Michael Medved and The 5 Big Lies About American Business (part 4)
Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
[Continued from Lie #2: When the Rich Get Richer, the Poor Get Poorer.]
Lie #3: Business Executives are Overpaid and Corrupt
Companies that refute the Lie: Amazon.com, Inc. (NASDAQ: AMZN), The Boeing Company (NYSE: BA), Costco Wholesale Corporation (NASDAQ: COST), Terra Industries (NYSE:TRA.DL)
Movie that challenges the Lie: Meet Joe Black (1998)
Forget corporate social responsibility, nowadays there are whole investment firms (profitable firms!) that predicate their entire strategies on measures of CEO integrity. A favorite among them has been retired Costco CEO and President Jim Sinegal who last year while making his final tour of the warehouses became so uncomfortable and frustrated at being approached by so many besotted fans (employees and members) clamoring for autographs and pictures that he retreated to the employee lounge and engrossed himself in a sports broadcast until the throngs subsided enough for him to get back to assessing end caps, and evaluating other minutia that is so integral to what he always referred to as “the treasure hunt”.
While Sinegal’s passion for retail is famous worldwide, and he is often perceived at ease with media and public venues, he is still old school and not particularly infatuated with the raw emotion usually reserved for rock stars and Hollywood celebrities – which of course just fans the flames of people with corporate crushes.
Though only in his mid-seventies (and only a millionaire), Sinegal’s apprehension and surprise at the public send off he received is reminiscent of perhaps the only movie to ever honor a billionaire, Meet Joe Black. In the closing scene, the media mogul portrayed by Anthony Hopkins asks, “Should I be afraid [of dying]?” To which Brad Pitt’s Death character replies, “Not a man like you.”
Michael Medved asserts in his book that someone like Jim Sinegal, though clearly one of the more outstanding leaders today, is more common than is reported. In fact, it is the media’s focus on sensationalism that wildly distorts perceptions of the high level of moral fiber that heads up most firms. Even in cases like Tyco (which ultimately proved that the system works), there is strong reason to believe that the fundamentals of most companies are sound and there are more mechanisms than in most institutions which correct for poor leadership:
Even in matters of intimate integrity, major corporations make far more rigorous demands on their leaders than the worlds of politics and media. During the Bill Clinton impeachment crisis of 1998-99, a common Republican mantra suggested that no corporate CEO could have survived revelations (and public lies) about a long-term dalliance with a youthful intern. In fact, less than six years later, the chief executive of one of the nation’s largest companies lost his position because an investigation by the corporate board produced evidence of an affair. At Boeing, CEO Harry Stonecipher (married and with grown children) resigned after admitting a romantic involvement with a female executive. In less than three years (2003–05) Stonecipher’s leadership had turned the company around, bringing an impressive 50 percent increase in the aircraft giant’s stock price, but the board still demanded that he leave “because of actions inconsistent with Boeing’s code of conduct, which reflected poorly on his judgment and would impair his ability to lead going forward.” According to Cai von Rumohr, an analyst with SG Cowen Securities Corporation in Boston, “Under the circumstances, the person who heads Boeing has to be Mr. Clean. Basically the firing was done to restore the company’s credibility.”
Nell Minow, one of America’s leading experts on corporate governance, has said that “investment bankers are the geishas of the financial world,” and blames “compensation committees 100% for the high pay for bad performance scandals.” Her solution is to replace the bad directors (possibly with an independent consulting firm that selects directors that are not part of a CEOs circle and independent of their approval.) Medved sees this as just one more market mechanism that makes business one of the most dyanamic institutions in modern society:
Fortunately, many other bosses offer a wholesome contrast to the well-publicized instances of lavish pay for poor performance. Since 2002, Forbes has compiled an annual scorecard of performance versus pay to select those executives whose achievements represent the most conspicuous bargains for investors. At the top of this “Most Valuable Bosses” list for 2009 was Michael L. Bennett of Terra Industries, a chemical company specializing in nitrogen compounds. Over the last six years, he delivered an eye-popping annual return to shareholders of 64 percent. His payment during that period of spectacular growth averaged a relatively modest $3.5 million (including salary and other benefits). Another example of an apparently underpaid executive is Jeff Bezos of Amazon.com, who has generated an annualized total return during his career with the company of 40 percent. During the last six years, however, he took total annual compensation of “only” a million dollars a year. Since he also owns 24 percent of Amazon stock, it’s probably inappropriate to feel pity for Bezos, who still places 110th on the Forbes list of world billionaires.
When asked if businessmen are corrupt and overpaid, Medved responds:
Of course. Are businessmen corrupt and overpaid? Some are, but compared to other fields of endeavor? Are there academics that are corrupt and overpaid? Are you kidding? Are there lawyers that are corrupt and overpaid? Are there baseball players or football players that are corrupt and overpaid? I mean anyone who follows professional sports – we’re stuck paying [Seattle Mariners baseball player] Chone Figgins $12 million a year…
Realistically, people don’t make lists of what percentage of people are corrupt and overpaid, but I think there are more corrective mechanisms in business. Another example that has gotten a lot of press recently that I wish I had included in my book is teaching. There are so many teachers that you can’t get rid of because of the union, but continue to draw their salary and do their job despite the fact they are no damn good. At least in the world of business there is usually a way of flushing somebody like that out.
When Davis Guggenheim, director of the acclaimed documentary on America’s education problems, Waiting for Superman (2010), was interviewed on Medved’s radio show, Guggenheim cited the startling statistic that, “1 in 57 doctors loses his or her medical license, and 1 in 97 attorneys loses his or her law license, but only 1 teacher in 2,500 has ever lost his or her credentials.” Ultimately, Medved sums up the crucial force behind compensation and virtue in private endeavors:
The truth of the matter is that if you think someone is corrupt and overpaid, please don’t do business with them, and you have the opportunity to not do business with them. You don’t really have the opportunity to not do business with the Department of Internal Revenue.
[Continued in Lie #4: Big Business is Bad, Small Business is Good.]
Motley Fool newsletter services recommend Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. hukgon has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.