The CEO as a Hero
The glorification of the businessman is a cult as old as social darwinism and the modern corporation. From the time of the robber barons, those predisposed to view society on the most superficial basis possible have sang the praises of those noble souls who built empires of commerce and reaped the overwhelming financial rewards. Embracing the status quo myth of the free market and uninhibited entrepenuerial competition, they built whole systems based on the superiority of economies of scale and big business.
Since it is always necessarily in mythologies to have a character to represent the forces of righteousness, the CEO was often singled out as a hero. By using his own superior intellect, charm, and intuitive capabilities to direct a massively sprawling and complex corporate organization through the waters of competition, marketing, and morale building, the CEO deserved all the credit and pay he got. He is also typically praised for being the one driving force behind a corporate hierarchy and a larger market that creates jobs and wealth for society at large. Even amid the crises of confidence in the modern corporate capitalist economy such as the Chrysler bailout, the S&L scandal, Enron, and WorldCom, the CEO is almost always lauded as the personality behind the successes and failures of businesses - and often whole economic sectors.
In a world of neverending corporate consolidation and market hegemony, it's important to have a human face to what is otherwise a cold, impersonal, and inhuman conglomerate. When we project the qualities of entrepeneurialism onto such giant, mechansitic entities, it's important to have a person to whom we can assign credit or blame. As humans dealing in a complex environment, we just need it somehow. We're unable to really grasp the accumulation of capital that these corporations control, and knowing that a human is still calling the shots gives us some relief, I suppose. Indeed, the charisma of the CEO's cult of personality is that he can, in fact, juggle these economies of scale in his head, and deliver an efficient market through some inner strength or gift he possesses.
I've met some capitalism advocates in my time - hell, I even went through an Ayn Rand phase of viewing big business as "America's most persecuted minority" - but rarely have I encountered such a touching ode to the death of a CEO, let alone a failed one, as that penned by Right Thinking Girl in Ken Lay's honor:
To me, it was a Shakespearean tragedy. A humble man who spent his entire life trying to build a life - wealth, yes, but more than that. A company. A legacy. And he succeeded. Oh did he succeed. He seemed to have a magnet inside him that attracted power and wealth and people. He had a wife. A good wife, a proper wife, who loved her husband and was faithful and strong. She had good humor; in interviews she would laugh over her husband's relationships with Presidents and kings. She had a lovely smile and she used it often, blushing and sweetly smiling and rolling her eyes to show how absurd, how unexpected, how lovely but fleeting it all was.
RTG is exceptional only in her investment of dramatic license in the Enron scandal, not in her passion for all things big business. There are many conservatives (and liberals) who see corporate captialism as an unmitigated good and can't help but evangelize this truth far and wide. What makes her unique is the single-handed charge she led to vindicate the people ostensibly responsible for one of the worst business failures in history. Her motivation: the romantic exaultation of the executive businessman to God-like status. Is the CEO deserving of this reputation, though?
Designing a Market Through Political Means
Ken Lay and Enron, far from being shrewd entrepeneurs, were instead experts at the game of lobbying governments to change rules in their favor. This was the whole impetus behind the "energy deregulation" movement in the late nineties: by altering - but by no means abolishing - the regulations on an otherwise monpolistic energy industry (the term "deregulation" is a misnomer; see this article at the Mises Institute for a good analysis), certain areas of the nation sought to "design" a market in energy.
From the get-go this should have raised alarm bells: markets are an example of a distributed information network resulting from human action but not human design. That is the core reason markets can moderate the complex and diverse activities and interests inherent in society - and why communism and central planning fails. But just because markets are spontaneous phenomena doesn't mean they can't be manipulated. Indeed, state capitalism is built around setting the scope of how markets can allocate capital, prohibiting certain activities and encouraging others. The outcomes are still market-driven: they're just less efficient and fair than they would otherwise be if free of forcible intervention.
Deregulation and privatization schemes are often concerned with redefining the bounds of acceptable activity to promote some limited form of market economics. Since energy deregulation, such as that which occurred in California, was not really about discovering market mechanisms in practice by encouraging innovation and efficiency, but rather about imposing them from above through rules guaranteeing profits and moderating risks, the situation was ripe for regulatory capture. Indeed, lobbyists and industry big-wigs worked hard to make sure that the system favored corporate interests over those of consumers. This political situation regulated into existence a complicated scheme that would allow great profits to be made by energy companies while limiting the amount of costs they would have to cover, allowing them to pass the costs of rampant speculation onto consumers who had extremely little say in the plan (for another detailed analysis of the evolution of the California deregulation debacle, see Severin Borenstein's painstaking treatment).
The result of deregulation was a scenario where consumer choice - always limited by the essential monopoly of the energy grid - was virtually nil, with all the market power in the hands of generators and speculative traders such as Enron. This should surprise nobody - Enron and Lay were among those who set the rules and stood to profit. Enron's whole ethic of "creating markets" was bogus: economic actors don't "create" markets, they serve them. True markets moderate special interests; they don't exist to serve them unless they've been engineered to. But then, an engineered market is an oxymoron (I looked at market rationalization via government intervention in another post). Jerry Taylor of the CATO Insitute points out the how regulations ensured these profits:
Enron, you see, was worried that the incumbent utilities would either under-price the non-utility competitors that Enron wanted on their trading floors or, alternatively, would charge such high prices for access to their transmission systems that non-utility gas and electricity providers would be unable to effectively compete for business. So Enron insisted that electric utilities be forced by law to get out of the generation business, that strict price controls be set for the rates charged for access to the various transmission grids, and that the day-to-day operation of the electricity distribution systems be handed over to state officials who were directed to govern those systems at the behest of the system's "stakeholders" (read: Enron and friends). So Reaganite competition, according to Enron, required new micromanagerial rules about industrial organization and the de-facto nationalization of the transmission systems by officials who'd have to answer to Enron.
Now factor in subsidies and tax breaks. This article by Ron Paul lays it out:
Enron provides a perfect example of the dangers of corporate subsidies. The company was (and is) one of the biggest beneficiaries of Export-Import Bank subsidies. The Ex-Im bank, a program that Congress continues to fund with your tax dollars, essentially makes risky loans to foreign governments and businesses for projects involving American companies. The Bank, which purports to help developing nations, really acts as a naked subsidy for certain politically-favored American corporations- especially corporations like Enron that lobbied hard and gave huge amounts of cash to both political parties. Its reward was more that $600 million in cash via six different Ex-Im financed projects. One such project, a power plant in India, played a big part in Enron's demise. The company had trouble selling the power to local officials, adding to its huge $618 million loss for the third quarter of 2001. Former president Clinton worked hard to secure the India deal for Enron in the mid-90s; not surprisingly, his 1996 campaign received $100,000 from the company. Yet the media makes no mention of this favoritism. Clinton may claim he was "protecting" tax dollars, but those tax dollars should never have been sent to India in the first place. Enron similarly benefitted from another federal boondoggle, the Overseas Private Investment Corporation. OPIC operates much like the Ex-Im Bank, providing taxpayer-funded loan guarantees for overseas projects, often in countries with shaky governments and economies. An OPIC spokesman claims the organization paid more than one billion dollars for 12 projects involving Enron, dollars that now may never be repaid. Once again, corporate welfare benefits certain interests at the expense of taxpayers.
Now let's be clear: Enron didn't do anything that most other corporations wouldn't do. But to say Ken Lay was some sort of genius for simply steering government largesse his way is ridiculous. It would take a mastermind to create the kind of markets they were claiming to create - a mastermind, in fact, such as has never existed in the history of the human race.
This is what makes RTG's praise for Lay so ridiculous: he didn't really do anything. It's especially absurd that in the face of all this risk offloading onto the public sector, Enron still had couldn't juggle their credit needs sufficiently to avoid bankruptcy. Clearly, they were playing a very dangerous game with investors' money.
Management, "Magic", and Exploitation
In telling her side of the Enron story, RTG goes into detail about the nature of the legal entities Enron created to make the books look good. Skilling created shell companies to hide risks from investors and lenders:
Enron's idea was to pay a third party to assume the risk that Rhythms' price would fall. If Enron could find an investment firm to sell it a put option, then its profits would be locked in. Unfortunately, that was impossible. It would violate the agreement with Rhythms, and more worrisome, no investment bank would sell a put option on a volatile, new, thinly traded stock like Rhythms. Andrew Fastow, the CFO of Enron, thought and thought and thought about the problem. And then he solved it. LJM (named by Fastow after his wife, Lea and his two sons, Jeffrey and Matthew) would act as an off-balance-sheet fund (in other words, completely separate from Enron; it would be a partner to Enron, not an asset of Enron). Enron would contribute its own stock (about $250 million) to some outside fund, which would then sell a put option on Rhythms stock to Enron. That outside fund, of course, was LJM.
This was the kind of stuff these executives were doing to create productive value for the market: creating entities to hide huge risks in order to "lock in profits".
And then there's the total farce of mark-to-market accounting, which RTG details lovingly:
Using M2M, Enron could acquire an asset yet report the amount of their expected future value as revenue for that year. For example, Enron could buy a pipeline contract for $100 million. The value of the contract (let's say it was for 20 years) could amount to $20 Billion. Therefore, even if technically Enron was out of $100 million in cash, it could report that it earned $20 Billion in that year. Interesting, isn't it? As I like to call it, pure legal magic.
I wonder if the shareholders in Enron would call it that. Real, productive business doesn't need stupid tricks like this, dreamt up by overpaid executives to pull the wool over people's eyes. But corporatism is all about locking in profits, making things look great, and making lots of money off of appearances - while offsetting costs to others.
What should be clear about all this is that the risks Skilling and Lay were taking were not being divulged to shareholders. All we have now to account for their good intentions was a hindsight admission from Skilling that the partnerships he created were "a horrible idea". One wonders if they were a horrible idea back when they were thinking of ways to tangle them up in webs of accounting.
One of the major problems with the corporate model is that of "agents" and "principals". Investors - the principals - hire management - the agents - to run the corporation that they own. But in practice, management accrues far too much power in the organization and can manipulate it to its ends. It's a culture that, while CEOs aren't necessarily responsible for it, they certainly thrive off of it.
Regardless of protestations by Lay and Skilling, executives don't have the same interests in mind when they take risks on behalf of the investors. Too often their pay is not connected to performance. Lay took $300 million in compensation from Enron for his management skills. To argue that he has the same interests in mind as a pension investor is ridiculous. This conflict of interests problem is built into many corporate situations, and Dean Baker highlights many in the third chapter of his book, The Conservative Nanny State.
The Con Job of Big Businessmen
All too often, this exactly what corporations and their leaders do: find ways to make others pay for their profits, hide information to gain advantage, and generally act like horribly overpaid confidence men. This isn't some new, novel analysis I'm making - no keener or wittier a mind than H.L. Mencken made this observation almost a century ago, when he described the class of man RTG idolizes:
The whole bag of tricks of the average business man, or even of the average professional man, is inordinately childish. It takes no more actual sagacity to carry on the everyday hawking and haggling of the world, or to ladle out its normal doses of bad medicine and worse law, than it takes to operate a taxicab or fry a pan of fish. No observant person, indeed, can come into close contact with the general run of business and professional men--I confine myself to those who seem to get on in the world, and exclude the admitted failures--without marvelling at their intellectual lethargy, their incurable ingenuousness, their appalling lack of ordinary sense. The late Charles Francis Adams, a grandson of one American President and a great-grandson of another, after a long lifetime in intimate association with some of the chief business "geniuses" of that paradise of traders and usurers, the United States, reported in his old age that he had never heard a single one of them say anything worth hearing. These were vigorous and masculine men, and in a man's world they were successful men, but intellectually they were all blank cartridges. ... The notion is certainly supported by the familiar incompetency of first rate men for what are called practical concerns. One could not think of Aristotle or Beethoven multiplying 3,472,701 by 99,999 without making a mistake, nor could one think of him remembering the range of this or that railway share for two years, or the number of ten-penny nails in a hundred weight, or the freight on lard from Galveston to Rotterdam. And by the same token one could not imagine him expert at billiards, or at grouse-shooting, or at golf, or at any other of the idiotic games at which what are called successful men commonly divert themselves. In his great study of British genius, Havelock Ellis found that an incapacity for such petty expertness was visible in almost all first rate men. They are bad at tying cravats. They do not understand the fashionable card games. They are puzzled by book-keeping. They know nothing of party politics. In brief, they are inert and impotent in the very fields of endeavour that see the average men's highest performances, and are easily surpassed by men who, in actual intelligence, are about as far below them as the Simidae.
And that's all there is to it. We have a system, propped up by the state for the benefit of the connected class. They use outright fraud and employ (admittedly bad) legal rules to trick investors, creditors, and other outside interests into looking bigger than they are (these are the same types of people who tell stories about the huge fish or awesome golf plays they made over the weekend). And in the end, they are really just overbearing figureheads for giant insitutions who appear to bumble along, getting profits handed to them on a silver spoon, in spite of their bad character and pithy intelligence.
With conservatives worshipping figures like this, is it any wonder they put the man they did in the White House?
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