The Corpocracy's Last Gasp

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In a recent supplement, The Wall Street Journal told the story of the young president of a Wall Street investment firm who walked into the offices of the chief executive of Tenneco Inc. and threatened to put the company into play if Tenneco didn't initiate a major corporate restructuring. Although the executive ignored the threat and Tenneco never became a takeover target, the vignette was used to highlight what the Journal saw as a profound and growing cultural clash between Wall Street's traders and raiders and Main Street's managers.

Indeed, hardly a week goes by now that a corporate takeover isn't announced by some raider who points an accusing finger at company managers for letting corporate performance decline while outfitting themselves with excessive bonuses, lavish perks, and golden parachutes. To hear it from the likes of Sir James Goldsmith or Ronald Perelman or the folks at Kohlberg Kravis Roberts, the raiders raid out of an abiding concern for the neglected shareholder and the future competitiveness of the U.S. economy.

For corporate executives, of course, this is the insult added to decades of injury inflicted by the truly greedy on the truly gifted. If it had not been for Wall Street's incessant demands, they complain, they might have been managing their companies for the long pull all these years rather than slavishly squeezing out meaningless increments of quarterly profits. Now the executives see these same Wall Street charlatans pulling down multimillion-dollar salaries by doing nothing other than speculating in paper and distracting them from the business of actually producing something of value.

I don't know about you, but I come away from this shouting match with the firm conviction that these folks richly deserve each other. For years they've conspired to feather each others' nests at the expense of stockholders, consumers, employees -- and eventually the entire nation. Now that the Japanese have proved a company can do very nicely without investment bankers and executive dining rooms, their cozy little scheme has been exposed. The ensuing squabble over the loot has turned rather nasty.

But listen carefully, for everything they say about one another is absolutely true. After all, who should know better about the inflated compensation of corporate executives than investment bankers who can pull in as much as $50 million or $100 million in a single year? And is anyone better qualified to comment on the coldhearted manipulations of Wall Street's traders and arbitrageurs than the corporate executives who spent the preceding decade buying and selling divisions, whose plants they've never visited, products they've never tried, and employees they have never met?

Even while they squabble in public, however, the two factions are quietly working their latest scam -- taking companies private. Under this scheme, the top executives of a public company, anxious to fend off a potential raid, and/or secure lifetime employment, and/or increase their personal wealth, offer to buy the company from its shareholders. The first thing they do is call in their Wall Street investment banker to "structure the deal" and arrange the debt financing. Then a second Wall Street firm is engaged and offered millions of dollars to issue an ambiguous one-sentence opinion saying that the price offered for the stock is fair. Stockholders, tempted by a 25% premium on their depressed shares, invariably fall for the line, and the leveraged buyout is consummated. Then, a year later, they read in the newspaper that the company has been broken up into pieces, and, in a series of deals, sold off for two or three times what they were paid for it. It's not too surprising that the sell-off is often arranged by one or both of the original investment-banking firms.

If a similar set of back-scratching transactions were to take place among the Teamsters, a mozzarella company, and a group of local pizza parlors, it would be called racketeering. In this case, it is called corporate restructuring, a perfectly legal activity that last year robbed the American economy of $173 billion in capital badly needed for modernization, product research and development, or customer service. Indeed, so dependent have corporate executives and Wall Street raider/traders become on each other that it would require a finely calibrated moral sensibility to determine which party occupies the higher moral ground. The differences between them are hardly worthy of distinction.

Take insider trading, for example. No sooner had Dennis Levine and Ivan Boesky been collared than dour-faced executives lined up before the cameras and business press to express their shock that illegal gambling was going on within the corporate establishment. And yet is there even one of these executives who had not himself bought and sold his own company's stock over the years on the basis of hundreds of bits of important and relevant information not available to the investing public -- information about market forecasts, imminent research breakthroughs, production problems, or likely personnel changes? In practice, none of that is considered inside information, and people who trade on it aren't prosecuted. It's only when you're stupid enough to buy or sell stock a few days before a quarterly financial statement is issued that they call it insider trading.

Greenmail is another one of those practices that generates a lot of righteous indignation. Under various proposals to outlaw greenmail, executives would no longer be able to buy off a raider by purchasing his shares of stock at a price not offered to all shareholders. But I have yet to hear anyone propose criminal sanctions in friendly takeovers for the successful raider who buys off the acquiescence of the target company with promises of cushy "retirement" packages for top executives. If there is a moral or economic distinction between greenmail and a golden handshake, it is not readily apparent.

It is precisely because of such ambiguities that these excesses of American capitalism will defy any quick cure. Greed, after all, is the grease of a free market economy, and any attempts to curb it by more aggressive government regulation are likely to prove ineffective, counterproductive, or both. Nor is it any more likely that these excesses would be curbed if the nation's business schools did a better job of teaching business ethics to their students. For it is not the neglect of business ethics that so marks the M.B.A. as the neglect of business itself. Managing people, improving production, marketing products, satisfying customers -- these are what successful company building has always been about. What unites the investment banker and the corporate chairman, the raider and the white knight, is the dedication with which they ignore these activities and the arrogance with which they dismiss the people who practice them. They are the antimanagers.

You don't have to look any farther than the names they pick for their reorganized corporate entities to understand how far the antimanagers have wandered from the real world of business -- the real Main Street. Allegis. Primerica. USX. Unisys. By their names you will know them as companies that have no histories and no long-term futures, that make no commitments to products, to places, or to people. They are names that reflect the levels of intellectual abstraction attained by the people who chose them.

Maybe it is the size of things that warps the mind of the corpocrat. In a world of billion-dollar deals and million-dollar legal fees and thousand-dollar lunches, one quickly learns not to think about money in terms of everyday human experience. Suddenly such values as thrift, loyalty, freedom, pride, even fairness have little or no meaning. Critics who mention them are to be dismissed as unsophisticated rubes.

You might suppose that these are people who started out arrogant and corrupt, but you would be wrong. For the most part, they are self-made men -- clever and ambitious but also weak enough to become addicted to the high of billion-dollar dealmaking. It is this addiction that explains why the investment banker bringing in $2 million a year risks going to jail for the chance at $3 million. And it is this addiction that drives the $100-million raider to put a healthy corporation at risk on the chance of reaching $125 million. Parking felons like Boyd Jefferies, pirates like Metromedia's John Kluge, even reporters like the Journal's R. Foster Winans can each be said to have been afflicted by this same disease.

It is symptomatic of the addict that he is unable to see or speak the truth of what he is about -- much the same way that an alcoholic denies his drinking. When T. Boone Pickens Jr. and Ivan Boesky write books about how they are going about the business of reinvigorating the American economy, the only people they fool are themselves. When Rockwell International Corp., the $12-billion defense contractor, takes out millions of dollars in advertising to proclaim that its managers have "entrepreneurial freedom," it is its managers the company is hoping to hoodwink, not its customers. And when Drexel Burnham Lambert launches a PR campaign to explain how junk bonds really allow growth companies "to purchase new plant and equipment, expand their research and development activities, increase employment . . . and productivity," one can't help but suspect that the good folks at Drexel doth protest too much.

The damage, however, goes beyond self-delusion, for there is something insidious about this hijacking of the language of entrepreneurship. It is a desperate attempt by the old economic order to disguise itself in the clothes of the new. And while the ruse is unlikely to succeed, it could well hamper the transition to a more competitive economy by turning public opinion against business and businesspeople of all stripes, including those who are genuinely interested in business, in management, and in enterprise.

There is a conflict brewing between Wall Street and Main Street -- but it is not the Main Street of corporate giants described daily in The Wall Street Journal. Along the real Main Street, executives concentrate on building companies rather than assembling them, and success comes to those companies that are highly motivated, not highly leveraged. When these Main Street managers talk of maximizing values, they speak of values in addition to money, and beneficiaries other than stockholders. Their belief is in a free market where competition is unfettered, not undisciplined.