Book Bites: Bite sized excerpts and reviews from recent books. We welcome additional submissions and suggestions.

October 2003

Putting Investors First

Putting Investors First: Real Solutions for Better Corporate Governance, by Scott C. Newquist and Max B. Russell offers a great guide to CEOs, directors, shareholders and their fiduciaries. From pay for performance, based primarily on options, to the accounting games and how they are played, Newquist and Russell step their readers through a lack of checks, balances and accountability, that have had serious consequences.

Central to their argument is that CEOs have “circumvented governance mechanisms by supplying the board with information that is incomplete, inaccurate, or incomprehensible.” For many shareholders, their most effective action would be to sell but to properly evaluate their options they need complete and accurate information. “The ultimate fix is up to boards of directors. They must reassert their power and accept fully their responsibilities and obligations to protect shareholders’ interests.”

Newquist and Russell see through the limited promise of box ticking guidelines, including most of those recently enacted in Sarbanes-Oxley. Enron would have all but loans to officers. They seek to move us away from “just-in-time-governance” and “governance by embarrassment” to principles, “supported by mechanisms that stress accountability, disclosure, performance measurement, and checks and balances. “Principles-based governance benefits from scrutiny, debate, and most of all, transparency.”

Among the recommended mechanisms are:

Requiring directors to also sign off on financial statements, with a “to the best of my knowledge” qualifier.
An annual meeting between independent directors and institutional investors webcast to all.
Disclosure of dissenting opinions on important issues and board votes as soon as practical.
Split CEO and chair or a strong independent director with an out “if the CEO is the only insider on the board and is totally committed to transparency and accountability.” (An out I would likely question)
Independent information sources and analytical capability for board members.

September 2003

Handy's Democratic Vision

The Fall 2003 edition of “Strategy + Business,” carries an informative article on one of the gods of modern business literature, Charles Handy. A good summary of Handy’s influence is found in a quote from Warren Bennis, “If Peter Drucker is responsible for legitimizing the field of management and Tom Peters for popularizing it, then Charles Handy should be known as the person who gave it a philosophical elegance and eloquence that was missing from the field.”

Lawrence M. Fisher begins with a stroll in one of England’s small villages where Charles Handy and his wife Elizabeth make their home. He explains that one of Handy’s early insights was that organizations aren’t inanimate objects but vibrant microcosms of human societies. Those who seek to manage companies need to understand the motivations of individuals and how collective behavior determines organizational behavior.

In his second book, Gods of Management, Handy saw us moving from corporate cultures built around the founder (Zeus) and bureaucracy (Apollo) to collaborative teams (Athena) and independent specialists (Dionysus).

Fisher goes on to portray an intellectual journey to the point that now Handy has come to believe that “a company ought to be a community, a community that you belong to, like a village.” “Nobody owns a village. You are a member and you have rights. Shareholders will become financiers, and they will get rewarded according to the risk they assume, but they’re not to be called owners. And workers won’t be workers, they’ll be citizens and they will have rights. And those rights will include a share in the profits they have created.”

And just what would such a company look like? Building on Handy’s work, Brook Manville and Josiah Ober begin to give us the outline in “A Company of Citizens: What the World’s First democracy Teaches Leaders About Creating Great Organizations” (2003). The authors provide readers with a wealth of information concerning the rise of Athenian democracy and the importance of harnessing the knowledge of people who have an innate desire to have a part in controlling their own destiny.

From citizens paying dramatists with public funds to expose the foibles of institutions and leaders to intricate systems designed to ensure artificial social networks stimulate the exchange of ideas, Manville and Ober present many interesting details. There is much here worth borrowing, from team-based rotating leadership to transparency of information to ensure group decisions had a solid foundation.

They appear to accept Handy’s suggestion, from The Hungry Spirit (1998), that companies should issue two classes of shares – voting shares for members of the company and some major stakeholders – nonvoting shares for more casual or short-term investors. People need to take center stage in terms of rewards and honors at most companies where human knowledge is the prime creator wealth. Handy sees the rights of citizenship being extended in some limited way to part-timers, freelancers, as well as suppliers and investors.

Elsewhere I have written of the need to reassess the role of antitakeover defenses, suggesting that instead of using poison pills, firm specific human capital could be better protected through bylaw amendments that require employee approval of changes in ownership. (see "ATDs Issues Not Simple" in August 2003 News)

Where are we likely to see such democratic companies arise? Based on Handy’s writings, as extended by Manville and Ober, we’ll find them where

• Companies have a clear sense of their own mission and goals -- where the company of citizens believes the goals can best be achieved through collective action.
• The nature of the work and the performance challenges demand large-scale cooperation and collaboration. Traditional hierarchies may work well enough for routine activities but as work relies increasingly on knowledge, democracy is a better fit.
• The need for fresh ideas and management approaches require regular changes in leadership.

Perhaps two of the most important factors are relatively high employee ownership and unionization. One indicates commitment to the firm, the other is a crucible of democracy in the workplace.

April 2003

Who Moved My Soap? The CEOs Guide to Surviving in Prison

The title is a play on the best seller “Who Moved My Cheese?” The point of the Cheese book was that we have to be alert to changes and prepared to search out new sources of wealth. Now that CEOs will be going to prison in droves, author Andy Borowitz, who writes for National Public Radio and the New Yorker, is there to help them search out the new business opportunities prison will yield.

At a glance, it looked like the author knows CEOs well enough to write an anthropological profile, covering everything from eating habits to decision-making strategies. Like many of us, he's probably bothered by the fact that their greed helped bring our investments to ruin. Unlike us, Borowitz has a way to cash in – morbid humor.

After reading both a recent BusinessWeek article on Executive Pay and the Borowitz book I found that, like many fantasies, “Who Moved My Soap” is built on exaggeration and contradictions. He predicts that within the next five years, one out of four CEOs in the United States will be convicted and sent to jail. Another 25% will flee the country with gold and diamonds sewn into their underwear. Still another 25% will do community service, teaching inner city youth how to shred documents and create off-the-books partnerships.

But it’s hard to reconcile these predictions with a later one where he says that by the end of the decade there will be 100,000 CEOs serving time in jail, roughly 10,000 times the number of people looking forward to the next Meg Ryan film. His numbers don't add up.

We may not know much about CEO conviction rates, but I think we can all agree there are more than 10 people waiting to see Meg Ryan in anything.

Borowitz may have gotten the numbers wrong and the severity of the punishment but he's certainly spotted a trend. According to BusinessWeek, average CEO pay has dropped by double digits for the second year in a row. Instead of being paid 550 times average, it’s now 200 times. That takes them back to 1996 levels, average pay of only $7.4 million a year.

The top CEO only earned $195 million last year, compared to $706 million in 2001. Second placed Jeffery Barbakow of Tenant Healthcare earned $117 million. His money may come in handy, since Tenant faces charges of Medicare billing fraud. And Dennis Kozlowski, who moved Tyco to Bermuda to avoid US taxes, earned $71 million before his indictment on sales tax evasion. But let's get back to Borowitz.

First, CEOs have got to learn the lingo and Borowitz is there to help. For example, a “snitch” is a prisoner who rats to get favors…like being a whistle blower and getting on the cover of Time magazine.

In discussing prison culinary delights, Borowitz tells his readers that “most aspects of prison life will be much more pleasurable, or at least more endurable, if you try to imagine that something other than what is going on is going on.” This shouldn’t be hard for most CEOs – “it’s just like keeping two different sets of books.”

Borowitz covers the seven habits of highly effective prisoners and even prison feng shui. For example his feng shui advice includes the following concerning how to maximize the flow of chi or energy: “Arrange your bunk so that you face the bars, not away from them. Facing the wall of your cell has a negative impact on chi, while looking out through the bars creates a wide-open feeling, thus increasing chi.” Additionally, it “helps you to see if a guard is coming, which can be helpful if you’re in the middle of a big transaction involving big stacks of money and weapons.”

Borowitz completes his book with a tale of Scamco Incorporated. Following Borowitz’s advice, his fantasy CEO behind bars creates a fashion sensation with stolen prison jumpsuits. Whether in pinstripes or horizontal stripes, all it takes is a good business plan... or a good sense of humor. I hope the CEOs of a few companies that I invested in get a nice long chance to read Who Moved My Soap? The CEO’s Guide to Surviving in Prison.

March 2003

Cookin' the Book$: Say Pasta La Vista to Corporate Accounting Tricks and Fraud

Don Silver has cooked up a little gem. I plan to give copies to recently hired auditors charged with finding where deadbeat companies have hidden the money. Written at about the level of the Sunday funnies, a couple of hours with Cookin' the Book$ will give you the basics of Enron and WorldCom style techniques.

Sections include a Brief History of Cookin', Four Corporate Recipes for Cookin' the Books, 10 Ways Corporations Cook Revenues, 10 Ways Corporations Cook Expenses and A Financial Self-Defense 'Menual.' Chapters are a bite sized 2-5 pages.

Silver's storyline for this work of fiction is a corporate chef''s gift of advice to his son. I'll have to admit, I was initially turned off by a presentation that seemed too basic to even skim. However, I soon found myself reading every page and picking up bits of spoon fed knowledge with no effort. With Silver's examples, I can now explain the fundamental techniques of modern corporate fraud to novices.

January 2003

The Human Face of Corporate Governance

Most corporate governance books take the approach of an attorney or business professor looking a systems. Lynn McGregor comes at it from the perspective of a psychologist or trusted advisor to better enable CEOs and board members to start by first looking within the self. It is certainly a fresh approach, one I haven't encountered elsewhere.

The book moves modestly to demonstrate how personal governance and different leadership styles can influence improvements in corporate governance. McGregoor offers a model for understanding how corporate decisions are made, how group decisions can be improved and discusses the "shadow" side of corporate governance to help us guard against destruction. Clear examples, individualized exercises and a good sense of humor help the reader on the road to establishing humane, yet competitive companies. McGregor offers a unique perspective based on years as a successful board mentor and consultant - a welcome addition to any library.

CEO Capital: A Guide to Building CEO Reputation and Company Success by Leslie Gaines-Ross

In today's CEO star system the reputations of CEOs and their companies are inextricably linked. Gaines-Ross offers helpful advice in establishing the reputation of both. It appears to be a practical guide for CEOs and the board members, search committees, etc. who select, evaluate and/or advise them.

Defending the Digital Frontier: A Security Agenda by Mark W. Doll, Sajay Rai and Jose Granado

All companies are on the edge of the "digital frontier." Left unmanaged is left vulnerable. Senior level executives need to know how to align their security programs with their company's objectives, take a holistic view, continuously improve, validate and formalize their programs. This book appears to offer at least the outlines of a roadmap into uncharted territory.

Please send your corrections and additions. If the work cited has not yet been published, include information on how it can be obtained and a brief description of the book. Books and prepublication manuscripts welcome:

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