How the Movie Mom Might Expose "Enron II"
Nell Minow leads a double life. Half her time is spent as The Movie Mom, a no-nonsense critic, columnist and radio personality (Movie Mom on Britney's Spears's Crossroads: "The good news is, Britney's a better actress than Mariah Carey. The bad news is, it's not a very good movie.").
The other half of the time, Minow edits The Corporate Library, an online research center specializing in corporate governance. It may sound like it's a world away from Movie Mom, but Minow says that the two are surprisingly similar. Michelle Chihara spoke with her recently about the Corporate Library's role in exposing potential misconduct at Global Crossing, a communications giant now facing bankruptcy, worthless stock and the possibility of total liquidation.
Michelle Chihara: You were one of the first people to draw attention to Global Crossing. Is its financial predicament on the same scale as Enron?
Nell Minow: It's too soon to tell. They're alike in some ways, but different in others. Enron's kickoff was the company's acknowledgement of omissions and obfuscations in accounting. That's when we began knowing that there was something crooked at the center. With Global Crossing it's not yet clear if it's failure or fraud.
With Enron, there was some understanding of its original business model, which was producing income. At Global Crossing, investors invested on expectations of future profits. It was more of a speculative investment.
Chihara: Recent revelations, which involve a complex side deal that Global Crossing made with its current potential buyers, make Global Crossing's mess look even more suspicious.
Minow: There's a pattern of insider coziness that's very troubling.
Chihara: How many Global Crossings and Enrons are out there?
Minow: I don't think there are a lot, but I do think there will be more. A company called AES Corporation [which is now selling off millions of dollars worth of assets in an effort to pay down its debt] could be a very troubling story. It could be another Enron, or it could be being unfairly battered because of concerns that it might be another Enron.
Chihara: What does "more" mean?
Minow: It means that the markets as a whole are going to take quite a battering for a while. Over the next 6 months every company is going to have to answer the same question, in one way or another, from shareholders: Why should we believe in your numbers?
Now, most companies will come out all right. They'll be able to say, here are some new numbers we hadn't shown you last time, or we've amended our numbers according to the following rules. Most companies will come out all right.
Chihara: You flagged a corporate executive contract at Global Crossing that promised the CEO everything from the make and model of his BMW to first class tickets to fly his mother back and forth across the country, among other lavish perks. Many people assume that this kind of excess is par for the course at big corporations.
Minow: First of all, that's not the case. But let me put it this way -- that contract was the only thing I flagged at Global Crossing. I decided to do a report on CEO employment contracts, to draw attention to my new Web site. Those contracts are theoretically public, but in reality they're very hard to find. I decided to publish them all in one place.
I got to Global Crossing, and it was so obvious, it was such an abberation. In terms of the total pay package, it was not that shocking. It was in the way the pay package was spelled out; even in the wacky world of CEO pay, it was genuinely shocking.
It wasn't because of flying mom out to visit first class, it wasn't that the make and model of the BMW was spelled out. That's unusual and appalling in its own way, but I understand that those things involve a trivial amount of money. It was the $10 million signing bonus and 2 million shares in options sold at $10 below market value. When a CEO asks for that, that's when you look for the eject button under your desk that opens a trap door under his chair. Because in effect, he's saying, "I don't think stock is going to up under my watch, and when it does go down, I'm not going to pay as much as everyone else."
The fact that he asked for that kind of pay package is an outrage. That the board agreed to it is the strongest possible signal that the inmates are running the asylum. It wasn't mom, it wasn't the car, it was below-market options.
In January, everyone laughed at me. "This is the big company of the future!" they said. The fastest rising stock in the history of the New York Stock Exchange! And I said, "OK. Wait and see."
Chihara: What's the basic problem here? What needs to change?
Minow: I'll tell you what the problem is, and it's a tough problem. It's human nature. I'm not talking about greed -- I'm with Michael Douglas, greed can be good.
Chihara: Uh, that's from the movie Wall Street, right?
Minow: Right. If marshaled in the right way, if expended on behalf of shareholders and not on behalf of mom's airfare, greed can be good.
The problem with human nature -- and this happened at Enron and at Global Crossing -- is that when a company does extremely well extremely quickly, everybody panics. Everybody stops thinking, and holds their breath. It's as if they say, "We're not exactly sure what's causing our success here, so we just won't change anything. We'll just keep it going."
Chihara: Then, what are the most important changes that need to be made?
Minow: Boards need to do a better job. There's no way to legislate that. They just do.
The Bush administration put forward a proposal involving more liability for directors, but what you don't want to do is to be talking to the most accomplished people in the state and say, "Want to put your house at risk?"
There are a number of things you can do to help boards do a better job. First: Director stock ownership. There's all kinds of academic research -- believe me, there's plenty -- and it points to one answer: the only thing that consistently correlates to better board performance is ownership of at least $100,000 of stock. Nothing helps a board think like a shareholder like being one.
Two, the board of directors needs to meet regularly in executive session. They need the ability to speak candidly with each other when management is not in the room. Three, the board has got control the nominating process -- they can't just be people chosen by the CEO. You dance with the one who brought you to the party, so that has to be the board itself, and not the CEO.
Chihara: You believe, then, that we can fix our problems from within the corporate world, from within the private sector?
Minow: If you're asking about legislative solutions, well, it's never going to happen, but what I think should happen is this. I think right now, almost all major corporations are incorporated in Delaware, because it has the most management-friendly laws in the country. If I'm not happy about Delaware laws, I'm stuck, because I don't vote in Delaware. If shareholders could pick the state of incorporation, then the other states would have to compete to come up with shareholder-friendly laws. But for now, director responsibility is completely the province of the Delaware courts.
Chihara: But if companies were forced to incorporate in less management-friendly states, wouldn't more companies just incorporate in Bermuda, like Global Crossing?
Minow: That's a real problem. It's a real problem that Global Crossing and Tyco are incorporated in Bermuda. If the company is located in the U.S., then that's just a tax dodge. The government needs to address that issue and I hope they do. It's a big problem. The Daimler Chrysler merger [in 1998], a big part of that was that it would no longer be subject to American standards of disclosure.
Chihara: What are the best resources for lay-people, non-financial types, to understand more about finance or to try to protect themselves?
Minow: The most important way is this: Those things you get in the mail every spring that look like they're written on tissue paper? They're proxy statements. And it's information that you really need.
Here's the 60 second proxy statement analysis: Look to see if the directors own stock. In the fall of 2000, we pegged Enron because they were last on the list of directorship ownership.
Next, the second thing, and this was a very important issue with Enron and Global Crossing: Look at the "Certain Transactions" or "Certain and Related Transactions" section. Ideally, that section should be blank. That section is where companies have to disclose their side deals -- you know, the CEO's wife's decorating firm has the contract for the lobby, that kind of thing. If it's not blank, see how long it is. Enron and Global Crossing had really long sections of information.
Look at those two things before you invest. All of this is online at the SEC or on our Web site. Do that and it'll give you a good idea of what you've got.
The 90 second version, the grad school version of analyzing your proxy statement: Look who's on the audit committee. Infinity Broadcasting had OJ Simpson on their audit Committee. Saks Fifth Avenue has Julius Erving on their audit committee. I don't think Erving's a dumb jock, but I don't see anything on Saks's proxy to show that he has the expertise to be an audit committee member. You should always ask if a company's audit members are committed to credible, committed financial disclosure.
Chihara: So, what are the similarities between being both Movie Mom and The Corporate Library's editor?
Minow: This is what I said when I gave a speech and talked about [Global Crossing's CEO's] contract. I have mothers write to me and say, "My two year old knows how to work the VCR, and I tell her to stop, but she still uses it. What should I do?" And I say, "Someone has to be the grown-up here, and guess what? You lose!" Someone has to make the rules.
Then I get a letter to the corporate governance mom, and they say, "I say the CEO's pay and performance should be linked, and he says no. What should I do?" And I say, "Someone has to be the grown-up here, and guess what? You lose!"
Corporations and movies, they're both group efforts, and everyone wants it to work. When they don't, it's really interesting to try to figure out why.
Chihara: What's the best movie metaphor for Enron?
Minow: The Godfather. Always a great movie. Robert Duvall as Tom Hagen goes to Hollywood to ask Woltz to give Johnny Fontane a part, and Woltz says no. Hagen says, "I need to go to the airport right now, because the Godfather likes to hear bad news immediately."
The board has to convey that to management. They have to say, "Lead with the bad news. If I hear it from someone else, you will lose your job. If I hear it from you first, we can work with you on it." If Enron had done that, they wouldn't be in this mess.
Michelle Chihara is a Senior Writer at AlterNet.org.