Business Brief: Who’s the Boss?

In Chicago, the trial of Conrad Black will turn on whether the jurors blame the context or the man. The numbers are, of course, mind-boggling: $25 to $40 million a year in management fees to Ravelston year after year to pay for a mere four-person management team of Black, David Radler, Jack Boultbee and Peter Atkinson, and, because evidently that wasn’t enough to make ends meet, an additional $64 million for personal non-compete agreements in connection with the sale of the Southam chain in 2001 and other miscellaneous bonus payments, some allegedly purloined.

Whether there were criminal acts committed or not is for the jury to decide. Perhaps the more interesting question is, how could this have happened? How could a board willingly pay the management team of a medium-sized, medium-performing company hundreds of millions in compensation? And how did the same team convince the board to let them pocket money from personal non-compete contracts through the sale of a corporate asset?

The key feature of the context is executive talent’s rise to nearly untrammelled power. For the bulk of the 20th century, capital fought with labour over the spoils of economic activity: winning between 1900 and 1935; losing between 1935 and 1960 with the rise and legislative protection of organized labour; then battling back successfully between 1960 and 1980 with sun-belt migration, international outsourcing, and the use of technology to firmly gain the upper hand. But just as capital won that battle, it encountered a new competitor for its potential earnings—executive talent. Capital had long enjoyed the benefit of docile executive talent, which actually helped capital beat down labour without asking for much in return. So docile were the executives that between 1960 and 1980, the average compensation earned by CEOs of large American companies per dollar of profit they generated actually dropped by 33 per cent—happy days for capital. During that period, CEOs essentially asked themselves, “What’s enough?” The answer was enough for a house, a vacation property, a new car every couple of years, education for the kids and a healthy retirement plan. In other words, not so much.

But then, circa 1980, CEOs awoke and started asking a very different question: “How much can I get?” Suddenly boards were plied with demands from CEOs for new compensation plans, mammoth stock option grants, and stakes in the upside of their work. It worked: during the 1980s, CEO compensation per dollar of profit doubled. In the ’90s, it further quadrupled.

Boards were mortified and terrorized. They were supposed to be protecting the shareholders, but executives were arguing that the company’s livelihood depended on their happiness and the only way to keep them engaged was to pay them more. They saw their fellow boards paying more and more and thought that was the only thing to do.

That was the context in which the Hollinger board was operating circa 2000. Facing them in this context was a formidable adversary—Conrad Black, a man not shy to characterize himself as talent of the most precious and indispensable sort. Hollinger would be nothing without him and his small band of executives. They deserved gigantic management fees and personal non-compete payments. How much? Lots and lots. What about those poor shareholders? Well, if they didn’t like it, Black and friends would leave and start competitive newspapers and the shareholders would suffer mightily, even though it has been a while since a major North American newspaper has been started profitably.

The board members will argue on the stand that they were actually doing what they thought was prudent for the shareholders. That is patently ridiculous. Like many boards of the era, they let shareholders down. But it is not the board that is facing criminal charges. Black, in turn, will argue that it was all legitimate—whether or not the paperwork on bonuses was duly filed.

The defence will say that the context created the entire problem, and lots of unfortunate people were caught in a situation not of their own making, while the prosecution will argue that evil men behaved criminally. The jury won’t have an easy time because neither story is entirely true. As always, the answer lies somewhere in between.