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I was perusing the Wall Street Journal this and you will never guess what I learned?  I was stunned to find that high-ranking corporate executives sometimes use the corporate jet for personal use.  Not only do they fly the company plane for interminable meetings with Wall Street analysts, big customers and regulators, occasionally, they use it to fly to the Virgin Islands.

 

Ladies and gentlemen, I am floored.  Do you mean to tell me that there are perks associated with being the CEO of a fortune 50 company? 

 

I want to make a few things clear, I am against corporate theft and I am for corporate transparency, but I feel that there is more to the outrage over these allegations.  I sense that people have their undies in a bunch because CEOs and other executives are ‘living the high life.’  CEOs are fat cats while the lowly worker toils in obscurity for lousy pay and benefits.  Whether the American worker is properly compensated is a discussion for another time and another column – but American workers are often interchangeable and somewhat commoditized (your feckless writer included).  But CEOs are different and thus should be treated differently.

 

We as casual watchers of corporate shenanigans should not be so quick to assume that being a CEO is easy or that it is particularly glamorous.  CEOs are often unfairly blamed for the misfortunes of their companies (and I would also add, unfairly feted for their successes), they are open to public scrutiny, they are personally liable for the shortcomings of their accountants and employees (see Sarbanes Oxley) and although it sounds like fun to you and me, they have brutal travel schedules.  These travel schedules are not all about cocktail parties and hotel openings – often it is meeting with angry customers, skeptical analysts and smug money managers, often in rapid succession.

 

We as investors in these companies really want one thing; we want to see our investments grow.  Above all else, we want the appropriate team assembled at the heads of our companies working hard to make us money.  [If one of us has an axe to grind about Wharton-Educated CEOs making too much money, one ought to look into real estate or other investments.]   There are two issues here, first, are our companies disclosing all the perks that our CEOs are receiving –I hope that answer is yes, but there has to be a materiality check here.  If the CEO sometimes takes some personal calls on his (or her) cell phone, but expenses the entire cell phone bill, I am alright with that.  If the CEO sometimes uses the office photo copy machine for the NCAA basketball pool, great.  If the CEO uses the company credit card on a three-night, strip club bender with aged scotch and steak dinners, as long as it is with potential customers, I am also OK with that.  If the dollar amount of those perks gets to be large, yes, they should be disclosed.  But if the question is whether or not these executives should be able to have any personal perks, I would have to say yes.  But the second issue, whether or not they are entitled to extraordinary perks is more interesting.

 

If this argument was about Tom Brady and the New England Patriots, I bet fewer people would care.  They would say that Tom is completely irreplaceable.  But let’s examine this further.  First off, being a CEO of a fortune 50 company is probably more difficult than being QB for the Pats.  First off, Tom Brady is only realistically competing against men, aged 22-30 who have attended a top 25 school and played QB there.  If you are a CEO, you are competing against men and women, aged 30-70 who hail from virtually anywhere on the globe.  If you are the CEO at one of these firms, you are probably more unique and have battled tougher odds to get there.  Secondly, it takes about one season (maybe two) to learn an NFL offense.  How long do you think it takes to meet, greet and gain the trust of all the significant people that come in to contact with a large company?  There are competitors, customers, suppliers, analysts, money managers, recruiters and lawyers; let alone learning about the actual business.  These people take longer to cultivate, are tougher to find and I would argue are more valuable to their organizations.

 

What am I getting at?  In order to keep one of these leaders at the helm of our companies (and once we are shareholders, it is important to think of our investments as ‘our companies’) what would we be willing to pay?  If it is an extra couple hundred thousand dollars in air miles, I bet we would all be happy to pay it. And furthermore, if our CEOs are somewhat safer in terms of kidnapping or other pratfalls, we get that for free.  And just to pile on, if our CEO is even slightly more likely to fly out and meet a client or a potential hire than to do it over the phone because he can fly on the corporate jet, then great.

 

To sum up; yes, we as shareholders want visibility in to the compensation packages of our CEOs but we also want to keep them happy, motivated and in the game.  So Mr. Otellini, please have some extra peanuts on your way to Milan.  Mr. Camilleri please, choose whichever DVD we have in the plane’s library and Mr. Weill, please have an extra drink on me on your way to San Francisco. 

Before I get to this week’s column, let me first state how excited I am to be affiliated with this most excellent site.  We have gathered here a first-class roster of talent commanding deep, battle-tested experience in virtually all facets of markets, asset classes and financial instruments.  I am honored to join this stable of investment experts in what will, in time, be regarded as the very best independent financial website on the ‘net.

 

But as The Wolf from Pulp Fiction wisely intones, “Let’s not start sucking each other’s [expletive] just yet.”  Enough self-congratulation, onto this week’s column:

 

This is a great country.  Seriously, this country is set up so that with minimal effort you can do very, very well.  What’s more, if you are privileged enough to earn your keep in the finance industry, all you need to do is work maybe 9-10 hours a day, exhibit some bare minimum competency, and keep your head out of your ass.  That’s all it takes.  After doing this for a few years, if you follow the above formula, you will soon find yourself eating the finest meats and cheeses, living in a nice crib, driving a sweet ride and dating hot chicks. 

 

But guess what, slick? 

 

This can all be taken away from you. 

 

They can take away your bank account.  Your AmEx platinum.  Your Audi, your Park Avenue apartment.  And if they take those away, the hot chicks will be gone faster than crack at Courtney Love’s place.  If you don’t believe me, ask MC Hammer.

 

But here’s the thing:  they cannot take away your honor.  They cannot take away your balls, or your word, as Tony Montana [LINK:IMDB] so eloquently noted.  That’s all you have in this world, ultimately.  You have your reputation and your honor that you trade upon every single day in order to do deals, in order to command your partners’ trust, in order to make the mad Benjamins so coveted by the strippers at the Olympic Garden [LINK] in Las Vegas .

 

As such, my word and my reputation mean more to me than my entire net worth – not because of some high-minded principle but because of the simple calculus that my word and my reputation represent the sum total of my future earning capacity as a finance professional. 

 

And you should take the same attitude.  Jealously guard your scruples and your reputation and do not ever compromise your ethics or your word.  Strict adherence to this policy will pay dividends greater than any investment you will ever make in your lifetime.  The ethics of the people who do business are truly the underpinnings which support the generous harvest of capitalism.  Without ethical norms, the system would fall apart and we’d all be living like citizens of a third-rate socialist country.

 

Which brings me to Bernie Ebbers.  Bernie, you miscreant, you worm, you little pubic louse.  Bernie, you toadie, you coward.

 

Bernie Ebbers, for those of you returning from the deepest Congo, is the former CEO of Worldcom, a glorified pyramid scheme.  As the Wall St. Journal noted in a prescient article in the late nineties, Bernie was practicing what Brealey and Myers describe as “the Bootstrap Game”. 

 

(Richard A. Brealey and Stewart C. Myers’ “Principles of Corporate Finance” [LINK:AMAZON.COM] is the pre-eminent corporate finance textbook used at the finest business schools in the world.  If you haven’t already:  purchase it, embrace it, digest it.  Know it cold, because the guy sitting across from you almost certainly does.)

 

Where was I?  Ah, the Bootstrap Game.  This neat little scheme involves a highly valued company which acquires smaller, slower growing companies which are not as highly valued.  In terms of p/e ratios, a predator which trades at a high p/e (presumably due to high growth prospects) can issue stock to acquire a target with a low p/e and immediately accrete its (the acquirer’s) earnings per share, without having added any value at all from the acquisition.  This can be repeated ad nauseum, resulting in accelerated earnings growth which (using circular logic) is used to justify the high p/e of the acquirer. 

 

“But Hollywood Jack,” the alert reader will ask, “isn’t the target company a low p/e company due to its own low growth prospects, and won’t the integration with the acquiring company inevitably lower the long-term organic growth prospects of the overall business?”

 

Bingo.  The Bootstrap Game only works for a time.  Furthermore, it only works if you can keep up the pace of acquisitions.  Ultimately, however, no matter how many times you slap lipstick on a low-growth dog, eventually the market will see the underlying growth for what it is.

 

Worldcom played this beautifully, although it was obvious to even the slow-witted mouth breathers at the Wall St. Journal that Bernie was playing the Bootstrap Game, and that this could not go on forever.

 

Fast forward to Q3 2000.  The market for all stocks is tanking as the Fed’s Y2K-liquidity pop has diminished and the capital expenditure bust is beginning to work its way through the telecom industry.  Bernie is facing margin calls on the debt he has unwisely placed against his stockholdings in Worldcom.  Bernie needs that stock price to stay up, so he can keep banging hot chicks and eating caviar.  So Bernie instructs Worldcom CFO Scott Sullivan to engage in accounting shenanigans (the substance of which is immaterial for this discussion – the very act of compromising the shareholders’, creditors’, customers’ and employees’ trust is the issue) in order to prop the stock up for another quarter or two.

 

Well, you know what happened: the whole house of cards fell apart, with Worldcom declaring bankruptcy, stiffing bondholders and stockholders alike.  (The fact that those same bondholders and stockholders should have seen it coming had they been diligent and alert is an issue for another day.) 

 

Shady CFO Sullivan turned State’s evidence à la Sammy “the Bull” Gravano and Bernie Ebbers was convicted of 9 counts of conspiracy and securities fraud in the largest accounting scandal in U.S. history.  During the trial, Bernie had the sheer gall to take the stand and claim that he didn’t understand the particulars of finance and accounting.  The CEO of a company that, at its peak, was valued at over $180 billion and had made hundreds of acquisitions claimed that he didn’t understand basic finance or accounting that the average college sophomore business student has mastered! 

 

“By my beard, Your Honor,”  I would have loudly declaimed, “this halfwit isn’t competent enough to manage the bar at a tri-Delt mixer, let alone a NYSE-listed company!  The prosecution moves to have the defendant doused in cat urine.”  (Had I been a trial attorney I would likely have been disbarred, I imagine.)

 

Bernie abused the trust of his shareholders.  He screwed ‘em.  He screwed many people on the way up, selling them on the lies of the Bootstrap Game, and he screwed ‘em as it was falling apart, dumping stock to save his own ass.   And if our justice system truly reflected what Plato referred to as the Form, or ideal, of “Justice”, Bernie would be hoisted up by the little pits he amusingly calls testicles and left to wilt in the hot desert sun.

 

But he will likely just go to country club prison, where he can serve out his term at his leisure.  However, we now know, definitively, what his reputation, his word, his honor mean:

 

Nothing.

 

Bernie, you’re nothing.