Money for Nothing: How CEOs and Boards Enrich Themselves While Bankrupting America - Hardcover

Gillespie, John; Zweig, David

Hardcover

ISBN 10: 1416559930 ISBN 13: 9781416559931

Publisher: Free Press, 2010

Synopsis

A Bank of America director questioned the CEO's $76 million pay package in a year when the bank was laying off 12,600 workers and found herself dropped from the board without notice a few months later.

According to their employment agreements -- approved by boards -- 96 percent of large company CEOs have guarantees that do not allow them to be fired "for cause" for unsatisfactory performance, which means they can walk away with huge payouts, and 49 percent cannot be fired even for breaking the law by failing in their fiduciary duties to shareholders.

The General Motors board gave CEO Rick Wagoner a 64 percent pay raise -- to $15.7 million -- in 2007, when the company lost $38.7 billion. The company went bankrupt two years later at a cost of $52 billion to shareholders and another $13.4 billion to all taxpayers.

If you own stock -- and 57 million U.S. households do -- every cent of these outrages comes out of your pocket, thanks to boards of directors who are supposed to represent your interests. Every customer, employee, and taxpayer is also being hurt and American business is being imperiled. In the most recent economic collapse, almost all attention has focused on the greed, recklessness, or incompetence of CEOs rather than the negligence of boards, who ought to be held equally, if not more, accountable because the CEOs theoretically work for them. But the world of boards has become an entrenched insiders' club -- virtually free of accountability or personal liability. Too often, corporate boards act as enabling lapdogs rather than trustworthy watchdogs, costing us trillions.

Money for Nothing exposes the glaring flaws in this dysfunctional system, including directors who are selected by the CEOs they are meant to hold accountable; compensation consultants who legitimize outrageous pay; accountants and attorneys who see no evil; legal vote buying; rampant conflicts of interest; and much more.

Using their extensive original reporting and interviews with high-level insiders, John Gillespie and David Zweig -- both Harvard MBAs with thirty-plus years of Fortune 100 experience at investment banks and media companies -- expose what happened, or failed to happen, in the boardrooms of companies such as Lehman Brothers, General Motors, Bear Stearns, and Countrywide and how it has resulted in so much financial devastation. They reveal how the byzantine yet indestructible web of power and money has brought on collapse after collapse, with fig-leaf reforms that feebly anticipate last year's scandal, but never next year's.

Money for Nothing shows how the game is played, and how you can help to demand real change in a badly broken system.

About this title

About the Author:

John Gillespie was an investment banker for eighteen years with Lehman Brothers, Morgan Stanley, and Bear Stearns and was the CFO of a nationwide health care company with 24,000 employees. He is married to New Yorker writer Susan Orlean.

David Zweig has worked at Time Inc. and Dow Jones and co-founded Salon.com. He was most recently senior editor of the World Business Academy, an international research and education institute dedicated to promoting responsibility in business. He currently consults on improving the performance of executive groups.

Excerpt. © Reprinted by permission. All rights reserved.:

1
Out of Control

THIS IS WHAT HAPPENS when a corporate giant collapses and dies.

All eyes are on the CEO, who has gone without sleep for several days while desperately scrambling to pull a rabbit out of an empty hat. Staffers, lawyers, advisors, accountants, and consultants scurry around the company headquarters with news and rumors: the stock price fell 20 percent in the last hour, another of the private equity firms considering a bid has pulled out, stock traders are passing on obscene jokes about the company’s impending death, the sovereign wealth fund that agreed to put in $1 billion last fall is screaming at the CFO, hedge fund shorts are whispering that the commercial paper dealers won’t renew the debt tomorrow, the Treasury and the Fed aren’t returning the CEO’s calls about bailout money, six satellite trucks—no, seven now—are parked in front of the building, and reporters with camera crews are ambushing any passing employee for sound bites about the prospects of losing their jobs.

Chaos.

In the midst of this, the board of directors—the supposedly well-informed, responsible, experienced, accountable group of leaders elected by the shareholders, who are legally and ethi-cally required to protect the thousands of people who own the company—are . . . where? You would expect to them to be at the center of the action, but they are merely spectators with great seats. Some huddle together over a computer screen in a corner of the boardroom, watching cable news feeds and stock market reports that amplify the company’s death rattles around the world; others sit beside a speakerphone, giving updates to board colleagues who couldn’t make it in person. Meetings are scheduled, canceled, and rescheduled as the directors wait, hoping for good news but anticipating the worst.

The atmosphere is a little like that of a family waiting room outside an intensive care unit—a quiet, intense churning of dread and resignation. There will be some reminiscing about how well things seemed to be going not so long ago, some private recriminations about questions never asked or risks poorly understood, a general feeling of helplessness, a touch of anger at the senior executives for letting it come to this, and anticipation of the embarrassment they’ll feel when people whisper about them at the club. Surprisingly, though, there’s not a lot of fear. Few of the directors are likely to have a significant part of their wealth tied up in the company; legal precedents and insurance policies insulate them from personal liability. Between 1980 and 2006, there were only thirteen cases in which outside directors—almost all, other than Enron and WorldCom, for tiny companies—had to settle shareholder lawsuits with their own money. (Ten of the Enron outside directors who settled—without admitting wrongdoing—paid only 10 percent of their prior net gains from selling Enron stock; eight other directors paid nothing. A number of them have remained on other boards.) More significant, the CEO who over shadowed the board will hardly hurt at all, and will probably leave with the tens or even hundreds of millions of dollars that the directors guaranteed in an employment contract.

So they sit and wait—the board of directors of this giant company, who were charged with steering it along the road to profit and prosperity. In the middle of the biggest crisis in the life of the company, they are essentially backseat passengers. The controls, which they never truly used, are of no help as the company hurtles over a cliff, taking with it the directors’ reputations and the shareholders’ money. What they are waiting for is the dull thud signaling the end: a final meeting with the lawyers and investment bankers, and at last, the formality of signing the corporate death certificate—a bankruptcy filing, a forced sale for cents on the dollar, or a government takeover that wipes out the shareholders. The CEO and the lawyers, as usual, will tell the directors what they must do.

THIS IS NOT JUST A GLOOMY, hypothetical fable about how an American business might possibly fail, with investors unprotected, company value squandered, and the governance of enormous and important companies breaking down. This is, unfortunately, a real scenario that has been repeated time and again during the recent economic meltdown, as companies have exploded like a string of one-inch firecrackers. When the spark runs up the spine of the tangled, interconnected fuses, they blow up one by one.

Something is wrong here. As Warren Buffett observed in his 2008 letter to Berkshire Hathaway shareholders, “You only learn who has been swimming naked when the tide goes out—and what we are witnessing at some of our largest financial institutions is an ugly sight.”

Just look at some of the uglier sights. Merrill Lynch, General Motors, and Lehman Brothers, three stalwart American companies, are only a few examples of corporate collapses in which shareholders were burned. The sleepy complicity and carelessness of their boards have been especially devastating. Yet almost all the public attention has focused on the greed or recklessness or incompetence of the CEOs rather than the negligence of the directors who were supposed to protect the shareholders and who ought to be held equally, if not more, accountable because the CEOs theoretically work for them.

Why have boards of directors escaped blame? Probably because boards are opaque entities to most people, even to many corporate executives and institutional investors. Individual shareholders, who might have small positions in a number of companies, know very little about who these board members are and what they are supposed to be doing. Their names appear on the generic, straight-to-the-wastebasket proxy forms that shareholders receive; beyond that, they’re ciphers. Directors rarely talk in public, maintaining a code of silence and confidentiality; communications with shareholders and journalists are invariably delegated to corporate PR or investor relations departments. They are protected by a vast array of lawyers, auditors, investment bankers, and other professional services gatekeepers who keep them out of trouble for a price. At most, shareholders might catch a glimpse of the nonexecutive board members if they bother to attend the annual meeting. Boards work behind closed doors, leave few footprints, and maintain an aura of power and prestige symbolized by the grand and imposing boardrooms found in most large companies. Much of this lack of transparency is deliberate because it reduces accountability and permits a kind of Wizard of Oz “pay no attention to the man behind the curtain” effect. (It is very likely to be a man. Only 15.2 percent of the directors of our five hundred largest companies are women.) The opacity also serves to hide a key problem: despite many directors being intelligent, experienced, well-qualified, and decent people who are tough in other aspects of their professional lives, too many of them become meek, collegial cheerleaders when they enter the boardroom. They fail to represent shareholders’ interests because they are beholden to the CEOs who brought them aboard. It’s a dangerous arrangement.

On behalf of the shareholders who actually own the company and are risking their money in anticipation of a commensurate return on their investments, boards are elected to monitor, advise, and direct the managers hired to run the company. They have a fiduciary duty to protect the interests of shareholders. Yet, too often, boards have become enabling lapdogs rather than trust-worthy watchdogs and guides.

There are, unfortunately, dozens of cases to choose from to illustrate the seriousness of the situation. Merrill, GM, and Lehman are instructive because they were companies no one could imagine failing, although, in truth, they fostered such dysfunctional and conflicted corporate leadership that their collapses should have been foretold. As you read their obituaries, viewer discretion is advised. You should think of the money paid to the executives and directors, as well as the losses in stock value, not as the company’s money, as it is so often portrayed in news accounts, but as your money—because it is, in fact, coming from your mutual funds, your 401(k)s, your insurance premiums, your savings account interest, your mortgage rates, your paychecks, and your costs for goods and services. Also, think of the impact on ordinary people losing their retirement savings, their jobs, their homes, or even just the bank or factory or car dealership in their towns. Then add the trillions of taxpayers’ dollars spent to prop up some of the companies’ remains and, finally, consider the legacy of debt we’re leaving for the next generation.

———

DURING MOST OF HIS nearly six years at the top of Merrill Lynch, Stanley O’Neal simultaneously held the titles of chairman, CEO, and president. He required such a high degree of loyalty that insiders referred to his senior staff as the Taliban. O’Neal had hand-picked eight of the firm’s ten outside board members. One of them, John Finnegan, had been a friend of O’Neal’s for more than twenty years and had worked with him in the General Motors treasury department; he headed Merrill’s compensation committee, which set O’Neal’s pay. Another director on the committee was Alberto Cribiore, a private equity executive who had once tried to hire O’Neal.

Executives who worked closely with O’Neal say that he was ruthless in silencing opposition within Merrill and singleminded in seeking to beat Goldman Sachs in its profitability and Lehman Brothers in the risky business of packaging and selling mortgage-backed securities. “The board had absolutely no idea how much of this risky stuff was actually on the books; it multiplied so fast,” one O’Neal colleague said. The co...

About this edition

• Publisher: Free Press
• Publication date: 2010
• ISBN 10: 1416559930
• ISBN 13: 9781416559931
• Binding: Hardcover
• Number of pages: 320