September 2008
Trust, Democracy, and Capitalism
by Charles H. Green on Tuesday, January 30, 2007 (post #60)
One business page, Sunday NYTimes. Two articles. Two distinct visions of our future.
Andrew Sorkin’s “A Growing Aversion to Ticker Symbols” describes the seeming tsunami of private equity money creating a shadow economy, engulfing publicly traded stocks, escaping the scrutiny of Sarbanes Oxley and the SEC, and enabling CEO compensation even greater than we’ve seen in public companies:
As one buyout king put it over drinks… “If one of my C.E.O.’s made $100 million, I’d say that’s great because it means that we probably just made $2 billion.”
Licensed greed, free of oversight.
Or not?
In the same article, John Thain, the New York Stock Exchange’s CEO, reminds us that much of the big money in private equity lies in taking the companies back public again.
Viewed this way, private equity is simply the vehicle du jour for creating efficiency in the financial and asset markets. Take the old company out of circulation for a bit, do a turn in drydock, clean up the turbines, a new coat of paint, voila—new company. A public service.
Au contraire, says Ben Stein in "The Hard Rain That's Falling on Capitalism. A writer and literate comedian, he has standing as an economist. He came by it honestly; his father was chairman of the Council of Economic Advisors under the Nixon and Ford administrations.
Capitalism values people as individuals according to contract…not according to the status of our birth. This in itself is a miracle.
This miracle has been vibrant in the lives of hundreds of millions of Americans who have gone from nothing to something, thanks to the dynamics of capitalism. They have seen their pay rise and they have been able to convert their sweat and toil and creativity into capital by saving and investing in the stock market and becoming capitalists themselves — myself.
The system of capitalism is wide open. If you have an idea, you can turn it into capital.
But… in capitalism, the most fundamental building block is trust.
When I see what the top dogs at all too many corporations are now doing to that trust, I feel queasy. Outrageous — yes, obscene — pay. Greedy backdating of stock options, which in my opinion is straight-up theft. Managers buying assets from their trustors, the stockholders, at pennies on the dollar, then forestalling competing bids with lockups and insane breakup fees.
These misdeeds and many, many more are hammer blows at the granite foundation of trust we built in the 1940s and ’50s. How long democratic capitalism can survive these blows before it gives in and gives birth to revolution or to an out-and-out aristocracy, I am not sure.
Stein’s not alone. Professor Bruce Scott, of Harvard Business School, is in the final stages of a forthcoming book tentatively titled Capitalism and Democracy in a New World. He enthralled senior audiences at Harvard Business School’s reunion last fall. A great number of seasoned MBAs, it turns out, share Stein's sense that something is rotten in the State of Business.
Scott suggests we have succumbed to an exceedingly narrow application of the democratic concept of freedom—economic freedom. Capitalism, he suggests, is strangling democracy. Scott points to the same social tensions Stein mentions—the accelerating gap in wealth across the world.
Financial fine-tuning for fitness is salutary. A nation of laws is a wonderful thing. But a nation whose laws of financial fine-tuning are opaque, written by those with a bias toward more concentration of wealth, and even then brazenly violated, is not a nation whose capitalist system is any longer built on trust.
If capitalism’s best effort at an ethical pronouncement is, “hey, it wasn’t illegal,” then Stein is an optimist.
We can do better.
Charles H. Green, author of Trust-Based Selling and co-author of The Trusted Advisor, is a consultant and speaker on trust issues for some of the world's best companies. He has written about trust in business relationships at Trust Matters since 2006. Read more...
posted in Trust in Leadership Development and Strategy
The Epicurean Dealmaker said
http://epicureandealmaker.blogspot.com
Charilie — As you know, I am no apologist for private equity. As an industry, it is composed of people who exhibit the same range of human behavior and characteristics as any other, just with more money (at present). However, PE does serve a useful and important function in our economy, as you point out, by acting as the capitalists of last resort for companies that need to undergo radical restructuring. This type of restructuring is desperately hard to do in a publicly traded company, because (1) management have little motivation or incentive to take the flak they will generate from employees, unions, politicians, and the press and (2) the shareholders are too diverse and unfocused a bunch to hold management's feet to the fire. Private equity turns this on its head, because with a buyout you get managers highly motivated with both carrot and stick and tightly focused, demanding owners who make sure the necessary restructuring is done, and quickly. Sarbanes Oxley and the SEC are frankly half-measures, designed primarily to reduce outright fraud perpetrated on unsuspecting and unsophisticated retail investors. The real problem with publicly traded companies is that virtually all of the "owners" of the company (and hence nominal "bosses" of management) are completely disengaged free riders who have no interest in executing their rights and duties as stewards of their own capital. They figure someone else will handle it for them. Well, we have seen what happens then. Finally, I am afraid that many of the public company CEOs and managers who are so desperate to gain freedom and immense wealth by going private are going to get a rather nasty shock. It is one thing to patronize a bunch of ignorant and indifferent public shareholders once a quarter and an entirely different one to have Henry Kravis and his partners breathing down your neck every week. PE guys fire managers who do not deliver, and if you are fired you usually lose most of that lovely money you were counting on. Managers of private equity backed companies have to think and act like entrepreneurs, and I think we will all see just exactly how few of these eager beaver public company managers can really make the grade.
posted on Tuesday, January 30, 2007