The Corporate Culture Takeover of America's Departments of Education Mandates the Termination of Personnel Without Cause
The ruthless management style of Jack Welch has been adopted in New York City, where new principals who graduate from The Leadership Academy are supposed to get rid of 5% of the personnel in the school every year, no valid reason necessary. Teachers and staff of our nation's schools are at risk of losing their jobs simply to meet a quota, and nothing the victim says or does matters. Betsy Combier
In New York City, Former CEO of General Electric, Mr. Jack Welch, is on the Advisory Board of The Leadership Academy, training new principals for the city's 1200 public schools. He is joined by Anthony ("Tony") Alvarado, run out of town after discoveries of real estate fraud and other improprieties (his wife is Elaine Fink, former Superintendent of NYC's District 2).
A helluva problem:The lessons of Jack Welch's outrageous employment contract
The Economist, Sep 19th 2002
GENERAL ELECTRIC has not had it easy since its legendary boss stepped down last year. Yet as if under some abominable curse, Jack Welch seems to grow more virile as GE wilts. The conglomerate's share price sags, yet there is Jack, beaming from the newspaper pages, bouncing about in a noisy, extramarital way with the (now former) editor of the Harvard Business Review. There he is again, sporting the same cheeky grin, divorcing his second wife, Jane. Up he pops this week in the editorial pages of the Wall Street Journal, trumpeting and justifying his magnanimous refusal of millions of dollars-worth of apartments, private-jet rides, home-entertainment systems and other retirement perks that were due to come his way. At his request, he informs readers, GE has altered his contract, allowing Mr Welch to save the company from the wrath of its shareholders. Another lesson in leadership from the great ex-leader?
Mr Welch has a lot to say about his perks (a "helluva problem") whose size has emerged only thanks to papers filed by his wife during divorce proceedings. Mr Welch's employment contract dates back to 1996, when GE's board was anxious to press millions of dollars into his hands so that he would stay until his retirement at 65. Shocked by the wastefulness of this proposal, Mr Welch suggested that he be paid in kind, in post-retirement perks at (he says) less cost to the firm. There is a danger, he concedes, that by giving up these benefits, it will now seem as if he thinks something was wrong with these arrangements. But for the record, he insists, neither he nor GE behaved improperly, as all was disclosed to shareholders. Is he right?
One measure of how well Mr Welch disclosed his perks can be found at The Corporate Library, a website that keeps an eye on job contracts. Nell Minow, a corporate-governance activist who created the site, thought back in 1999 that Mr Welch's contract was "a tribute to Mr Welch and his board", guaranteeing no special bonuses, payments or perks. Ms Minow's only worry then was "some vague language in section five, which assures Mr Welch of 'continued access to company facilities and services comparable to those provided to him prior to his retirement, including access to company aircraft, cars, office, apartments, and financial-planning services'."
It was via this language that GE had been planning to dish out, on Mr Welch's estimates, between $2m and $2.5m of perks a year. Ms Minow understandably feels misled. The Securities and Exchange Commission is also looking into the adequacy of this disclosure.
Whether or not GE's actions are found to be improper, Mr Welch's celebrated gut instincts are certainly sending him the right message now. It is proper, even desirable, for bosses who make their firm's shareholders much wealthier-as Mr Welch did spectacularly-to be handsomely rewarded. But it is crucial that they be paid in ways that are transparent to shareholders, and show clearly that the firm is being run in their interests and not those of the boss. This may, as Mr Welch recognised, mean that the company has to pay in a way that is less tax-efficient. But that is worth doing so that the boss, like Caesar's wife, can remain above suspicion-as GE is now discovering.
As questions were raised this year about the quality of its accounts, GE mounted a formidable publicity campaign to put clear water between itself and clearly dissembling firms such as Tyco, a distressed conglomerate whose boss, Dennis Kozlowski, faces an assortment of criminal charges and who enjoyed countless perks from his employer. Mr Welch's perks could easily give the impression, no doubt unfairly, that he, too, has been living it up on his old firm's payroll. And, if that, some investors wonder, what else?
There are other bosses with generous contracts who would do well to follow Mr Welch's lead. Robert Nardelli, whom Mr Welch passed over for GE's top job, now runs Home Depot. His five-year contract there includes a $10m loan, to be forgiven (what sort of loan is that?) in $2m tranches over five years; bonuses, options and deferred stock in vast amounts; an automobile "similar in class to that of the current Mercedes Benz S600"; and a guaranteed minimum payment of $2.25m a year after he retires. You can almost hear his lawyer (kindly paid for by Home Depot) chuckling to himself.
There is no particular reason to pick on Mr Nardelli, although his GE provenance does suggest an interesting pattern. If Carly Fiorina, boss of HP, were in future to be sacked for mere incompetence, massive contractual payments would be triggered. Robert Annunziata, a former boss at Global Crossing, a bankrupt telecoms company, got first-class flights for his mum written into his contract. And so on.
America once worshipped these people as gods, laying offerings of unimaginable wealth-and whatever else they asked for, it seems-at their feet. Now impoverished shareholders are choking on their own disgust. Stern moralists, such as William McDonough, president of the Federal Reserve Bank of New York, are urging restraint in the boardroom. Warren Buffett, the famous investor, chastises greed. Moreover, the cops have woken up, and some once-celebrated bosses are sure to go to jail.
Mr Welch once liked to brag about his supine board, as if it were yet more evidence of his abilities. Yet even boards now sense change is afoot. So do those sleeping giants, the big investing institutions which are meant to fight for shareholders. Cynics talk of market cycles and a return, soon enough, to the old ways. But this convulsion feels too powerful to permit the survival of the ancien regime. It is not ignoble and sanctimonious moral disgust that will seal its fate. Much more powerful is the pervasive sense of foolishness. Mr Welch, more than most, deserved to be well rewarded. But as he himself has come to realise, giving some back "sure feels right in my gut".
The Corporate Library
The 'Jack Welch Management Style' is to get rid of 5% of a company's employees every year, even if the company is doing well:
CEOs grapple with talent retention problems
M. Ramesh, The Hindu Business Line, Nov. 7, 2003
Hong Kong , Nov. 6, 2003
TO what extent should family-owned businesses entrust company management to professional executives? How should companies deal with the issue of non-performing employees?
These were among the HR-related issues that came up for discussion at the Seventh Annual CEO Forum, a conference of select Asian CEOs held by Business Week.
A lively discussion revolved around whether or not companies should adopt `Jack Welsh-type ruthlessness', with the leading panellists in a session taking opposite positions.
Mr Jack Welsh, the renowned CEO of General Electric, retrenched the worst five per cent of employees every year, even when the company was doing well.
Mr Venu Srinivasan, Chairman and Managing Director, TVS Motor Company, said that Indian companies usually downsized "in a humane way", and do not "ask them to go the next morning".
TVS Motor itself had faced a financial crisis some years ago and had to cut its workforce by 40 per cent. But the company gave them two years' pay and helped many of them get another job. (Mr Venu Srinivasan, along with Mr Rajesh Hukku, Chairman and Managing Director, i-flex Solutions, was among those who received the Business Week Stars of Asia award today from the former US President, Mr Bill Clinton.)
Another panellist, Mr Luis Conde, Chairman, Amrop Hever group of Spain, said that he would not in the first place hire people if there were a doubt in the candidate's abilities, especially at the top levels.
But if the hired employee was found unfit, he would not be given opportunities to continue in the job and make mistakes.
Mr Richard Elman, CEO of the Hong Kong-based Noble group, said that while employees ought not be given a guarantee of employment, it is not good for a company that its employees come to work with the fear of losing their jobs.
However, closing down or selling a business in case of exigencies, if it happens once in a while, would serve as a wake up call to the other employees.
Mr Venu Srinivasan said that even in family-run businesses executives ought to be empowered and encouraged to innovate. If they made a bona fide mistake, they should not be taken to task for that. On the other hand, some glory-seekers would never fit into any group. It would be better to separate them, giving them adequate compensation, rather than "humiliate" them, keeping them in the job but not giving any work.
Mr Elman said that in hiring for top executives, he would not go so much by "paper qualifications" as his own assessment of the candidates' skills. He would prefer an "entrepreneurial type - a risk taker, a dreamer, who wants fun, freedom and social recognition."
January 16, 2005
Remember When Ken Lay Was a Genius?
ARE you new to a high-level job and fearful of failure? Then you may want to consult "You're in Charge - Now What?," a new management guide by Thomas J. Neff and James M. Citrin, executives at Spencer Stuart, the headhunting firm.
But if you're an investor who plans to follow the criminal trials of disgraced former chief executives like Kenneth L. Lay of Enron, L. Dennis Kozlowski of Tyco and Bernard J. Ebbers of WorldCom, an earlier book by the same authors is much more entertaining. "Lessons From the Top: The Search for America's Best Business Leaders," features secrets-of-my-success tips from, yes, Mr. Lay, Mr. Kozlowski and Mr. Ebbers
"Lessons," published in 1999 by Currency, is a perfect pre-crash, celebrity-C.E.O. period piece that includes fawning interviews with 50 business bigs. Mr. Neff and Mr. Citrin wrote that they used a "rigorous methodology aimed at identifying the very best business leaders in America," which included results of a Gallup poll of 575 chief executives and an analysis of companies' stock performance and cash-flow growth.
Since its publication, nine of those leaders - almost one in five - have watched their companies become the subject of criminal prosecution, regulatory rebukes, shareholder revolts or all three.
Of course, any list of top executives from the bubble era is bound to include some flameouts. As the authors said in an interview last week, many executives on their 1999 list remain successful and in their jobs.
Still, given that this will be the year of executives-on-trial, the book provides some much-needed comic relief. And because Mr. Ebbers, Mr. Kozlowski and Mr. Lay may decline to take the stand in their defense, it's good to have a record of their achievements told in their own words.
Let's hear first from Mr. Ebbers, whose trial on charges of conspiracy, securities fraud and filing false statements to securities regulators, is scheduled to begin Tuesday. In his defense, Mr. Ebbers, who was fired from WorldCom in 2002 just a few months before it made the world's largest bankruptcy filing, is expected to contend that he knew nothing about the $11 billion accounting fraud at the company. He left the arithmetic at WorldCom to Scott D. Sullivan, his chief financial officer, his lawyer says.
Back in 1999, however, explaining how he made it to the top, Mr. Ebbers evidenced a more than passing involvement in financial matters at WorldCom, a company he founded. At first he was a passive investor, he explained, but when the company hit some turbulence, he parachuted in.
"It was only after the company was in desperate financial straits that I became involved," Mr. Ebbers said. "It was strictly a matter of survival."
Later in the interview, Mr. Ebbers boiled down his business philosophy to one main view: "It is not how much revenue growth you can have. The question is how much does it cost you for each dollar of increased revenue that you get? We focus on that because a dollar of revenue is not worth anything unless it's a profitable dollar."
Alas, at the end, profitable dollars at WorldCom were far outnumbered by unprofitable ones.
Mr. Kozlowski, whose trial on charges that he looted the company is set to begin later this month, also takes a star turn in "Lessons." Much of the interview centers on the unusually generous reward system he instituted at Tyco. "There's no upward limit on our incentive programs," Mr. Kozlowski said.
Mr. Lay, facing criminal prosecution in Enron's failure, has also shrugged off responsibility for the debacle by claiming ignorance of the manipulations that brought it down. Yet, six years ago when the sun was shining on the company, Mr. Lay took responsibility for it all.
What was his recipe for executive greatness? "I think one of the secrets to our success has been creating big pockets of entrepreneurship throughout the company," he said. "We start off recruiting very smart, very results-oriented, very creative, high-performance people. And then we create an incentive system that rewards performance, one that lets them share in the company's success."
Andrew S. Fastow, the former chief financial officer who set up partnerships that enriched himself at the expense of Enron shareholders, certainly took that ball and ran with it.
Another "Lessons" hall-of-famer is Franklin D. Raines, former chief executive of Fannie Mae, the mortgage financing giant. Mr. Raines lost his job - but not his copious benefits - last month after it became clear that the company would have to restate its earnings downward by about $9 billion for the last three and a half years.
"Organizations need to have someone at the top who can keep everybody on track, and who will determine whether a particular item being discussed is part of its focus or not," Mr. Raines said in his interview. "People lose track of what the goal is after a while."
"Does this fit, or doesn't it fit?" he added. "Are you doing things that advance your organization toward its goal, or are you doing things that are moving it toward something else?"
Like, say, the edge of a cliff?
Perhaps the most loquacious executive in "Lessons" is Charles Wang, the former chief executive of Computer Associates, which last year agreed to pay $225 million in restitution to shareholders who lost money as a result of the company's accounting improprieties.
Mr. Wang was never charged in the matter; five of the company's former executives have pleaded guilty in the case. Sanjay Kumar, Mr. Wang's former deputy and his successor, has pleaded not guilty to charges of securities fraud and obstruction of justice. He awaits his trial.
What was the signal value that Mr. Wang said he brought to the Computer Associates' boardroom? "I think to be a successful person, and C.E.O.'s are often very successful, you have to have integrity," he said in his interview. "Your word has to be worth everything you've got. You must have a moral compass."
As for how he ran his business, Mr. Wang averred: "It's not that complicated. I make sure that what comes in exceeds what goes out."
Mr. Wang also told his interviewers that it was crucial to give something back.
"I always tell everybody, give back, give back," he said. "Because if you don't give back, this world is not going to get better. And if you're fortunate to do really well, give more."
Something may have changed Mr. Wang's mind after the interview on this topic. According to Computer Associates, Mr. Wang has not yet offered to give back any of the $14.4 million in bonuses that he earned during years in which the company's results were inflated by improper accounting.
What even a cursory reading of "Lessons From the Top" proves, of course, is that the prosecutors and regulators assaulting these corporate commanders are going after the wrong guys. Don't they know that chief executives are gods among men and worthy of worship? That's why their compensation goes up every year whether or not their workers lose their jobs or their stockholders' returns rise.
Companies are not really the property of their shareholders after all. They belong to the giants who run them. And the sooner everyone understands that, the faster we can put this unfortunate and undeserved attack on corporate leaders behind us.
(We believe that the author is being sarcastic. We hope. Betsy Combier)
The Corporate Takeover of America's Public School: Background
NYC Leadership Academy and $300,000 For Training One Principal
Texas: Dallas Morning News and Houston Chronicle Reporters Uncover Multiple Scams by School Officials
Well Folks, It Looks Like the Texas Education Agency is Goin' Down
Double-Dipping in Texas May End, a Legacy of Mike Moses
Naomi Responds to the Economist
by Naomi Klein, NoLogo.org, November 11 2002
Anthony Alvarado's Results in San Diego