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Plutocracy Today, Kleptocracy Tomorrow?
A Look at Corporate America's Latest Megascandal

by Sam Pizzigati
September 4, 2004

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We here in the United States currently have more people behind bars than any other developed nation in the world. In fact, as a percentage of population, we have five times more people in jail than the British, ten times more than the Swedes, and fifteen times more than the Japanese.

But here’s the amazing part, With all these people we have behind bars, our biggest crooks are still traipsing around free as the breeze — and figure to stay free forever.

Take, for instance, Conrad M. Black.

Never heard of him? Over a seven-year period that ended last November, Conrad Black and his gang ripped off over $400 million. And they never once had to pull out a gun. They just pulled rank, as the top executives at the world’s third-largest newspaper publishing empire, Hollinger International.

Hollinger CEO Black and his four top executive colleagues, a special report just submitted to the U.S. Securities and Exchange Commission is charging, turned their company into what amounted to a “corporate kleptocracy.”

Black and friends, the 513-page report documents, “made it their business to line their pockets at the expense of Hollinger almost every day, in almost every way they could devise.” They succeeded to an almost unimaginable degree. They walked off with loot that equaled 95.2 percent of their company’s entire net earnings from 1997 through 2003.

Their accomplices in this heist? The Hollinger corporate board of directors, an august body that included luminaries who ranged from Henry Kissinger and former Illinois Gov. Jim Thompson to Richard Perle, a key architect of the Bush administration’s war in Iraq. These superstars collected their ample board director fees — and repeatedly looked the other way as Black and friends emptied out Hollinger’s corporate coffers.

Work on the report that reveals all this crime-in-the-suites began soon after Black resigned from his Hollinger CEO post last November. Richard Breeden, a former SEC chairman, led an investigative team that interviewed over 60 witnesses and reviewed almost 750,000 pages of documents.

Black and his top aides, Breeden’s investigation concluded, essentially turned Hollinger International, the owner of the Chicago Sun-Times and a vast network of smaller newspapers, into a personal “piggybank.”

The thievery followed no single pattern. Some of the loot that Hollinger’s execs amassed came from common garden-variety fraud. The Black gang, on occasion, simply falsified and backdated documents. Other dollars came from unloading valuable Hollinger newspaper properties at deep-discount prices to other companies Black controlled.

But the single biggest share of the loot came from “management fees” that went from Hollinger to a private company run by Black and his fellow executives. The Hollinger executives, in effect, outsourced Hollinger management to themselves. These fees alone funneled out of Hollinger over $218 million.

But the thievery didn’t stop here. Black routinely expensed to Hollinger bills for his own personal consumption. Hollinger footed the bill for his exercise equipment, stereo, and opera tickets. Hollinger paid for his wife’s handbags and jogging attire. Hollinger even shelled out $90,000 to refurbish a Rolls-Royce for Black’s motoring pleasure.

Conrad, of course, only used his Rolls for tooling around town. For all longer journeys, he and his wife Barbara had the Hollinger corporate jets at their disposal. One 33-hour round trip — to Bora Bora — set the company back $530,000.

In New York, meanwhile, Hollinger cash served to turn Mrs. Black into a hostess with the mostest. The bill for one of her birthday dinner parties totaled a neat $42,870. Among the guests for “beluga caviar, lobster ceviche, and 69 bottles of fine wine”: Barbara Walters, Peter Jennings, and Charlie Rose.

Where did Mrs. Black get the time needed to orchestrate such prime-time soirees? She did have a job, after all. Luckily for Mrs. B, that job was with Hollinger, a sweet no-show position that paid her $1.1 million a year.

In all, the Breeden report notes, Black and his top four executive friends personally pocketed $57.2 million in 1999, $116.8 million in 2000, and $60 million in 2001. Meanwhile, in its official disclosure documents, Hollinger was reporting that its top five execs earned only $1.2 million in 1999, $5.4 million in 2000, and $2.8 million in 2001.

For all this thievery, Conrad Black so far faces no criminal charges. A civil lawsuit is currently pending against him, and the Breeden report agrees that the money the Black crew “looted” from Hollinger should be returned, with damages.

In typical thefts, of course, giving back the money you steal just doesn’t cut it. If you rob a bank, get caught, then offer to give the money back, you’re still going to jail.

But jail seems most unlikely for Conrad Black. He behaved, in the end, not all that differently from his fellow CEOs. He spent his time, for the most part, simply wheeling and dealing, buying and selling other companies. The more deals he cut, the more money he “earned.” In contemporary corporate America, that’s standard operating procedure.

We currently have, in corporate America, no limits on how much this standard operating procedure can return to its practitioners. We have essentially concluded, as a society, that no reward for wheeling-and-dealing prowess can ever be too high, a conclusion that makes behavior like Conrad Black’s almost understandable, if not inevitable.

An analogy might help here. Suppose you were walking along on the shoulder of a busy highway. Cars are zooming past you at 50 and 60 miles an hour. Suppose you see, on the other side of the road, a $1 bill sitting under a rock. Are you going to try to cross that busy highway and grab that $1 bill? Of course not. You could cause an accident if you tried to cross that highway. You could get yourself killed.

But what if you spotted tall stacks of $100 bills on the other side of the road. Would you try to cross that busy highway to get at those stacks? Some people might, even if that meant risking an accident that might leave innocent people badly hurt.

We find ourselves today in exactly the same situation with corporate America. CEOs see huge fortunes just beyond their grasp, and they’ll do just about anything to get at them. They’ll downsize workers, they’ll outsource jobs, they’ll cook books. They’ll even thieve. And none of this should surprise us. With unlimited rewards as an incentive, outrageous behaviors will always be the result.

So what do we need to do? The author of the compelling Hollinger investigative report, former SEC chairman Richard Breedem, suggested a solution in an equally compelling report he completed last year on WorldCom, the telecom giant that had gone bankrupt midway through 2002.

In that earlier report, Breeden saw an opportunity to fix what ailed all of corporate America, not just one corrupt company. And what ailed WorldCom and the rest of corporate America, he concluded, was an incentive system run totally amuck, an incentive system that held out for CEOs the prospect of fantastic, unlimited riches.

Bountiful incentives, Breeden noted in his WorldCom report, encourage a “reckless pursuit of wealth.” And that reckless pursuit at WorldCom, Breeden found, “created a climate conducive to the fraud that occurred,” a fraud that ultimately cost WorldCom investors $200 billion in share value.

The fix? Breeden recommended, and a U.S. District Court judge subsequently ordered, nothing less than the wholesale dismantling of WorldCom’s entire executive incentive structure. No stock options. No retention bonuses. No personal use of corporate aircraft. And, perhaps most significantly, no unlimited compensation.

Under the terms of Breeden’s WorldCom report, the new corporate board for WorldCom, now known as MCI, has been directed to set a lid on “total compensation from all sources” for its top executive, a “maximum dollar amount for any single year.”

MCI’s new incentive structure, Breeden urged in his report on WorldCom, ought to become a model for all of American business.

“We hope all of corporate America,” he noted, “will look at it very carefully.”

So far, America, corporate and otherwise, has paid precious little attention to Richard Breeden’s call for a cap on income at the top. How many more Hollingers will we have to encounter before that ever changes?

Sam Pizzigati is a labor journalist and the editor of Too Much, an online weekly on excessive income and wealth. His latest book, Greed and Good: Understanding and Overcoming the Inequality That Limits Our Lives, was published earlier this summer.