Leadership Lessons from a Dead Socialist

Leading in the New Millennium: Pay for (Lack of) Performance

“It is difficult to get a man to understand something when his salary depends upon his not understanding it.” – Upton Sinclair

Although Sinclair’s words were uttered in 1935, they ring especially true when applied to the leadership void we face today. While Sinclair, a socialist, didn’t speak these words to decry the inattentive state of management during the Great Depression, his words speak volumes when applied to the CEOs, boards of directors, and other executives of the failed and failing businesses of this Great Recession.

We’re still a few months away from the first of many Lehman Perp Walks, though it’s important to note we believe that Sinclair’s quote can be equally applied to the senior leadership of Lehman as it could to the senior team at Enron.  

Enron and Lehman: Two Peas in a Pod

Let’s compare Ken Lay and Dick Fuld – two monosyllabic managers with their eyes on their own bank accounts and little regard for their employees or their shareholders.

Enron’s Lay claimed he had no responsibility for and little understanding of the risky and illegal ventures of his management team that bankrupted the giant company.

“It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

Assuming Lay was telling the truth when he feigned ignorance regarding the schemes that brought down Enron, it’s easy to assume that he did not want to understand – he was making too much money in his ignorance.

Lehman’s Fuld claims his company and he were, in effect, victims of the housing and credit crisis. Dick Fuld made over a half a billion dollars during his 14 years as CEO of Lehman – that hardly qualifies him for victim status. Moreover, Fuld made his hundreds of millions all while allowing his company to dive into riskier investments requiring insane amounts of leverage.

When Fuld is finally brought to answer under oath for the enormous bankruptcy he orchestrated (his congressional testimony in October was a joke), he will no doubt claim he didn’t fully understand the credit default swaps and other risky investments his team was helping create.

“It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

So What Must We Change?

Clearly shame and public humiliation aren’t enough to sway America’s CEOs to always act responsibly and in the best interest of the company’s shareholders. Case is point: Merrill Lynch CEO John Thain recently requested he be awarded a bonus of $10 million for 2008. Without going into Merrill’s ‘08 financials (or lack thereof), let’s just say that Thain proved, if nothing else, he has incredible nerve. (Boards of failed companies, generally, don’t even face shame or public humiliation – they just move on like carpetbaggers.)

Given the speed at which many companies are collapsing, it seems that even the alleged pay for performance packages that reward a CEO for some short term positive movement of a company’s share price are ineffective. Fuld had the gall to argue in front of congress that he delivered terrific shareholder value during the first 13 of his 14 years as CEO. Big deal, Dick, tell that to the September 2008 shareholders and employees.

Leaders as Stewards

CEOs, like US Presidents, serve at the pleasure of their constituents. Presidents serve at the pleasure of the American citizens; CEOs, allegedly, serve at the pleasure of the shareholders (the owners of the company). No matter how many years of prosperity a CEO has delivered (via shareholder value), a sudden bankruptcy that destroys a 158-year old company proves that the CEO was no steward; that personal gain (including stroking his own ego) was his primary (and possibly his only) goal.

If our business leaders fail to act as stewards, then our boards must act. If our boards fail to act, shareholders have little recourse beyond civil remedies that generally fail to change behaviors. Civil penalties for underperforming and/or incestuous boards are insufficient to stem the tide of bad leadership we’ve faced over the past decade.

Perp Walks for Boards

It’s time we criminalized the lazy, incestuous boards who fail to protect the shareholder. It’s time that more than a few directors received several years behind bars for every billion in shareholder value they failed to protect.

If you think what we’re requesting is akin to advocating the death penalty for jaywalking, you’re way off base. We asked someone who sits on three Fortune 500 boards (who spoke to us on the condition of anonymity) what made them feel they were qualified to sit on so many boards while leading another large company as CEO. Their response: “Listen, I get about $100,000 from each company for four meetings a year. I think I can handle it.”

Four meetings a year – unfortunately, that’s how far too many board members view their duties. What’s worse is that your “performance” (i.e. networking) on one board leads to appointments to other boards. Rock the boat, and you’re not asked to join the other boards.

“It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

Amazing how a socialist like Sinclair can teach us so much about capitalism.