Who Stole the American Dream? (10 page)

Unlike Al Dunlap, who was managing plants from his distant headquarters in Florida, Wahl and his heir apparent, son Greg, lived in the same town as their workers. They were a privately owned, family-run business, operating profitably for seventy-five years. “
We actually care about our people,” Greg Wahl explained. “Our kids go to school with their kids. We go through life for generations with our workers.”

As a private company, the Wahls didn’t have to cater to Wall
Street. “We don’t have a stock price,” Jack Wahl emphasized. “No one is interested in the day-to-day value of the stock.”

“That’s interesting,” I said. “You’re suggesting that Wall Street’s interest in stock prices is inefficient.”

“It can motivate people for the short term,” Wahl replied. “You need to look at the long-term value of the corporation. And it’s not just one year. It’s not just two years. It’s decades, as far as I’m concerned.”

Wahl’s comment was more prophetic than I realized at the time. Al Dunlap was in deep trouble because his strategy was to make dramatic cuts, boost the stock price, and sell the company to another business quickly to make his exit while Wall Street investors cashed in their winnings. Dunlap had done that half a dozen times. But now his exit strategy was stymied because he couldn’t find a corporate buyer for Sunbeam. The stumbling block was Sunbeam’s stock price. It had gotten too high.

In addition, as Jack Wahl had suggested, Dunlap’s severe cutting had crippled Sunbeam. But that was not obvious to investors because Dunlap had exaggerated Sunbeam’s profitability by claiming big write-offs for 1996, so that his first year—1997—looked more profitable than it really was. To maintain the image of success,
Sunbeam had been exaggerating its sales and income by what investment analysts call “inventory stuffing”—claiming sales for warehouses full of appliances that it had allocated to customers but which had not been actually bought or paid for.

In June 1998,
Barron’s
saw the downside at Sunbeam and accused Dunlap of “accounting shenanigans and puffery,” falsifying the impression of success.
Sunbeam’s stock started tumbling, and two weeks later, Dunlap’s unhappy Wall Street sponsors fired him. In February 2001,
Sunbeam filed for bankruptcy.

Sunbeam shareholders and the Securities & Exchange Commission
filed lawsuits against Dunlap and his lieutenants, accusing them of inflating the company’s stock price through fraudulent accounting. Without admitting or denying the charges,
Dunlap and other top Sunbeam executives paid $15.5 million to shareholders to settle the suits. The SEC barred him from ever again serving as a corporate officer. Still, Dunlap walked away with a fortune big enough to
retire to a much larger estate than the one I had seen—a 9,700-square-foot mansion with its own pond and an indoor swimming pool.

At every step, Dunlap’s defense echoed the mantra of New Economy CEOs: He was creating shareholder value. “I work for you,” he told Sunbeam shareholders. “You own the company.” To Wall Street, that signaled a CEO focused on boosting the company’s stock price in the short term for investor gains.

That cost-cutting, shareholder-value formula rankled more traditional corporate leaders such as Bob Galvin at Motorola and Henry Schacht, former CEO of Lucent Technologies, who believed in long-term growth and value. “
Firing people and slashing things and selling it to somebody else, that’s a no-brainer,” Schacht said. “That’s not creating value. That’s destroying value, in my view.”

“I don’t think that
the chain-saw mentality knows anything about growth,” agreed Stephen Roach, chief economist for Morgan Stanley investment bank. “It knows a lot about cutting. And to me, that is a short-term strategy that is ultimately a recipe for disaster.”

“They make a lot of money for the shareholders,” Schacht added. “But the debris they leave behind seems to be unthinkable.”

That conflict over the social costs of short-term profits versus the enduring gains from creating long-term value is still playing out today in the political debate over
Mitt Romney’s corporate strategies at Bain Capital, the private equity firm that Romney ran for nearly
fifteen years. The critique that Schacht and Roach directed against short-term gains from downsizing in the 1990s applies as well to the behavior of the big Wall Street banks that fueled the financial collapse of 2008 by engaging in the highly profitable but ultimately disastrous mortgage and derivatives trade of the 2000s. The risks they took for short-term gains made hundreds of billions of dollars in Wall Street bonuses but had devastating consequences for Main Street and for the American economy.

Some in the business community would like to dismiss Al Dunlap as an aberration—an extreme downsizer. But while it is true that Dunlap overplayed his hand at Sunbeam and that his Rambo posturing offended some CEOs, other corporate chiefs wielded the ax much as Dunlap did—and often more brutally.

“Once upon a time, it was a mark of shame to fire your workers en masse. It meant you had messed up your business,”
Newsweek
’s business columnist Allan Sloan commented in early 1996. “Today, the more people a company fires, the more Wall Street loves it, and the higher its stock price goes.”

In a cover story titled “The Hit Men,”
Newsweek
listed the big guns of corporate cost cutting in 1990. They represented some of America’s most profitable blue-chip companies: IBM CEO Lou Gerstner with 60,000 layoffs; Sears, Roebuck CEO Ed Brennan with 50,000 layoffs; AT&T CEO Robert Allen with 40,000 layoffs; Boeing CEO Frank Shrontz with 28,000 layoffs; Digital Equipment CEO Robert Palmer with 20,000 layoffs; and General Motors CEO Robert Stempel with 74,000 layoffs.

By the mid-1990s, structural layoffs—not temporary layoffs, but jobs that would never come back—were a fixture of America’s economic landscape. What caught
Newsweek
’s eye in its 1996 cover story was that large-scale firings had moved from the factory floor to the
office suites of white-collar professionals and middle managers at firms such as IBM and Chase Manhattan Bank.

Probably more than any other U.S. business leader in the past three decades, Jack Welch, who headed General Electric from 1981 to 2001, personified the Darwinian New Economy CEO.
BusinessWeek
called Welch “the gold standard against which other CEOs are measured,” and
Fortune
named him “the Ultimate Manager” of the twentieth century. Welch gained that reputation by drastically streamlining General Electric, imposing change from within, and boosting its stock price.

Welch’s
hallmark was downsizing—slashing 130,000 jobs, 25 percent of GE’s workforce. He claimed that saved GE $6.5 billion. Welch not only cut rank-and-file employees on the shop floor and in the back office, but made a point every year of
firing GE managers rated in the bottom 10 percent by their bosses. Welch’s demanding,
abrasive management style was legendary,
Fortune
reported, and he ran meetings “so aggressively that people tremble. He attacks almost physically with his intellect—criticizing, demeaning, ridiculing, humiliating.” As one executive put it, “Working for him is like a war—a lot of people get shot up.”

These tactics made Welch a personal fortune. In one year alone, his final year running GE in 2000, Welch collected $123 million in pay, bonuses, stock, and stock options, plus the guarantee of roughly $2 million a year in perks, lifetime use of a Manhattan apartment (including food, wine, and laundry), access to corporate jets, and a range of other in-kind benefits. All this luxury at stockholder expense for a man so ruthless in cutting GE employees that he was nicknamed “Neutron Jack,” for the modern weapon that kills people but leaves buildings standing.

Welch was unabashed in rejecting the employee-friendly legacy of the earlier generation of GE executives, including his widely respected
predecessor as CEO, Reginald Jones, who talked of loyal employees as the company’s most prized asset. Welch scoffed at the 1950s and ’60s mantra that loyalty was the vital ingredient for high corporate performance. “
Loyalty to a company, it’s nonsense,” Welch snorted. “If loyalty means that this company will ignore poor performance, then loyalty is off the table.”

The payoffs for the captains of U.S. industry from wedge economics has been enormous. Average CEO pay has soared since the 1980s compared with earlier, more successful periods of American capitalism. In the 1970s, the Federal Reserve reported that chief executives at 102 major companies were paid $1.2 million on average, adjusted for inflation, or roughly 40 times an average full-time worker’s pay. But by the early 2000s, CEOs at big companies had enjoyed such a meteoric rise that their average compensation topped $9 million a year, or
367 times the pay of the average worker. At Wal-Mart, which bills itself as the friend of the struggling middle class and the working poor,
former CEO Lee Scott was paid $17.5 million in 2005, or roughly 900 times the average pay and benefits of the typical Wal-Mart worker.

With America’s changing political climate and the rising influence of pro-business conservatism, CEOs went from being under fire in the 1960s and 1970s, as Lewis Powell observed, to being lionized as superstars in the 1990s and 2000s, supposedly entitling them to pay on a par with Hollywood celebrities and star athletes.

CEOs and their corporate boards boldly argued that rising CEO pay was merited because CEOs increased shareholder value; moreover, they said, the rise was dictated by the invisible hand of the market.
Shareholder activists and scholars dispute this. Princeton economist Paul Krugman suggested that the seedbed for CEO fortunes was the cozy fraternity inside corporate boards of directors. “The key reason executives are paid so much now is that they appoint the members of the corporate board that determines their compensation …,” Krugman said. “So it’s not the invisible hand of the market that leads to those monumental executive incomes; it’s the
invisible handshake in the boardroom.”

As Krugman was suggesting, a large proportion of corporate board members in recent decades have been other CEOs, former CEOs, or business colleagues with ties to the CEO whose pay they were setting. In one poll of 350 corporations over a fifteen-year period, CEOs said they considered one-third of
board directors as their “friends,” not just acquaintances, and an even higher proportion—50 percent—of the compensation committee members as “friends.” In short, corporate boards are a club, and CEOs as a group have been ratcheting up their own collective pay scales.

Somewhat puckishly, former Federal Reserve Board chairman Paul Volcker suggested that this was “
the Lake Wobegon syndrome” at work, alluding to humorist Garrison Keillor’s fictional town where “all the women are strong, all the men are good looking, and all the children are above average.” As Volcker quipped to Congress, “Everybody wants to be in the top quintile.”

In short, every company believes its CEO deserves higher pay than his peers. No company wants to give its CEO below average pay, because as Harvard Business School professors Jay Lorsch and Rakesh Khurana put it, “
that would imply that the board of the company … believe its performance is below average.” In fact, corporate boards, forced by the SEC to disclose how they set pay, have admitted that “peer” comparisons drive CEO pay, and they typically assume their CEO is “above average” and deserves to keep ahead of the pack. Moreover, some companies stack peer comparisons by matching themselves against bigger companies with higher CEO pay.

It irks some former CEOs that peer benchmarking has become more important in setting CEO pay than a company’s performance,
which is supposed to be the yardstick—pay for performance. DuPont CEO Edward S. Woolard, Jr., said that corporate boards keep pushing up their CEOs’ pay “because they think it makes the company look strong. So when Tom, Dick, and Harry receive compensation increases,… I get one, too, even if I had a bad year,” with the result that
CEO pay spirals ever upward.

In sum, what lies behind the widening gulf between CEOs and middle-class employees in the New Economy is not only changes in the marketplace, but a fundamental shift in the collective attitudes of American CEOs, the corporate ethos that sets the norms for what constitutes fair and reasonable pay for CEOs and for employees.

America’s business leaders have a different explanation. They tell us that the meteoric rise in CEO pay and the wage freezes and job cutbacks of the 1990s and 2000s that have cost average Americans so dearly reflect impersonal market forces, emerging new technologies, and the pressures of low-cost global competition. And while it is undeniable that technological change and globalization have forced major changes, that is at best only part of the story. The American business response to those challenges created a more Darwinian form of capitalism than elsewhere.

Those same forces of change have swept through other advanced countries, such as Germany, Japan, France, Australia, and Scandinavian Europe, yet the Organisation for Economic Co-operation and Development (OECD) reported in 2011 that none of those countries shows the huge disparities in income between the executive class and rank-and-file employees that have developed in the United States.

So disproportionate has America’s ratio of incomes become that in late 2011, the OECD
ranked the United States thirty-first—fourth from the bottom—among its thirty-four member countries. Only Mexico, Chile, and Turkey did worse. All of the advanced countries
of Europe and Asia—the ones whose economies were most affected by globalization and new technology—rank better than America in sharing the wealth. So globalization and technology do not explain the U.S. wealth gap.

Something happened in the United States that was different—a new CEO mind-set. Middle-income Americans, from the assembly line workers to bank tellers, have largely been victims of a U-turn in the ethos of U.S. business leaders.