Monday, June 20, 2005

Why Do They Do It?
The news this evening made a great deal of fuss this evening about the convictions and sentencing of the Rigas, pere and son. These are the guys that once owned Adelphia Communications, a cable television empire, and looted their company to the tune of about 1 billion (with a B) dollars. Mr. Rigas, Sr. faces 20 years in the slammer, unless old age (he's 80) or his cancer, kills him first. Mr. Rigas, Jr. faces 30 years in prison.

The sentences brought about a great deal of speculation vis-a-vis Mr. Bernie Ebbers, the former CEO of World-Com, who faces his sentencing next week. If the judge in this case was not willing to show mercy to an 80 year old man, the thinking goes, then Ebbers is in a heap of trouble. World-Com, by the way, was an 11 Billion dollar boondoggle. Additional speculation related to Dennis Kozlowski (Global Crossing) and what he might face when he gets in front of a judge.

The whole situation of runaway CEO's, the huge amounts of money they seem to either borrow without promise of repayment from their companies, or waste on the mere accumulation of useless wealth, leads one to ask what at first blush to be commonsense questionsHow do guys who are supposed to be financial geniuses manage to get themselves into these situations? I mean, don't they already make a ton of money as a CEO? What leads them to loot the corporate coffers with such reckless abandon and why do their individual boards of directors allow them to get away with it?

As to why, my theory is that in this day and age, wealth by itself no longer confers any distinction. I read recently (I can recall if it was Forbes or Fortune) that the number of millionaires in the United States has doubled in the last 10 years. Once upon a time, having a million dollars in the bank was considered a big deal. Now that just about anyone can do it, it's not all that exclusive a club anymore. Ego dictates that since you cannot impress with wealth, you now have to impress with ostentatious displays of wealth. The Enron crowd, Kozlowski, the Rigas, et. al., all have multiple homes in the most tony neighborhoods (Georgetown, the Upper West Side, Aspen, Malibu, etc). They all have private jets. I'm sure they all have more automobiles and yachts than they could ever hope to drive or sail. Mere possessions no longer work as a measure of distinction. Now the idea is to have something no one else has.

So, the Rigas built themselves 18-hole golf courses on their properties. Kozlowski got himself an $8,000 shower curtain or somesuch nonsense, and a $16,000 umbrella stand, not to mention the $2 million toga party he threw for his wife at Caesar's Palace in Las Vegas. If it can be overdone or overblown, then rest assured, it will be. Penis envy writ large.

And who pays for it? Certainly not the guy who wants it. He can simply raid his corporation and because he's a "genius", no one will question him, or press him very hard to pay it back. The shareholder is shafted so that the CEO can have platinum-plated toilet seats, and a full-time ass wiper in his 4,300 square foot, italian marbled, centrally heated, bathroom. The one on the EAST side of the 40 room mansion.

This lead me to start wondering about something else that seems to bother the financial world greatly to the point of becoming a very dangerous fixation: the fascination with corporate earnings. Now, earnings, naturally, have value as a measure of the profitability of company, which invites other investors, which attracts customers, and so on and so on, as they taught us in Economics 101. In that sense, the better the earnings, the better the company. However, when you stop to consider that the number of millionaires is doubling every few years, it brings up a very interesting proposition (and I hope someone actually does some research on it, because it's beyond my tiny brain). We live in an investor society now. Fifty years ago, when perhaps 1 in 80 people had any interest in the stock market, earnings, while important, did not mean all that much (comparatively). The only people that were going to get paid dividends were that 1 in 80, and they were happy with what they got. Nowadays, when 1 in 10 people actually own stock, those original 1 in 80 are quite pissed. They just don't quite make what they used to, having to split it with the peasants, so to speak. The only way to keep the big investors happy is to increase earnings, which gives a bigger return per individual investor.

All of which leads to some very stupid business decisions, prime among them, giving the guy who pumped those earnings up the ability to steal. That's his reward for keeping the old money happy. And what does he do with it? He buys a $16,000 umbrellas stand or gets himself sentenced to 30 years in prison when he's caught juggling the books to artificially keep those earnings up. The CEO also (not always) receives a large portion of his compensation in stock options (meaning he's also looking for the biggest return he can get) and gives him an additional incentive to steal and cheat.

What's the solution? Heck if I know. But I'd line 'em up and shoot 'em. After the concrete enema.

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