Lay-ing low

By Joshua Green

One of the more frustrating Republican talking points is the politically advantageous assertion that Enron's collapse, far from being a scandal, actually vindicates the free-market system. "That companies like Enron go bankrupt," National Review lectured recently, "is a sign that markets work." Treasury Secretary Paul O'Neill hailed its collapse as "the genius of capitalism." And as Ken Lay sat glumly before Congress recently, while news spread that six Enron directors would resign, it probably sounded like a reasonable point. After all, who would let Lay or Enron's directors run their business? You wouldn't trust Wendy Gramm to balance your checkbook, would you? They're finished, done, kaput, right? 

Wrong. The fallacy of the markets-punish-poor-performance argument is its implication that corporate executives are punished, too. But that's rarely the case. A look back at earlier "Enrons" – other companies driven into disastrous bankruptcies – reveals that even the most spectacular failures rarely claim those at the top. As corporate watchdog Nell Minow puts it, "[failing] CEOs never die, they just join boards of directors." And not surprisingly, many reprise their poor performance. 

Take Edward S. Finkelstein. The notorious former chairman of Macy's and poster boy for ’80s corporate excess took the company private in an ill-fated 1986 leveraged buyout. In 1992, shortly after Macy's was forced to file for Chapter 11, Finkelstein jumped ship. This hardly killed his career. He became chairman and CEO of the Cherry & Webb chain of women's clothing stores in 1997. And guess what? The company filed for bankruptcy three years later. 


Nor did the Macy's bankruptcy hinder its board of directors. Robert G. Schwartz approved the leveraged buyout– and he went on to become chairman and CEO of MetLife. 

The Baldwin-United Corp. was another high-profile disaster. In January of 1985, after it declared bankruptcy, board member Philip E. Beekman resigned along with the rest of the board of directors, citing "continuing controversy about their role" in the troubled company. Today, Beekman is chairman of the audit committee for the financially troubled Sunbeam Corp., and a director of multiple public firms. Or how about Pan Am's onetime CEO, Thomas G. Plaskett? He survived the airline's bankruptcy to become chairman of the board of the Dallas-based energy company Probex. 

The issue of why this problem lingers has simmered for quite some time. Several years ago, Albert J. Dunlap, then chairman and CEO of Scott Paper Co., told The Wall Street Journal: "I don't think CEOs who fail in running their companies should be on other boards. If you can't run your own company, by what reason should you be on another company's board?" 

In order to alert companies and shareholders to the track record of failed directors who may not wish to disclose their pasts, the Securities and Exchange Commission created a rule that "tags" directors of companies that declare bankruptcy on their watch. For five years, such directors are legally obligated to disclose their status to any new board they join. According to Peter Gleason of the National Association of Corporate Directors, that's why so many directors jump ship just before a company files for bankruptcy– a trend Gleason says was especially pronounced during the recent spate of dot-com bankruptcies. 

A good example is George Shaheen, onetime CEO of the online grocery service Webvan. After burning through $1.2 billion in capital, Shaheen resigned shortly before Webvan declared bankruptcy last July in one of the new economy's most dramatic failures. Yet in October, Shaheen joined the board of software company Closedloop Solutions and remains a director of business software giant Siebel Systems. 

Spurred by recent events, the AFL-CIO has been among the most vocal opponents of this type of board-hopping. (The "market at work" argument is particularly toothless when mismanaged companies go bankrupt and cost millions in worker pension funds.) And the sentiment is suddenly in fashion, prompted in no small part by an example from Enron's own board of directors. In addition to sitting on Enron's board, Norman P. Blake Jr. is the CEO of the technology-services company Comdisco, which declared bankruptcy last July. And if Comdisco goes under, Blake can fall back on his other job as a board member of Owens Corning. At least he can for the moment– Owens Corning filed for bankruptcy protection two years ago. 

This story first appeared on The author may be most famous in Charlottesville for his 1997 cover story in another weekly on the topic of why critics hate Dave Matthews.


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