in the details.  It was enacted by a venal, unknowledgeable Congress whose own house is terribly out of order, both ethically and financially.  For instance, if the federal government published responsible financial statements, it would take into account its humongous unfunded liabilities in both Social Security and Medicare and then declare itself broke.  But legislators on both sides of the aisle have instead suppressed  reports on this gargantuan dilemma. 

The act itself should  more properly be called the “Lawyer and Accountant Enrichment and Employment Act of 2002,” since it has created a whole new parasitic industry around corporate compliance, gigantically expanding corporate expenditures for accounting, legal, etc.  We would remind readers that many instances of corporate fraud and worse stem from neglect or complicity on the part of accountants and lawyers.  The new legislation merely gives these foxes easier access to the henhouse.  For your amusement, you can read about this in “404 Tonnes of Paper,” Economist, December 16, 2004.   

The consequences of this wasteful, alibi paper exercise are countless.  Several private companies have decided not to go public, and several that are public plan to disappear.  Board members are spending most of their time on CYA (Cover Your Abdomen), making sure they avoid law suits, rather than tending to the future of the company.  Far from increasing the flow of information into the financial markets, scared corporations hemmed in by their lawyers are saying less than ever before, pulling down the curtains over their operations.  We know of several worthy businessmen who simply won’t serve on public boards.  Europeans and Asians are beginning to shy away from America’s once-vibrant capital markets, since the registration requirements are deemed too onerous.  In “Goodbye, Farewell, Auf Wiedersehen, Adieu….” (Wall Street Journal, February 9, 2005), attorney Daniel Epstein opines that something has to change: 

Whatever proposals are made, they will be aimed not at  accommodating the demands of European companies to get out, but at persuading issuers in developing markets—China, Russia, and Latin America—that it is safe to get in. 

We would argue that corporate governance clearly is not working right.  Sarbanes-Oxley, adding yet more problems, has been a horrible distraction that is mainly putting a damper on our capital markets, inflating capital costs, and, importantly, immensely driving up compliance costs without making the world any safer for investors.  It is ill-founded because it legislates silly process instead of tackling goals.  It trains board members to spend their life avoiding negatives rather than creating positives. 

It only takes bad governance by a few inept people at the top to run down a treasured asset of a fine company or empty the national treasury of a wealthy country.  That is why so many of finest companies and institutions are coming up short.  Odds are that even good business leaders will lose the corporate jewels in an atmosphere tainted by bad laws and poisonous politics. 

Global Governance.  We cannot here come to grips in this brief letter with how to  redirect corporations at the board level, so that our giants don’t shrivel and die just when we need them most.  A starter would be to realize that most of our companies today lack a strategy and know that we have to do something about that.  Maybe board members need some rigorous formal training in strategy formulation, in risk evaluation, and in senior management recruitment and development—issues we ourselves first began working on for boards of directors in the 1970s.  Our legislatures probably need to make clear what has always been implicit in the act of incorporation.  The corporation or joint stock company exists at the pleasure of the state with the understanding that the corporation owes as much fealty to the commonweal as its investors.  In fact, a corporation cannot be great if it cannot serve the community as well as it tries to serve its investors.  That is clearly not understood today, particularly by the herd in Wall Street. 

The Missing Global Compact.  Broadly relevant here is a lecture called “Taking Embedded Liberalism Global: The Corporate Connection,” given at the London School of Economics on June 6, 2002, and delivered by John Gerard Ruggie, now at Harvard’s Kennedy School and before a longtime aide to Kofi Annan at the UN. (See www.lse.ac.uk/
collections/globalDimensions/globalisation/takingEmbeddedLiberalism/Default.htm).  Ruggie reminisces:  

Twenty years ago I published a scholarly article that introduced the concept of embedded liberalism.  It told the story of how the capitalist countries learned to combine the efficiency of markets with the broader values of community that socially sustainable markets themselves require in order to survive and thrive.   

But then he brings us into the grim aspects of the present day:  

Because embedded liberalism presupposed an international world; we have come to live in a global world.  It presupposed the existence of national economies, engaged in external transactions, conducted at arms length, which governments could mediate at the border by tariffs and exchange rates, among other tools.  But markets have gone global, threatening to leave behind merely national social bargains.  …  Devising new institutional forms for “embedding” global markets in shared social purposes is a monumental challenge. 

Ruggie, not unexpectedly, is woolly about how we spread decent communitarianism throughout the globe.  It is not at all clear how we get the Chinese or Indians to take up reasonable health and environmental standards that would narrow the perceived cost gap of producing wares or services there versus crafting them at home in the advanced countries of the West.  Uneven social standards throughout the global economy have upset the rules of the game, slain the AT&T’s and IBM’s that are accustomed to regulated marketplaces, and overwhelmed boards that never even dealt that well with national markets.  These boards have been improvising policy as they go, and built corporate castles on quicksand. 

It’s here where our legislators and governors should be spending their time.  Fixing the global marketplace to put a context around unfettered capitalism.  Companies won’t get it right, til governments do.  Global political stability is the sine qua non of better functioning companies.  Our leaders  must find ways to strike bargains with our economic competitors that amount to a global compact corporations can use to orient themselves as they try to do good while doing well.  Then some corporate board members might begin to do their job.  

Carly’s Refrain.  Another Carly, Carly Simon, wrote the background music for the movie Working Girl. Maybe she was singin’ to Mrs. Fiorina.  She offers up a song called “Let the River Run” in which she poses the aspirations felt by all young men and women in this America: 

Let the river run,
let all the dreamers
wake the nation.
Come, the New Jerusalem…. 

For our governors, the problem is not to spoil the dream for those who are next. 

P.S.  Warren Buffett of Berkshire Hathaway is greatly concerned about misgovernance,  a subject he treated at length in his last annual report.  Read about this and globalism in our last Annual Report on Annual Reports 2004.

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