SSCI-It's Time To Practice Safe capitalism

Time to Practice Safe Capitalism (Download PDF)

1.0 Time to Practice Safe Main Street Capitalism

1.1 Main Street Capitalism Defined

Main Street – stakeholder – capitalism offers safe capitalism practices for a new age of corporate responsibility. It is an answer to the cry for a value-based economic model with environmental and social harmony that world leaders desperately want. French President Nicholas Sarkozy: ‘A new form of capitalism is needed, based on values which put finance at the service of business and citizens and not vice versa.”

U.S. President Barack Obama is searching for an economic model that “will help usher in a return to an ethic of responsibility. That is you’re placed in a position of power, then you’ve got responsibilities to your workers. You’ve got a responsibility to your community. Your shareholders.” Main Street capitalism’s (MSC) ethic is based on Peter F. Ducker's philosophy that management must consider the impact of every business policy and business action upon society. Main Street capitalism is where private enterprise initiatives meet with government public policies to satisfy the hierarchy of needs of various stakeholders -- shareholders, customers, working families, farmers, pensioners, students, other businesses and communities.

Drucker’s two golden rules are that the first responsibility of a business to society is to operate at a profit, and secondly, and only slightly less important, is the necessity for growth are two tenets of Main Street
capitalism. Profit is not a dirty word. Managers’ capitalism is. Profits are essential to drive a company’s financial and non-financial wealth producing capabilities. Profits, as advocated by U.S. President Barack Obama should, “reward the industriousness and entrepreneurial spirit that’s always been the engine of our prosperity, and crack down on the culture of greed and scheming that has led us to this day of reckoning.” Profit that hurts stakeholders’ basic needs is bad business.

From a MSC stakeholder accountability and transparency perspective, Sustainability Scorecard International Inc.’s (SSCI) Peter Downing MBA, CA has researched and developed a Main Street Four-Bottom-Line
Sustainability Performance Scorecard™ reporting:

1) financial returns,
2) economic growth,
3) environmental management, and
4) social returns.

It is easier to prepare, more cost and market readership effective than a tedious GRI sustainability report. It is a multi-year trends report on key performance indicators (KPI) that pertain to the company’s financial and non-financial wealth producing capabilities. It is a
report that can be issued by small, medium and large businesses, an annual MSC wealth statement.

1.2 Managers’ capitalism is bad for stakeholders.

Primary stakeholders --- shareholders, employees, customers, suppliers, local governments -- are directly affected financially by the internal operations of publicly-traded and by privately-held companies. Strategic
shareholders are individuals and groups whose external actions affect the internal operations of a business:

NGOs, civil societies, media, international agencies, international governments, peer companies, diverse communities’ values.

Mary Schapiro, the new Chair of the U.S. Securities and Exchange Commission, should champion MSC’s safe capitalism practices. Wall Street’s, high-risk, managers’ capitalism practices have killed jobs,
upset the social balance, and have badly depleted government tax revenues. Managers’ capitalism is a plague that has inflicted greater economic and social hardship on more people worldwide than has AIDS,
SARS, TB, malaria and tobacco combined.

Managers’ capitalism has evolved over the past decades as shareholders, including our large pension funds, have abdicated their rights and responsibilities as owners of publicly-traded companies. Corporate
management has moved into the void and has taken control of the governance process.

John Bogle, named by Fortune as one of the four U.S. investment "Giants of the 20th Century”, has said that the shift in responsibility from owners’ to managers’ interests has corrupted capitalism. William Pfaff, The International Herald Tribune distinguished public affairs columnist, wrote ‘our current shareholder capitalism system has undergone 'a pathological mutation' from traditional owners' capitalism to a new form, managers' capitalism.”

1.3 SSCI’s Managers’ Capitalism Saga #1

An extraordinary achievement became a bloody ‘bad mistake’.

October 7, 2007 In the biggest banking takeover in history, a consortium comprising England’s RBS, the Belgium Fortis Financial Group and Spain’s Banco Sanrander acquired the Dutch ABN AMRO bank.

A consortium led by RBS beat Barclays in the bidding battle for the Dutch bank with an offer of €71bn (US$98.5bn) in the world's biggest ever bank takeover. Barclays chief executive John Varley claimed that his rival, Sir Fred Goodwin of Royal Bank of Scotland paid too high a price to take over ABN AMRO. Sir Fred was unavailable for comment on Varley's remarks but supporters described the deal as 'an extraordinary achievement' The consortium dispensed with the services of ABN's chief executive, Rijkman Groenink, in short order, for a reported pay-off of €18m (US$25m).

October 3, 2008 Continuing problems in the Fortis operations caused by the 2008 financial crisis has led to the Dutch state to buy full control of all Fortis operations in the Netherlands, including those parts of ABNAMRO that belonged to Fortis for €16.8bn, US$23.3bn.

October 13, 2008 British Prime Minister Gordon Brown announced a UK Government bailout of the financial system. The Treasury would infuse £37 billion ($64 billion, €47 billion) of new capital into Royal Bank of Scotland Group Plc, Lloyds TSB and HBOS Plc, to avert financial sector collapse. This resulted in a total government ownership in RBS of 58%.

October 14, 2008 France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros (US$2.7 trillion) to guarantee bank loans and take stakes in lenders, racing to prevent the collapse of the
financial system.

December 14, 2008 The collapse of Bernard Madoff's Ponzi scheme might mean the loss of 2.33 billion euros at Spain’s Banco Santander.

January 2009 RBS made an annual 2008 loss of £28bn of which £20bn was due to ABN AMRO. At the same time the government converted their preference shares to ordinary shares resulting in a 70% ownership of RBS. February 5, 2009. Royal Bank of Scotland's acquisition of ABN AMRO was "a bad mistake," former
Chairman Tom McKillop told the politicians, saying he was sorry the deal -- a major source of RBS's problems -- happened just before the credit crisis credit shocked banks across the world.

February 5, 2009 Santander, the eurozone's largest bank, has dismissed suggestions that the deepening Spanish recession and the bank's involvement in the Madoff scandal would force it to seek funds from shareholders or the government.

1.4 SSCI’s Managers’ Capitalism Saga #2

Managers’ capitalism at work and at pay at Merrill-Lynch.

Merrill Lynch was once one of the world's leading wealth management, capital markets and advisory companies, with offices in 38 countries and territories and total client assets of approximately $1.8 trillion. Merrill-Lynch was formally taken over on January 1, 2009 for $19.4 billion in Bank of America shares. Bank of America has the largest number of depositors in the United States.
●●● Stan O’Neal

October 31, 2007 -- After a notable 21-year career at U.S.’s largest brokerage Merrill Lynch & Co., Stanley O'Neal, age 56, stepped down as chairman and CEO, less than one week after the firm stunned Wall Street by revealing a $7.9 billion loss on risky investments in sub prime mortgages. O'Neal received no severance package. He does have $161 million in stock that he received during his tenure at the company. O'Neal took home $46 million in compensation in 2006, including salary and annual bonuses.

O'Neal took personal responsibility for the losses in a conference call with investors Wednesday morning, a departure from the routine on Wall Street. "The bottom line is we got it wrong by being overexposed to sub prime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result," said O'Neal.

Merrill-Lynch’s board of directors had not adopted corporate governance “best” practices” O’Neal was both Chairman and CEO when best practices call for the positions of Chairperson and CEO should be held by two persons. Board duties include CEO succession planning; Merrill-Lynch’s used the services of a head hunting firm to find O’Neal’s replacement.
●●● John Thain

November 14, 2007 — Merrill Lynch & Co., Inc. today announced that John A. Thain, had been appointed chairman and chief executive officer of Merrill Lynch, effective December 1. Merrill Lynch announced that
Mr. Thain would receive at least $50 million per year in compensation and could be paid as much as $120 million a year, based on the company's stock price. Before he came to Merrill, John Thain was a CEO at the New York Stock Exchange and had served as president, chief operating officer, and chief financial officer at Goldman Sachs. He received about $300 million in Goldman stock. The Associated Press found that John Thain had received $83.1 million as the best paid among the executives of S&P 500 companies in 2007.

January 2008. John Thain signed off on a $1.2 million renovation of his Merrill-Lynch offices. Of this amount, $837,000 was spent to hire celebrity designer Michael Smith. Some of the 16 items purchased for
the office refurbishment included: persian area rug ($87,000); Egyptian silk curtains ($28,000); mink guest chairs ($87,000); 19th century credenza ($68,000); six antique chairs ($37,000), private dining room mirror ($5,000), dining room chandelier ($13,000), commode on legs ($35,000); parchment waste can ($1,400).

September 15, 2008. After spending the weekend of September 13 and 14 on due diligence, Bank of America said on Monday that it would acquire Merrill-Lynch in an all-stock takeover worth about $50 billion at the time. It would rival Citigroup Inc., the biggest U.S. bank in terms of assets.

December 8, 2008. Thain gave up asking for a controversial bonus of $10 million from the Board’s compensation committee at Merrill. The board said “no”, as it seemed inappropriate at a time when the government was providing hundreds of billions of dollars to bail out the banking sector.

Thain accelerated payments of bonus to employees at Merrill, giving out between $3 billion and $4 billion of the taxpayer bailout funds before the Bank of America deal closed. December 31, 2008. Merrill's staggering $15.31 billion fourth-quarter loss has caused many to question Lewis' judgment in signing on to the deal. The Treasury Department's investment of an additional $20 billion in bailout funds and $118 billion in loss protection against Merrill's assets has further spurred the belief that Lewis' Merrill purchase was a bad buy.

December 31, 2008 Merrill-Lynch paid $231,000 to Thain’s personal driver for one year’s work, including $85,000 in salary, $18,000 in bonus, and $128,000 in overtime pay.

January 22, 2009 Former Merrill Lynch Chief Executive John Thain resigned from Bank of America. Bank of America Chief Executive Ken Lewis flew to New York to talk with Thain on Thursday. They mutually agreed "that the situation was not working out" and Thain resigned immediately.
Bank of America lost confidence in Thain after he failed to tell the bank about mounting losses at Merrill late last year. Merrill lost more than $15 billion during the fourth quarter, forcing Bank of America to ask the government for billions of dollars in extra support to close its acquisition of the brokerage firm.

January 24, 2009 President Barack Obama signalled that he would toughen restrictions on and oversight of
banks as part of a fresh plan to aid the battered industry.

January 27, 2009 Caught by the unfavourable glare of publicity with his hand in the cookie jar of office renovation extravagancies, John Thain said he plans to reimburse Merrill for the $1.2 million spent.

January 28, 2009 New York’s attorney general, Andrew Cuomo, has subpoenaed former Merill Lynch & CO. CEO John Thain about bonuses paid to Merrill executives a few days before the company’s takeover by Bank of America On Wall Street, about half of all revenues earned by financial brokerage companies is allocated to compensation, even in bad times. In 2008, Merrill paid $15 billion in compensation and benefits. The Merrill bonus pool was higher than Bank of America would have liked. The stock component of the Merrill bonuses was paid in Bank of America stock.

February 11, 2009 New York Attorney General Andrew Cuomo said Merrill Lynch & Co. "secretly" moved up the date to award $3.6 billion in 2008 bonuses despite billions of dollars in annual losses: 696 Merrill individuals more than $1 million in bonuses; 28 individuals received a combined $499 million; giving more than $121 million combined to four top executives. Merrill's board of directors’ compensation committee
approved the bonuses.

1.5 The Quandary

When will Main Street primary stakeholders stop paying for Wall Street’s financial services pied-pipers’ toxic assets, high-risk lose-lose mergers and personal greed? Maybe 2050 or sometime sooner, if they are lucky!
The three nefarious gangs of managers’ capitalists who are responsible for our worldwide economic recession are ineffective boards of directors, the ‘imperial CEOs’ and their courts of stock-option laden executives and an array of check and balances that didn’t always work, such as, national security regulators, central banks, the accounting and legal professions, misinformed investors.

Not s single US dime has been earmarked in the $700 billion TARP bail-out largesse and in President Obama’s $787 billion jobs-creating stimulus package, nor will a single pence from the two U.K. governments’ multi-billion bail-out bank packages be spent to eradicate managers’ capitalism malpractices.

Managers’ capitalism corporate governance malpractice's must be stopped if the 1929 and 2008 economic histories are not to be repeated in 60 years time. Bail-out and stimulus packages are direct costs to tomorrow’s taxpayers for yesterday’s managers’ capitalism malpractice's. That is simply not fair.