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Something is Rotten in Denmark, But What?
What are we to make of Enron, Tyco, Global Crossing, Rite Aid, WorldCom, and Xerox? What are we to conclude about Martha Stewart, Bernie Ebbers, Joseph Nacchio, Dennis Kozlowski, and the seemingly endless parade of executive no-gooders? Something is rotten in Denmark, to paraphrase Shakespeare, but what? When the sordid mess now unfolding across our newspapers, magazines, and news shows is relegated like a bad John Travolta movie to the dust heap of recent history, what will we have learned?
It’s possible we may conclude that what is now being called “Corporate Watergate” is nothing more than the result of the greed and avarice of a few people who managed to run the table at Wall Street and have now crapped out. I read an article in my local paper today that quotes Paul Hazen, the former Wells Fargo chief executive who sits on the boards of seven companies as saying that although corporate governance has failed at a handful of companies, it remains successful at the majority of them. "I would hope that we don't just overreact." I have no way of knowing if Hazen was accurately quoted or not, but I’d say his explanation for what’s going on falls into the “few bad men” category: find and punish the few bad men, and everything will be fine.
I have at least two problems with this line of thinking. The first is embedded in the idea of “few”. Towards that, I think the Watergate imagery is in fact quite apt. A quarter of a century later, few people could tell you anything about what happened, why, and what was done as a result other than the villain, played by Richard Nixon, resigned and flew away to write books and later become a rehabilitated elder statesman.
If history is any guide, Hazen has nothing to worry about. We could overreact by a factor of 100 and it wouldn’t be too much. More to the point, it will all be forgotten in twenty years anyway. Remember the savings and loan scandal? For 100 points, name one person who got slapped around as a result. (Double credit if the name you came up with wasn’t Charles Keating.) See what I mean?
No, if you’re going to subscribe to the “bad man” theory, you might as well go all the way. There were lots of bad men involved with Watergate, particularly if you view Watergate as something larger than a bungled burglary. There were lots of bad men involved in the Savings and Loan scandal. Similarly, the names being bandied about in the press today don’t begin to hint at the number of people that have knowingly participated in some form of financial trickery, insider trading, or thinly disguised plausible deniability. Either that, or there are:
a) An awful lot of amazingly unobservant people running companies these days.
b) An awful lot of people that have simultaneously and mysteriously had portions of their memory and/or intellect wiped out by alien death rays.
One of the pleasant fictions we Americans polish and treasure is that we live in a meritocracy. As long as you’re good, and good at what you will do, you’ll rise to the top. The better you are, the higher you’ll rise. We also tend to define our sense of merit quite inclusively. If you’re good at numbers, you must also be a good person. If you’re a good athlete, you must also be a good role model for children. If you’re a good business person, you must also be a good parent.
I don’t mean to be the one to break your bubble, but 99.9% of the people who “rise to the top” in business, politics, sports, or any other organized endeavor you can name didn’t get there simply because of merit. And no, even if merit is an adequate explanation (which it isn’t), merit is not some universal solvent that washes clean everything it touches. Bill Gates may be smart, but that’s not why he’s the richest civilian in the world. Warren Buffet may look like the kooky uncle you never had, but don’t kid yourself about what he’s capable of.
No, the Gateses, Ellisons, Bushes, Gores, Clintons, Jordans, Bryants, Nixons, Blairs, Husseins, Eisners, Welchs, Ebbers, and Stewarts of the world got where they got because they were cunning, clever, driven, politically astute, and ruthless. Yes they’re also talented, but make no mistake: they abide by an internal moral code that wouldn’t make most of us comfortable if it were on display around the house on a daily basis.
A few bad men? Try thousands. The Bush crowd is delighted that WorldCom and Xerox came along so that attention will be diverted from the all too obvious connections to Enron, Halliburton, and all the others in the energy patch that are busy trying to cover over their misdeeds.
The nice people on Wall Street that issued all those glowing “buy” recommendations on companies they knew were “turkeys” are similarly relieved now that the SEC has a new toy to play with.
The politicians who begrudgingly voted for campaign reform are feeling a bit squeamish, but not so much so that it didn’t stop their lackeys on the Federal Election Commission from gutting the intent of the law.
All that said, I guess I’d be happy thinking that the answer is as simple as punishing the guilty. It’s not. The other problem with the “few bad men” theory is the implication that everything else was fine: it’s just the bad people who screwed up. In other words, there was nothing wrong with the larger game or the rules by which it’s run just the bad men (and occasional woman) who were playing it. I don’t buy that.
The Evils of Bigness: A Modern Morality Play
You have to at least consider the possibility that the events now unfolding are part of a larger morality play about bigness, the dangers of playing God, or both. That what has gone wrong isn’t ruthless people reaping the whirlwind, but the inevitable consequence of what happens when you think you’re smart enough to optimize, fix, build, or otherwise tinker with something that has millions of moving parts.
Big, highly complex systems are, well, complex. That’s true of companies like WorldCom and Enron, just like it’s true of ecosystems like a forest or prairie, or biological systems like the human body. Nature assembles these later systems over very long periods of time (assuming time even exists) and with lots of messiness and redundancy built in. There are plenty of disasters, crashes, burns, and other seeming cataclysms. In the grand scheme of things, these are nature’s way of working things out and building a system that works.
But that’s not how we humans like things to work. We want it all, we want it perfect, and we want it now. Got to go, go, go! Life is short! There are places to go, people to see, lands to conquer, brands to build, enterprises to expand, industries to invent, and street corners without McDonalds or Starbucks to populate. Big is good. Bigger is better. Gigantic is better still. Nothing is too complex when capital is cheap and the markets are hungry. For whatever reason we think we’re smart enough to swizzle a couple of variables, raise a bunch of money, and be near-deific masters of complexity.
So, for the past ten years, despite the overwhelming historical evidence that big mergers and acquisitions don’t work, executives supported by their accounting and investment banking and legal entourages, bought and merged like there was no tomorrow with little thought as to how all the disparate pieces would fit together.
And they haven’t worked. Every one of the companies we’re reading about now is an example of the God complex in full bloom. Too much, too complex, too fast, and too bad. For every one of these that works, nine more don’t. And no, Carly Fiorina isn’t any smarter or better than the rest, and no HP won’t work either.
The trouble with playing God—and messing with or trying to build wildly complex systems in a cosmological nanosecond is exactly that—is that we’re not very good at it. In the grand scheme of things, we come up just a bit short on the omnipresent, omniscient, and omnipotent dimensions.
For example, it’s only the beginning of July 2002 as I write this, and wildfires have burned some 2.5 million acres of the American west. That’s a lot. More than a “normal” year and we’re not anywhere close to being done. I’m not smart enough to know how all the pieces fit together, but smarter people than me say that decades of misguided forest management and land management policies have upset the natural rhythm of things out where the trees grow. Comparatively small fires that would otherwise have thinned out forests have been vigorously contested, turning vast swaths of the west into monster tinderboxes waiting to happen.
It turns out that removing an unwanted feature of the ecosystem—in this case the natural burn cycle—has significant downstream implications. A bit closer to home, this same phenomena shows up in dog breeding. I’m not sure what they’ve done to deserve this, but man’s attempts to engineer the perfect dog has turned Man’s Best Friend into breed after breed of mutated messes, each now with significant physical and mental problems. Think about that next time someone raises the topic of genetic engineering.
I don’t think it’s at all coincidental that the companies we’re now reading about are arguably the financial equivalent of a forest that hasn’t been allowed its natural burn cycle or a dog that’s been over-bred in the name of better ears. They’re mutated freaks of commerce burdened by too much debt, phantasmagorical expectations, and scrambled accounting DNA. And yes, many have been assembled and run by “bad men.” The only shock in all of this is that anyone is shocked. You could see it coming a mile away but for the irrational exuberance we were all feeling.
. . . continued
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05/03/06