Sonnenfeld: Thank you for joining us on this conference call. At some point or another in your lives, all four of you have been a CEO of some sort, and I know you will bring four discrete, valuable perspectives to the discussion.
The underlying theme for this discussion is whether or not you can get carried away with this whole idea as to whether or not management is a profession. Obviously, we don't have a single standard journal. We don't have certification to practice what we do.
Nell, as a licensed professional yourself, as a lawyer, do you think it makes a difference? Or do you think it pushes the metaphor too far to talk about the professionalization of management?
Minow: I think there are two aspects of being a professional. The first is on the level of training and certification and the code. Professions always have some sort of an ethical code. But the second aspect of being a professional, in my mind, is that a professional is someone who serves not just the employer but also society as a whole. And that's why we speak of lawyers who are officers of the court, and that obligation supersedes their obligation to the client.
And so the question is, do executives fall into that category? I'm not sure that certifying them so that somebody can't be CEO unless he's got the right ticket punched is a good thing. If you look at the most successful CEOs, most of them did not go to Ivy League schools, and many of them do not have graduate degrees. And many of them did not do particularly well in school. So I'm not sure that certification is the way to go.
But I would like to think of them as professionals in that other category, where their obligation transcends their company.
Sonnenfeld: The c-plus students were often some of the finest entrepreneurs. Do you think we need a code of conduct, Nell, since you brought it up?
Minow: I do think a code of conduct is a very good idea. And I would like to see that. I'm not sure how you would police it.
Sonnenfeld: Jack, does that sound practical?
Bogle: I'm with the doubters about any ability to enforce it. We're a long way from medicine and law, which, sad to relate, are becoming more and more like businesses themselves and less like professions—the exact opposite of the way that I think things should be going. But there certainly can't be a credential, because I don't know who would establish it. And when you think about the difference between the little shop on the corner that has a CEO (whether he's called that or not; it may be a two-person or even a one-person show) and a multinational corporation, it's very, very difficult to set credentials and to set standards. I mean should you have an educational standard even? Should a businessman or –woman have a college degree? That doesn't seem like a good idea to me.
Sonnenfeld: It doesn't matter, you feel?
Bogle: I think that the chance of someone without a degree being a CEO is infinitely reduced from the reverse. But I don't see how you draw a line across that.
Sonnenfeld: And you'd screen out Bill Gates and a number of successful—
Bogle: And you'd also screen out the guy that runs that little newsstand where you stop to grab your New York Times every morning. Running his own business.
Sonnenfeld: Austin, what do you think about both credentialing and a code of conduct?
Ligon: Well, since I started out as an economist working on health economics, and I've always considered the certification of doctors as primarily a form of restraining trade, I don't have a very positive view of that.
Sonnenfeld: Would you rather not certify doctors?
Ligon: I'd rather not have doctors in charge of determining the terms of competition and the number and type of competitors in their marketplace.
Ligon: But back to what Nell said: The two key things that are probably relevant are practice standards and ethical standards. Not so much professional knowledge, because from a practical point of view we're never going to say, "Gee, you can't be in business or run even a public business without some academic standard." But my view is that a certification, indeed a voluntary certification, for a CEO who runs a public company could be valuable. That's a post-appointment rather than a pre-appointment certification. But it would be run by the exchanges themselves. And you don't have to do it, but it would be a signal to the market.
Sonnenfeld: This is a certification of actual functional competencies?
Ligon: No, not functional competence. That's up to the board, and I don't think there is a practical way to do that. I'm thinking more of: Are you aware of the law? Are you aware of the critical, ethical obligations and knowledge that your new role as the leader of a public company that has shareholders involves? And, third, are you aware of and knowledgeable about the best practices?
Sonnenfeld: So this wouldn't be for any manager. This would be for senior leadership, a CEO in particular.
Ligon: Yes. The world of management is so large that it's pretty hard to understand. I think most good companies have some sort of manager certification. We at CarMax had a week-long program that you've got to go through before we'll let you lead other people. And it's kind of the basics of how to treat people with respect, plus the basics of ethics in our company, and what your leadership obligations are.
But I think the CEO as the leader of a public company steps up to some different standards. And he may be aware of all of them. He may not. But I think the opportunity to have sort of a NASDAQ-New York Stock Exchange joint program that says, "Look, I spent a week with the exchange and we went through what's good practice for a CEO, what a CEO's obligated to do, and I chose to do this because I want my shareholders to know that I take it seriously." I think that would be worthwhile.
Sonnenfeld: But you think that something to do with elemental tools of financial analysis, of understanding marketing channels, that that's too idiosyncratic to every business to ever bother to have a basic certification?
Ligon: Well, I can't imagine any group of people ever getting together and agreeing on what that body of knowledge would be.
Sonnenfeld: Plenty of universities would probably love to fight for the chance to get the battle going.
Ligon: I'd still say, "If a Michael Dell starts a company and he's doing a great job, who in the world are the MBA professors of the world to tell him that he's not qualified to run the company?"
Sonnenfeld: Everybody agrees with that?
Bogle: I was going to say that, when you think about it, understanding all these various elements of a business is not the most important thing. Most CEOs come up through one of those routes but not through all of them. And they have to have some understanding of each. But I don't think I'd want to test them on any of those individually.
I wonder if by talking about the different aspects of management we aren't really talking about something a little bit different. Just reflect on this for a minute. Maybe we're talking about something closer to leadership or trusteeship or the responsibility to stockholders as a leader or setting standards for a company, the character of a company. Rather than the elements we think of as units of management itself.
Sonnenfeld: Well it's almost like we're talking about a knowledge base and a code of conduct that pertains to the CEO or senior leadership in particular as a profession all in itself. Are you guys creating a separate category of a managerial profession that is the top leadership?
Goings: When you look at law or medicine, those are really sophisticated trade schools, very much like plumbing. Those are sophisticated plumbers with very narrow areas of focus—
Sonnenfeld: Isn't management a trade school too?
Goings: Yes. But it is such a wide field, because there are so many different kinds of businesses out there, and so many different kinds of functional skills. I think it gets narrower again when you get into general management and you're running bigger companies. Everybody tends to have their specialty, and they understand a little bit about everything else, at least how to coordinate the resources of the organization.
I would add my personal story. When Avon recruited me and I sold my company, the major reason they said they went to someone like me was that their people had been so focused on functional areas that they didn't have any general mangers.
Sonnenfeld: So, for a physician it's still coming back to the same living bodies. It's not like we want botanists and surgeons to be certified by the same process. Nell, you were going to jump in?
Minow: Well, I was going to say that when I went to law school, although the philosophy students at my university used to deride us as attending trade school, the fact is the professors at the law school told us that as far as they were concerned we would pick up all the mechanical stuff about what a grand jury does and how does a filing look after we graduated. And they felt that they were there to give us the big picture, the political science picture, the history picture, the cultural picture, the critical legal studies and law and economics pictures. And so I'm very big on the Aspen Institute's model of giving businesspeople Thucydides' Peloponnesian Wars to read and getting them to talk about that.
I really hate the idea of business schools just keeping kids' noses in spreadsheets all the time, so that they don't understand what their role is. It reminds me of the old story of the people on the boat who got very upset because one of the passengers was drilling a hole in the bottom of the boat. They told him to stop, and he said, "I don't know what your problem is. I'm only drilling under my own feet." You don't want that; you don't want to promote that kind of micro focus. And I think it's fair to blame that kind of micro focus for some of the problems that we saw at Enron. Everybody thought, "Well, I'm just taking care of my little part and I'm not really responsible for anything else." So, to the extent that we could make sure that people at the top levels of business are aware of the bigger picture, I think that's a very good thing. The question is, who's going to be responsible for that? I don't think it's a self-policing thing. I think any time you set up some kind of a certification process, you create an incentive to make it nonsubstantive. Not one person will ever tell you that the bar exam says anything about whether you are fit to practice law or not. Nobody feels that way. Or whether you attend continuing legal education.
But I do think—
Sonnenfeld: So you think those are pointless in those professions?
Minow: I do. In fact, I refuse to speak at events that give continuing legal education credit anymore because everyone sits there with their Blackberries. It's ridiculous.
Sonnenfeld: Is the intention bad? Or is it the execution? Or is it both?
Minow: You know, you can lead them to the course but you can't make them think. So I think that aspect of professionalism is not necessarily something we want to carry over.
But—I just want to make one last point: I think that it's fair to say that executives are subject to a market test that is pretty sharp and pretty good in terms of policing what they do, and would be even better if boards of directors were more effective.
And some countries are experimenting with certification of directors.
Sonnenfeld: You think you can certify directors?
Minow: Some countries are experimenting.
Sonnenfeld: Some countries are. But do you think so?
Minow: And the U.S. is—
Sonnenfeld:You don't want to certify managers, so why would you certify directors?
Minow: I'll tell you what I would do. I wouldn't certify them. But what I would do, and what is now underway, is the D&O [directors and officers] insurers are working with purveyors of instruction to make sure that people who do complete classes get at least a discount on their D&O insurance. I think—
Sonnenfeld: But isn't that once again perfunctory like you said continuing ed is?
Minow: I have a great deal of faith in the D&O people, who understand numbers very well, to make sure that they only give discounts for effective programs.
Sonnenfeld: How do others feel? Nell said that you can classify professional and unprofessional conduct not based on their level of functional competence but based on their awareness of the larger impact of actions across the firm. Austin, do you think that's right?
Ligon: Once again, we're talking about business and not medicine or law, which are, as Rick points out, very narrow professions with very specific knowledge. In business our basic attitude is, "Look, we're an open economy. Anybody can start a business. And it can be as big as the market says it should be."
Now, if you want somebody else's money, there are fundamental rules that you should have to play by. If you're incompetent and somebody chooses to invest in you, I consider that more their problem. What I'm more concerned about is: Are you honest? And do you understand and fully certify that you're going to comply with the ethical standards required of somebody who's taking shareholders' money?
I've come around to believing that, particularly after all of these options backdating scandals. You can look at Enron and WorldCom and you can say, "Okay, anybody with a lick of sense knew that something was wrong at those companies and that somebody was out of control. And those are isolated crooks." When you look at a hundred-plus companies with executives backdating options, which is the equivalent of theft, I think you have a more systemic problem and something where there's clearly not agreement on what's ethical and what's not. And you know I think you could make some progress just focusing on that issue.
But the other thing I'd say is, I'd be up for actually giving shareholders more power. Let shareholders vote on the CEO's pay package.
Sonnenfeld: Rick, how do you feel about that? Bill McGuire's response when people initially questioned the sheer level of his compensation was, "Look how much money my shareholders are making in this period of time." That's often what you hear. Rick?
Goings: I went to a conference at Stern for the Reynolds American board—which I'm stepping off of because I've taken over Boys and Girls Clubs again, and there's a conflict there. I heard a great deal of dialogue that day on this executive compensation. And on that same day, Henry Kravis [cofounder of private equity firm Kohlberg Kravis Roberts & Co.] was bragging that he has never been able to attract the level of talent that he can today because executives are tired of being beat up on compensation packages.
Now, I'm exactly where Austin is on this thing. Hey, to do this backdating of options, that's just stealing. That's so clear. However, to get the kind of talent you need today, I just see more and more guys say, "I've had it with this scrutinizing."
I spent a half a day with a pension fund recently. They are not the least bit interested in strategy. They're only interested in their governance profile. No classified boards. You know, they have their checklist of things. But what's really interesting is, the moment you did a non-classified board in a company that was in a seven-, eight-year turnaround situation, you could have a private equity group come in in a day and take over that company, wring it out, and take the value. So this thing has gone crazy.
Sonnenfeld: But we've had—
Minow: I would like to respond to that.
First of all, with regard to executive compensation, believe me, pension funds stand up and cheer when someone earns a tremendous amount of money because the shareholders have earned a tremendous amount of money. They never complain about dollar amounts. They only complain about wacky cases where people make hundreds of millions of dollars without creating value for shareholders. If Carly Fiorina makes $180 million in five years where she takes the stock price down by half, that's the kind of thing that I think is legitimate for shareholders to complain about.
With regard to the point about whether the investors should get involved in strategy, I don't think you want a pension fund telling you what your strategy should be. They invest in you. They invest in your competition. They don't know anything about strategy. They do know about corporate governance as a factor in assessing the risk of an investment. And I think it's very appropriate for them to raise that.
Goings: Well, Nell, let me give you a case in point here, though. On that same day, I met with the two senior people of a major investment group. We had a discussion on corporate governance. They said, "We have a simple approach on corporate governance. If we don't like the stock, we sell it." Rather than—
Minow: "Vote with management or sell the shares" is an idiotic thing to say, because what you're essentially saying is, "If I have the opportunity of increasing the value of my holding through pushing them to make some governance changes that are going to create a better market feedback loop for them, I could do that for a dollar. But instead I'm going to sell it at the low because I don't like the management." That's ridiculous. You can make a lot more money going the other way.
Sonnenfeld: Rick, would you say that, if you are talking about pay for performance, some of these investors and investor activists can be caught up on the same short-termism that you were talking about before? If you're a CEO of a large company building up long-term value, it takes a while to pay off—
Minow: That's a good example. A good bad example. That CEO should not get paid until it does pay off.
Goings: In the real world, Nell, you're not going to attract the "A" players to do that.
Minow: Really? Lee Iacocca took a dollar a year and escalated stock options.
Sonnenfeld: Not before he was wealthy. Steve Jobs did too. After they were wealthy.
Minow: I think there are a lot of people who are willing to bet on themselves. And if they're not willing to bet on themselves, then I, as a shareholder, am not willing to bet on them either.
Sonnenfeld: Jack, what do you think about the market being the arbiter or being responsible to professional constituencies?
Bogle: I think the market is terrible. We have a whole world constructed around an expectations market, which is betting on the future, and we've forgotten the real market of—the way I put it is, real companies run by real people and making real products and real services and making real profits and paying real dividends using real strategies. And that's not what the market's about.
It's too easy to shape expectations by what we call financial engineering. And, as everybody must know, it's a hell of a lot easier to raise the price of your stock than it is to raise the value of your company. So I don't like the stock market as an arbiter of management performance. I hear so many opinions here today where I've never been as sure about anything as most of you seem to be about everything.
Goings: I'm not sure of anything other than, it takes time to do this. It's interesting right now that decisions I've had to make taking an old brand and trying to—Who the hell needs Tupperware today? You can go buy ten of these GladWare things for a dollar. How do I take a company—when I know there are a million women out there, mostly disadvantaged, for whom this has provided enlightenment, education, and empowerment—and how do I find a way to make this company perpetuate in the future?
Well, I'll tell you, I had a couple easy options. I could have exited some markets there, shown some great spikes, and it would have done great things for the stock. But long term it would have hurt a lot of people.
Sonnenfeld: You could have sold out the brand, the great name.
Goings: Oh, it just would have been easy to do. So what we said, we got a board of directors who were aligned on this and said, "You know what? We're going to make a difference in the world on this thing." And yes, we had profit incentive and we're a business. But to rebuild that, it's the hardest thing I have ever done. And now it's starting to really pay off. If I did this over again, I would do it privately, because it's caused such a distraction dealing with external markets.
Sonnenfeld: Today you would go for private equity. This is a pretty condemning statement of capitalism in the public market, isn't it?
Minow: It's remarkable to me that anybody would think that they are going to have more freedom and flexibility under private equity than they do under Sarbanes-Oxley.
Sonnenfeld: It's more patient though, isn't it, Rick?
Goings: Oh, it certainly is. I think you have a better chance for understanding of your key investors.
Sonnenfeld: Austin, you kind of did that. You were under a protected shell. CarMax, of course, as a public company, did extremely well. But when you first launched it, it wasn't all that successful. But you were protected from public markets in the beginning, right?
Ligon: Well, we had a very sophisticated venture capitalist, is what we had. And we could never have survived to accomplish what we accomplished with a traditional venture capitalist or with just IPO money, because we wouldn't have had the patience. We almost had our parent company run out of patience. I don't think it's bad that there's a parallel market in private equity, because I think that's where a lot of companies belong until they're really ready for the open marketplace.
Minow: That's the wonderful richness of our capital markets. They make all of that variety available.
Sonnenfeld: Jack, did you want to jump in here?
Bogle: Yes. The biggest problem, I really believe, is we changed the nature of ownership in the country so much. I mean radically. Instead of institutions owning 8%, as they did a half-century ago, these agents now own 68%. There's a change for you. And the agents aren't investing their own money. Number one, you don't pay attention to other people's money the way you pay attention to your own. And number two, these agents are paid for doing something. So they turn the portfolios over at an idiotic rate of more than 100% a year. So not only are they not investing their own money, they're not representing their principals. And they also are really not investing anymore. They're speculating.
Sonnenfeld: Nell, I've never heard you say Jack Bogle is wrong, but you're going to have to take a position here.
Minow: No, Jack Bogle is always right. And what I don't understand is why corporate America, which is the largest investor in America through the ERISA funds, doesn't take the lead. Why don't they all get together and say, "We are the trustees of our pension funds, and we're going to make them exemplary patient investors"?
Bogle: Because in many respects corporations own themselves. Think about that for a minute. Together they own 50% of their own stock, through 401(k)s (they don't really own it but they influence the managers) and their own pension plans. All the public corporations, in effect, control their own stock.
Sonnenfeld: Jack, if that's the case then—and we're coming back to this metaphor of professionalism—you're saying that now it's come to a point where management's only responsible to itself.
Bogle: Exactly. These are big problems. But we need to make sure mutual funds are run not for the management companies but for the shareholders, by giving independent directors the real power to do something. And we need to get pension funds off corporate America's balance sheet. We need to require those fiduciaries to act like fiduciaries, and not corporate executives who are constantly raising the returns on their pension plans to bail themselves out.
So it's really an ownership problem. And this gets back to the essential nature of what's different about a CEO. And I think we've defined the problem wrong. We're not talking about management here. We have MBAs and people getting management degrees. And they can do what they wish in their own particular area. But CEOs are a different breed of cat. Think about this for a minute: The CEO is the only person in the company who doesn't report to another person. Start with that. He or she reports to a group.
Ligon: A group he selects.
Bogle: And he doesn't even think about himself, usually, as an employee of the company—which he'd better start to do pretty quickly. When he takes on that CEO job he has a certain responsibility—we call it a fiduciary duty—to make sure that the company's run in the interest of shareholders, with directors overseeing that that is exactly the case. And that's where I think we've departed from traditional standards.
So I don't look at it as a management issue when we're talking about a publicly held corporation. I look at it as a leadership/CEO/fiduciary duty. Call it "trusteeship." Use "stewardship." That's a word we don't hear much about. But it's a very, very good word. And the responsibilities are there, rather than management. And I think if we talk about that crucial fulcrum between the interests of the shareholders and the interests of the management, that's why we need independent directors to play a big role, because it's very hard for the CEO to do both when he's in control.
I think it would be a heck of a lot easier to have some kind of a code of conduct along those lines, than a code of conduct about "management."
Minow: Don't all companies have codes of conduct? I mean we all know the Enron code of conduct was very explicit and really exemplary. But—
Bogle: They tend to be vague. I would be much tougher on a CEO.
Ligon: And that's where I go back to the idea—when you become a CEO, as Jack is, you've spent a career making a lot of money, doing a lot of things, but suddenly you're in a completely different position.
And there's an opportunity to sit down and say, "You've just joined an exclusive club. And tell you what, we've got a week. You don't have to come. But we've got a week where we want to make sure that you're aware of what the duties and responsibilities of this new job you've taken are."
I think that would at least be a useful several days spent for a new CEO of a public company.
Sonnenfeld: Now some people are complaining that the rules themselves are driving business offshore.
Ligon: I think all of us who have dealt with Sarbanes-Oxley would agree that there are some aspects of it that aren't adding any value.
Sonnenfeld: But how about just on this notion of certification that is part of Sarbanes-Oxley?
Ligon: I think every CEO who sits down and signs the certification looks a little more carefully, actually quite a bit more carefully. The idea of a potential criminal penalty from that signature concentrates your mind some. And I think that's a useful part of Sarbanes-Oxley.
Minow: I'm not going to argue with you about it.
Goings: I take it as seriously now as I did before Sarbanes-Oxley. But we did public executions back then any time we ever had any kind of issues in market. So it's only changed some of the ways that we do things. And we're spending double the audit fees today.
Sonnenfeld: How about the American business community collectively then? Do they act like a professional body? When we see misconduct, do the professional associations, groups of business leaders, trade associations speak out and point a finger of shame? Or are we too tolerant of misconduct?
Ligon: To say that the legal profession is better would be laughable. And if you're really familiar with how rarely doctors ever enforce an action against other physicians—
Sonnenfeld: It's pretty tough to deny a physician their right to practice and all the rest—
Ligon: The truth is, I think, executives are no better or worse than the legal or medical profession.
Goings: Can I come back to what Jack was saying? Everybody who becomes this different breed, that becomes a CEO, they come up through functional areas, more or less. But once you become a CEO you've reached a level where you have to have unflinching integrity and just unconditional responsibility. And it would be helpful if in more of our education, whether it's undergrad, whether it's in graduate business school, and whether it's in how we're educating our people as we're raising them in management, we focus more attention on those kinds of things, so that by the time somebody did become a CEO, this isn't the first time they've heard it. These are real businesses, real people. They're all different. But ethics are ethics.
I never will forget, I was walking through a Boys and Girls Club in Atlanta. And I looked up on the wall and some kid—and I don't know if it was a code from somebody else—had painted the letters across the wall, "Character is what you do when nobody's watching."
That's what needs to be taught.
Minow: So what happens then when we have a CEO who writes a book that is sent out under the company's name, over 200,000 copies, and then it turns out he plagiarized it?
Goings: Fire him.
Minow: I'm with you.
Sonnenfeld: Even if his performance was strong?
Sonnenfeld: So fire him. I would agree.
Goings: If a mid-level clerk would be fired for that act, you have to fire the CEO.
Ligon: I agree, too. At least our own ethical policies would force us to fire them.
Sonnenfeld: You guys would all have fired that CEO even though his performance was strong and his conduct was otherwise acceptable because—
Ligon: Absolutely. We do it every day with other associates.
Goings: The Boeing deal, fire his ass. I mean I'd go down the list.
Sonnenfeld: So, you would all enforce a high standard of integrity for that different breed, the CEO.
Our hour is up, but let me just say that, as promised, we covered all perspectives in here. And I want to thank you.