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The CEO Outrage ConstraintNew York Times – by Paul Krugman – August 24, 2002
The high pay of America's C.E.O.'s reflects intense competition among companies for the best managerial talent. Stock options and other typical forms of executive compensation are designed to provide incentives for performance. These incentives align the personal interests of managers with those of shareholders.
Nothing in the preceding paragraph is true. That's the message of an extraordinary research paper circulated by the National Bureau of Economic Research, an economics think tank. The paper is must reading for anyone trying to understand what's really going on in our economy.
I first read this paper, "Executive compensation in America: Optimal contracting or extraction of rents?" by Lucian Bebchuk, Jesse Fried and David Walker (of Harvard, Berkeley and Boston University respectively), last December. It was largely due to their analysis that I concluded, early in the game, that Enron would be only the first of many scandals.
What they show is that the official theory of the corporation, in which the C.E.O. serves at the pleasure of a board that represents shareholder interests, is thoroughly misleading. In practice, modern C.E.O.'s set their own compensation, limited only by the "outrage constraint" — outrage not on the part of the board, whose members depend on the C.E.O.'s good will for many of their perks, but on the part of outside groups that can make trouble. And the true purpose of many features of executive pay packages is not to provide incentives but to provide "camouflage" — to let C.E.O.'s reward themselves lavishly while minimizing the associated outrage.
The most obvious case in point is stock options. There is a good argument for linking an executive's pay to his company's stock price, but a true incentive scheme would have features that one almost never sees in practice. For example, an executive's pay should depend on his company's stock price compared with a benchmark index composed of other, similar companies, so that what he gets reflects the job he is doing, not general market conditions.
In fact, however, a C.E.O. almost always receives stock options at the current market price — end of story. If the stock price goes up, he cashes in. If it goes down, he receives new options at the lower price. There are, to be fair, quirks in the tax law that encourage this practice. But the main reason executives are paid this way is that it gives them an almost sure thing — unless the stock falls steadily, sooner or later an executive who keeps getting options at the current price makes a lot of money — yet does so in a way that camouflages the sweetness of the deal. The options grant often isn't even counted as a corporate expense, and the payoff, when it comes, can always be represented as a reward for achievement.
Thanks to the growing skill of companies at camouflage, and also to a steady erosion of old inhibitions against apparent excess, the average pay of C.E.O.'s at major companies has skyrocketed. It was "only" 40 times that of an average worker a generation ago; it's 500 times as much today. That's a lot of money, but the direct expense is not the main problem. Instead, it's the fact that the tricks used to camouflage exorbitant pay give executives an enormous incentive to get the stock price up in time to cash in their options.
We're only beginning to see the extent to which that incentive distorts corporate behavior. We now know that some companies engaged in grandiose programs of acquisition and expansion that ended in grief — but only after top executives had profited immensely. We also know that companies eager to meet or surpass analysts' expectations engaged in creative accounting on a grand scale: in each of the last few years of the bubble most big companies reported double-digit profit growth, yet national statistics show that true corporate profits were hardly growing at all.
I'm not claiming that C.E.O.'s are conscious villains, twirling their mustaches and chortling over their evil doings. People are very good at rationalizing their actions — even Jeff Skilling reportedly regards himself as a victim — and the great majority of C.E.O.'s surely stayed within the letter of the law.
But the fact is that we have a corporate system that gives huge incentives for bad behavior. And I would be very surprised if Wednesday's plea by Enron's Michael Kopper is the beginning of the end; at best, it's the end of the beginning.
Fed Up With Corporate AmericaThe Charlotte Observer – by Amber Veverka - August 23, 2002
More Americans are unhappy with their jobs than seven years ago -- and that drop in satisfaction comes at all age and income levels, a survey released Wednesday says.
Just 51 percent of Americans are satisfied with their jobs, down from nearly 59 percent in 1995, according to a survey of 5,000 U.S. households by The Conference Board, a New York-based nonprofit business research group.
Workers are most unhappy with dollars-and-development issues: promotion policies, bonus plans and the training their company provides. But the survey showed they're also growing more dissatisfied with benefits such as health and pension plans and flexible scheduling.
"There is a general, growing dissatisfaction among workers," said Lynn Franco, director of The Conference Board's consumer research center.
New Englanders are the most unhappy with their jobs, with just 44 percent saying they're satisfied. Job satisfaction was highest in Rocky Mountain states, at 57 percent. South Atlantic employees -- which included workers in the Carolinas -- fell in the middle, with 48.6 percent of them saying they're content with work.
Monroe resident Kristen Gilbert, 30, said growing hours and shrinking bonuses drove her from her job as manager of a Bath & Body Works store in Monroe earlier this month. She took a new job two weeks ago as a customer-service representative for American Community Bank. Though she took a pay cut to make the switch, the stable, shorter hours "already have been such a relief," Gilbert said.
People ages 35 to 44 reported the largest decline in overall job satisfaction -- 47.4 percent from 60.9 percent in 1995. People in this age bracket were once the happiest group in the American work force, The Conference Board report said.
What's to blame for the rise in unhappy workers? Franco pointed to something that once was touted as a New Economy improvement: the blurring of the line between work and personal life.
"We have become a much more 24/7 society," Franco said. But as work bleeds into other areas of their lives, employees are feeling more pressure, she said. Too, the cell phones and e-mail less common in 1995 are now standard business tools, and because of them, bosses expect faster turnaround on projects.
Charlotte outplacement expert Jim Appleby said his clients complain all the time about the growing stress at work.
"I hear `It's the 60-, 70-, 80-hour weeks, working weekends, being away from my family. I'm being asked to do more with less support from people around me because they're cutting back.'"
Many clients come to Appleby when they've been laid off because of a merger or cost-cutting campaign.
"A lot of them will say to us, `I'm really sort of glad it happened to me. I'm fed up with corporate America.'”
The growing unhappiness doesn't appear to be caused by the economic recession. Even in 2000, when the economy was stronger, dissatisfaction was the on the rise, Franco said.
That's not to say despair is everywhere.
There may be some evidence to suggest workers at some Charlotte-based companies are more satisfied on the job than the nation as a whole. The Employers Association, a Charlotte group that provides research and consulting to member companies, surveyed 4,700 employees of 20 to 25 companies and found that in 1999, 51 percent were satisfied or very satisfied with their jobs. That rose to 62 percent this year.
Still, more disgruntled workers are showing up at Tammie Lesesne's office. Lesesne, a licensed professional counselor in Charlotte, specializes in helping people with job problems. Many complain their workplaces are becoming pressure cookers.
"Lawyers in big law firms are being asked to do more with less," Lesesne said. "I hear that over and over again."
Her theory: In the 1990s, the crusade to grow stock prices at the expense of nearly everything else led companies to demand more and more from workers.
In fact, the one part of work life in which more American workers are content is the place they're relatively free from office stress: the commute.
"I guess it's probably the downtime," Franco theorized. Or maybe, she said, "they like the drive home."
Firms Need Ethics LessonsReuters – by Judith Crosson - August 21, 2002
(8/11/02) - DENVER (Reuters) - Corporations must view their employees as stakeholders, let them sit on their boards of directors and give them a say in how pension plans are directed, an MIT business school professor said on Sunday.
"They should know what is happening to their pension plan and have a voice," Thomas A. Kochan, the George M. Bunker Professor of Work & Employment Research at MIT Sloan School of Management, told the Academy of Management annual meeting in Denver at a special panel set up to address corporate scandals.
Another panelist urged business schools to do a better job of teaching ethics, saying the lack of focus on ethics has some MBA programs "turning out some very skilled criminals."
A rash of corporate scandals has turned investors against Wall Street, decimated some pension plans, moving the term "perp walk" from the police blotter to the business page of newspapers.
Congress recently approved tougher penalties for executives who commit fraud and President Bush ( news - web sites) signed the bill into law.
Employees, along with shareholders, should be considered "stakeholders" in how their companies are run, he said.
"Something has to be done to allow employees to have a voice," he said.
He said U.S. corporations have placed too much emphasis on stock prices without paying attention to workers, customers, communities and others with stakes in a company's success.
He said one estimate puts the loss in pension and 401k plans since 2000 at $7 trillion, but employees often have little say in how pension plans are run.
But maybe things are changing, he said later.
"I'm seeing political ads that say 'I'm sticking up for the employees. I'm going to protect employees pensions,"' he told Reuters. Such pressure may get the public engaged and push corporations into changing how they govern themselves, he said.
It's also about time business schools, often seen as the step to a high-paying job in the corporate world, focus on ethics, another panelist Dennis Gioia of Pennsylvania State University told the packed standing-room-only audience.
He said business schools do a good job teaching sophisticated courses such as finance, accounting and economics. "But we are also turning out some very skilled criminals."
He said ranking of business schools was big business, but the rankings do not look at how ethics are taught, so the discipline gets little attention at universities.
He said professors should not believe a student's code of ethics is already formed by the time they get to business school and therefore it's too late to teach them when academics considering learning a lifetime job.
Digging Deeper Into Executives' PastsNew York Times – by Alex Kuczynski – August 20, 2002
The nation's major corporations, facing a tide of public suspicion and investor mistrust, are responding by vetting candidates for top positions as never before, looking into all aspects of their professional and private lives with an intensity usually reserved for major criminal investigations or Park Avenue co-op board applications.
Public companies are hiring accounting, security and investigative firms to pore over court documents, search federal databases and interview long-lost college girlfriends, ex-husbands and former employers.
"What we do is everything short of 24-hour surveillance," said Robert Strang, executive vice president of Decision Strategies, a security and investigation firm in New York. "We will find out if they were investigated for fraud when they were 25 years old and never charged with a crime. We will find out if they did drugs, with whom, and what. We will find out if they had an affair."
To learn all this, investigators conduct face-to-face interviews with former colleagues, business partners, spouses, secretaries, estranged children, apartment doormen and even members of the clergy.
Frank Renaud, the senior vice president at Beau Dietl & Associates, a private investigative firm in New York, who supervises checks of executives, said that the requests have poured in over just the last six months.
"There is far more interest, post- Enron and post-all these other corporate scandals, in checking people out," he said.
Until recently, it was considered bad form to ask a prospective senior executive to agree to a background check, a request that requires the signed consent of the candidate.
"It was awkward, like asking for a prenup," said Jules B. Kroll, founder and executive chairman of the Kroll Inc. security and investigations firm. Rather than calling in the gumshoes, senior executives or headhunters simply asked around. They, in turn, would tactfully tell the candidate, "I talked to a couple of guys at your golf club, and you sound like a good guy," Mr. Kroll said.
But now, nothing is off limits — in part because many executives say they believe that the check will be limited to a credit report, like the type done by Dun & Bradstreet, or calls to references.
"When executives hear the words `background search,' they think, `Hmmm, they'll do a D.& B., no big deal,' " said Mr. Strang, who was formerly with the F.B.I and the Drug Enforcement Administration. "But there aren't too many people out there who think that a background check means that a SWAT team of former federal agents will be overturning every detail of their lives."
Mr. Strang's firm, along with others that specialize in accounting, security and investigation — including Kroll, I.G.I, ChoicePoint Inc., KPMG and Controlled Risk — are getting a spike in requests for background checks on candidates at the highest executive levels.
Howard Safir, a consultant to ChoicePoint and a partner in his own firm, Safir Rosetti, which specializes in executive background checks, said that the demand for such investigations at his firm is up about 60 percent from last year.
The fee for a report on one executive can range from $20,000 to $50,000. Investigators are recruited from the legal profession, journalism, the ranks of the C.I.A., F.B.I., D.E.A. and police departments.
The firms' staffs are well connected, often with strong ties to law enforcement. Mr. Safir is the former police commissioner of New York City, and John F. Timoney, the chief executive of Beau Dietl, is the former police commissioner of Philadelphia. Kroll even employs a former New York City tabloid gossip columnist.
John K. Castle, the chairman of Castle Harlan, a corporate buyout firm, said that in one deal, it was not until investigators went out of their offices and into the courthouse that they discovered that the chief executive had been charged with battery, twice, and the victim turned out to be his wife.
That in itself would not have eliminated him, but it did lead the investigators to look at still more records, which revealed that he also had a rack of lawsuits arrayed against him.
The deal went through, though without the chief executive.
Publicly held companies used to let investment bankers, search firms or senior executives choose new top executives. Now that company board members are being held more rigorously responsible for the conduct of top executives, they often insist on bringing in the investigators. "What is driving public companies now is the fear of individual accountability," said Wilbur L. Ross Jr., who manages $1.6 billion in investment funds.
Not every firm, however, catches every bad apple before it slips into the corporate barrel. "We do everything we can, but no one in this business will tell you that they are completely infallible," Mr. Strang said. "People who specialize in fraud can be very good at it." Some firms accuse rivals of sloppiness, though they could provide no specifics.
The search for squeaky-clean executives has been spurred by some huge but belated discoveries. Last July, Becton Dickinson, one of the country's largest medical-device companies, fired Dr. Seymour I. Schlager, a top executive scientist, after learning that in 1991 he was convicted of trying to murder his wife, sentenced to prison and had his medical license suspended. But the company had not even checked the local news media, which covered the trial prominently.
Then there was the case of Albert J. Dunlap, fired as chief executive of Sunbeam Corporation in 1998 and accused of overseeing accounting fraud. A report last year revealed that Mr. Dunlap had been fired twice before because of similar charges, blips that managed to escape the attention of the executive search firm.
"Now everybody is trying to cover themselves and make sure that they don't wind up with a Chainsaw Al," Mr. Strang said.
Joseph Daniel McCool, the editor in chief of Executive Recruiter News, said that after the Dunlap news, companies started requesting deep background checks and re-examining the role of the executive search firm.
"That constituted a real scandal," Mr. McCool said. "And it pointed out problems in the recruitment process, which was that search firms are dependent on their candidate's hire for their commission. Their fee is tied exclusively to seeing their candidate ascend. So they don't necessarily want to know everything. "
Investigators look for arrests or other criminal records, a listing as an unindicted co-conspirator in a fraud case, personal bankruptcies, evidence of gambling or drinking problems, disparities in an executive's lifestyle and salary and any sexual harassment complaints, even if unfiled and unprosecuted. They especially value access, sometimes provided by former business associates and colleagues, to the hard drive on a computer the executive once used.
One investigator, looking at a prospective senior executive for a software company, said that the only red flag went up in an interview with the man's former secretary from two jobs and eight years back.
"She said he used to carve fruits and vegetables into lewd shapes and use them to taunt her," the investigator said. "We put it in the report. I don't think it stopped him from getting the job. I think it just raised eyebrows."
Investigations that used to end at the golf course now just begin there. One investigator, who asked not to be identified, said he got an initial tip about missing money involving a candidate to be a chief financial officer on the links. The investigator flew to Europe and drove several hours to a remote village to interview a former business partner, who had abandoned corporate life to run a vineyard and make goat cheese. The partner accused the executive of embezzling $5 million from their partnership. The company chairman then confronted the executive, who withdrew his candidacy.
"It pays to travel in lots of different worlds," the investigator later said.
Mr. Ross said that the cost of an investigation is relatively minimal in view of the risk. Last week, when Mr. Ross supervised the International Steel Group's $65 million deal for Acme Metals, he spent $2.5 million on due diligence checks. "When you consider that people are doing deals in the hundreds of millions of dollars, it's a small price to pay," he said.
New scrutiny can uncover what was missed before. Mr. Safir said that last year a client asked him to investigate a man who said he could find investors to provide hundreds of millions of dollars for starting a company. The man asked for a $500,000 finders fee upfront.
"It turned out this guy had done the same thing several times before, and disappeared with the money," Mr. Safir said. His client backed away. And the swindler? "Unfortunately he's still out there in the wind," Mr. Safir said.
Some advocates of privacy rights say the investigations are going too far. John W. Whitehead, the director of the Rutherford Institute, a conservative legal organization based in Virginia, said that while investigating a person's background is not illegal, the frenzy for knowing everything is dangerous.
"It speaks to where we are going in sociological terms," Mr. Whitehead said. "I think down the line we are going to pay for it in a lot of ways. People will get conditioned, and say, `Sure I agree to this. Sure, I don't mind being be monitored by cameras.' It's a fine line, balancing our freedom, security and privacy."
Mr. Strang begged to differ.
"C.E.O's these days have to think like politicians, in terms of being scrutinized by the public," he said. Alluding to people whose savings vanished when their companies collapsed, he said, "It's inevitable when people's lives change like they have, entire retirement funds gone. People want accountability."
Even if that means finding out a prospective executive has had an affair and telling his future boss?
"We don't have to tell the wife or anything," he said.
Options Do Not Raise PerformanceNew York Times – by David Leonhardt – August 12, 2002
(8/11/02) - The downside to stock options has become spectacularly evident in the last year or so. They can give executives an incentive to inflate their company's earnings or make irresponsibly optimistic forecasts to keep their stock prices high and their paychecks lavish.
With executive indictments continuing, the benefits of options are easily forgotten. Enron and its brethren aside, however, isn't the economic rationale for awarding managers stock to align their interests with those of shareholders as solid as it has always been?
No — and it was never really as solid as it seemed, says a new paper that will be presented tomorrow at an academic conference in Denver. Combining more than 200 studies over 30 years to create the largest possible sample, the paper finds that the amount of equity executives own does not affect their company's performance.
"There's no relationship whatsoever," said Dan R. Dalton, the dean of Indiana University School of Business and one of the paper's four authors.
The conclusion is hardly intuitive, coming after years in which investors and executives hailed stock ownership as a solution to the age-old problem of how to ensure that people who run but do not own a business act in the best interests of the owners. Adam Smith noted the problem in 1776, writing, "negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company."
The recent stock market bubble has shown that negligence and profusion can prevail, and investors can turn a blind eye to them, even when executives own large stakes in their company. Now that some investors want to reform executive pay, the new findings deserve a place in the debate.
When scientists talk about the relationship between two variables, they like to use the numbers zero and one. Measuring the relationship between the height from which a ball is dropped and its speed when it hits the ground, for instance, will yield a number very close to one, showing a nearly perfect correlation. The relationship between the latitude of an American city and its average temperature will fall between zero and one — a significant correlation but not close to perfect.
The relationship between executives' stock holdings and their companies' performance is so close to zero that it is zero in statistical terms, the paper says. This means that an alphabetical ranking of companies is as apt to predict their performance as a ranking based on executives' holdings.
A number of explanations are possible. Other incentives, like cash pay and an executive's reputation, may be as strong as stock in motivating executives. Even if stock is a powerful incentive, the strength of the economy and the long-term health of a company may determine its results more than a group of executives can.
"It's possible that we attribute far too much control to executives relative to what they actually possess," Mr. Dalton said.
The researchers looked at a long list of performance measures, and the only one that seemed even slightly related to executives' equity was the easiest for managers to manipulate: earnings per share. Executives can lift that figure by directing the company to buy back shares or cut its dividend payments.
Buying back stock may not be ideal for the company, but it is likely to lift the stock price at least temporarily.
"You have to step back and ask yourself who is attending to the long-term interests of an organization?" said Kathryn M. Daily, a professor at Indiana and one of the authors. "No one." The other authors are S. Travis Certo of Texas A&M University and Rungpen Roengpitya of Indiana. The paper will be presented at the annual meeting of the Academy of Management.
The paper's conclusions are not wholly original and are not likely to be the last word on executives' stock holdings. Many economists believe that equity can affect performance but only when it is part of a more complicated corporate governance strategy, a possibility the authors do not dispute. Ira Kay, a compensation consultant who has read the paper, said the fact that the studies on which the paper is based dated to 1970 gave him hope that a new study would produce different conclusions.
"A lot of the studies are old and were done before there was significant stock ownership, which is what it took to have an effect on performance," Mr. Kay said.
For now, however, skepticism is in order. When executives receive enormous grants of stock or options, they like to say that they are acting in the interests of their investors. The executives might be more credible if they simply said they thought they deserved a lot of money.
Worker Loyalty Has Lost Its RewardsBoston Globe – by Donald M. Murray – August 8, 2002
(7/30/02) - When I first met my friend Roger LePage, I was impressed by his energy and his commitment to work. He always spoke of his job and his company with pride.
He was employed by the same company all his working life. The company, which manufactured automobile trim, kept changing its name. Profile Rubber became Davidson Rubber, then McCord, Excello, and Textron. Last December, Collins & Aikman bought Textron's trim unit. Despite the changes in management, Roger showed up early and stayed late until retiring in 1993.
He started at the bottom as an hourly worker, but soon his work habits became apparent, and he moved up to head shipper, then production supervisor, and finally manufacturing manager.
As his responsibilities increased, so did his hours. His wife remembers that when they spent time at their summer cabin, Roger would leave on Saturdays and drive to the plant to make sure everything was on schedule. If it wasn't, he would stay. On Sundays, on his way home from the cabin, he would stop by the plant. If there were problems, he would drive the family home and return to the assembly line.
He wasn't the only one who worked this way. He could call his foremen and floor workers at night or on weekends to solve problems. They believed in ''their'' company and believed in hard work.
During the '60s and '70s the company sponsored monthly dances and family outings attended by white- and blue-collar workers. As Roger's wife says, ''We were family.''
After 35 years on the job, Roger retired at age 55, proud of the fact he had never called in sick. He had a good retirement package, and the monthly cost of health coverage increased slowly, from $70 to only $85 a month.
Recently, they opened the mail and began to live another American story - of loyalty rewarded with disloyalty. They were told that as of Aug. 1 they will be enrolled in a Collins & Aikman medical plan. The monthly payments will increase from $85 a month to $830.
Collins & Aikman's notice of the rate change had a chilling paragraph: ''The rates stated above will remain in effect until January 1, 2003. Collins & Aikman reserves the right to change the types and amounts of the benefits under the plan and the eligibility rules at any time. Collins & Aikman also reserves the right to terminate a plan at any time.'' To make sure everyone understood the present relationship between workers and the new management, the rate notice added: ''Plan benefits for active, retired, or disabled participants are not guaranteed.''
A Collins & Aikman spokesman said that in purchasing the Textron plants in New Hampshire, the company actually had no obligation to offer any healthcare program at all to employees who had already retired. The spokesman said Textron had many health plans in effect and that Collins & Aikman offered to enroll everyone in the same plan as its other employees, saying the plan is ''comparable to those offered within the automobile supplier industry.'' The company concedes that some people will pay more for their health insurance but adds that others will pay less than they had under Textron.
Still, the LePages feel betrayed, but they realize that no laws protect them, and because they are too young for Medicare, they are ''lucky'' to be covered at any cost. Many workers in other companies who made as great a personal commitment of loyalty to their employers as Roger did have lost their health plans, even their pensions.
As 401(k) plans deflate, as companies merge and disappear, our retired workers have ''disappeared'' as well, cut off from what they were promised when they need it the most.
I worry about the LePages, wonder if the same thing might happen to me, and worry that the system of capitalism in which we believed is being destroyed from within by the greed of a few at the top.
Top managers across the country apparently have no conscience, no sense of responsibility, no loyalty to the workers who make the products that provide their profits.
I wonder if the young workers who see what happens to employees like Roger LePage will come in early and stay late.
If they don't, productivity and quality will decrease - and so will the profits management distributes to itself.
This story ran on page E4 of the Boston Globe on 7/30/2002.
Greedheads Want Your WaterAlterNet.org – by Jim Hightower – August 5, 2002
(July 24, 2002)
They hang the man and flog the woman
The law demands that we atone
The greater villains are loose in our world today, literally thirsting to take things that are yours and mine -- and this time they might make off with the greatest plunder of all: our water.
Yes, the ideologues and greedheads who brought us the fairy tale of energy deregulation and the Ponzi scheme of Enron are aggressively pushing for deregulation and privatization of the world's water supplies and systems. They are determined to turn this essential public resource into another commodity for traders and speculators -- a private plaything for personal profiteering.
In just the past few years, trans-national conglomerates already have privatized all or parts of the water systems of Atlanta, Berlin, Buenos Aires, Bolivia, Casablanca, Charleston, Chattanooga, Ghana, Houston, Jacksonville, Jersey City, Lexington, New Orleans, Peoria, Ontario, San Francisco, and many other places.
It amounts to a corporate "water rush." In our country, private control has rapidly become global control: The largest U.S. firm, American Water Works, was recently swallowed up by RWE of Germany (which also got Azurix in Enron's fire sale); Suez Lyonnaise of France took our second biggest company, United Water Resources; and Vivendi of France grabbed U.S. Filter.
Water gets hot
Two years ago, Fortune magazine exulted that water "will be to the 21st century what oil was to the 20th." And the magazine was thrilled that "the liquid everybody needs . . . is going private, creating one of the world's great business opportunities." Four factors are powering this rush to privatization: scarcity, greed, ideology, and political weaseliness.
The World Bank predicts that two-thirds of the world's population will run short of adequate water in the next 20 years. You might think that the sheer scariness of this scarcity would prompt policy makers to focus on such goals as protecting the purity of the aqua we have, pushing rational conservation, and promoting the long-term public interest in this irreplaceable resource.
Whoa there, Pollyanna! You forget greed. Speculators look at the looming scarcity of a substance that no one can do without and think: "Wow, if I could control that, I could make a killing." Suddenly, the unsexy task of piping in water and piping out sewage became a hot prospect.
This coincided nicely with the corporate right wing's ideological zealotry for the mumbo-jumbo of deregulation and privatization. Not only can conglomerates do everything better than a democratic government can, goes their religious mantra, but they firmly believe that today's global corporations are magical kingdoms run by new-economy wunderkinds.
In Fortune's paean to the corporatization of water, Suez Lyonnaise was lionized as being "more than a water company. It's a fresh invention." This is the same gibberish that, until only a year ago, was being heaped on Enron, Global Crossing, World Com, and other hucksters whose only invention was a new way to package the age-old shell game.
There's nothing fresh or inventive about global corporate greed thrusting its way throughout both the industrial and developing worlds to establish empire. Suez Lyonnaise knows a lot about that. It is the descendant of the corporation that built the Suez Canal in 1858 under the patronage of Emperor Napoleon III. Suez marches on, expanding its multibillion-dollar water empire by 10 percent a year.
As for picky concerns that cities, states, and entire nations ought not surrender control of their water supply to the whims of corporate empire builders, the CEO of Suez retorts: "We must rise above national egotism!"
This is where the political weasels come in. From the mid-seventies to the present, just about every politician from mayoral to presidential candidates of both major parties have caved in to the privatization ideologues, campaigning and governing as tight-fisted, no-more-taxes, business-minded conservatives.
So local pols have frittered away public funds on building flashy sports palaces for privately owned teams, and national pols have cooked up trillion-dollar tax giveaways to the richest people in the country -- and all of the pols have let America's crucial water systems fall apart. To fix decades-old leaking pipes, sputtering pumps, and the other faltering parts of the water infrastructure will require an estimated $11 billion a year more than governments now are spending.
Faced with this unpleasantness, weaseling politicians have simply escalated their weaseling. Rather than being straight with people by saying, "Look, we've got to get our public house in order," the pols at all levels have thrown open the doors of our house to any corporate flimflammer with a medicine wagon, a talking pony, and a bottle of that old magic elixir: Privatization!
As Bob Dylan sang, "The pump don't work 'cause the vandals took the handle." In case after case where corporate water vandals have taken the handle to the public pump, folks have found themselves left with skyrocketing bills, foul water, lousy service, non-functioning fire hydrants -- and no control over the culprits.
Anyone thinking that a dose of good old corporate efficiency is just what their cranky, antiquated utility needs should check out the excellent reports that Public Citizen has written on the broken promises of water privatization.
Take the case of United Water Resources, which had humble origins as the Hackensack Water Co. In the mid-nineties, however, the company got ambition, dressing up in the sleeker corporate name of UWR Inc. and going on an expansionist binge that quickly made it the second-largest corporate water fiefdom in the U.S., before UWR itself was swallowed by Suez Lyonnaise last year.
The company and its executives have hauled in millions in profits and personal gains from its privatization adventures, but its customers have been soaked. In Atlanta, UWR promised dramatic cost savings, which it proceeded to get by whacking the city's water staff from 731 employees to only 327. Among the "savings" this produced:
-- Debris and rust started turning up in residents' water. At first, UWR honchos denied there was a problem. But, hey -- the tap water was brown! Even then, it was four months before the company did anything.
-- Fire hydrants started coming up dry or inoperative. Again, executives tried to deny that there was a problem. Then, when it was pointed out that this was life-and-death stuff, UWR tried to shift the blame (and the cost), saying that after the company repaired or replaced a hydrant, it was the city's responsibility to test it to see if it actually worked.
-- Complaints piled up about impossibly slow service on everything from repairing leaks to installing water meters.
Likewise, Jersey City has been hosed by UWR. The company is paid millions in annual fees to bring its corporate efficiency to this municipal water system, but instead it has produced a chorus of complaints about billing errors. It turns out that, as in Atlanta, UWR's "efficiency" is based on cutting staff -- in this case, it subcontracts meter reading to a low-wage firm. No problem, though, for when the complaints about misread and broken meters roll in, UWR service representatives have simply been directing irate citizens to municipal employees.
What a deal -- UWR privatizes the water revenue, but socializes the problems! Worse, the company is not required by its contract to open its books or justify its fees. It simply sends a bill, which is not subject to public review.
In Jacksonville, Florida, UWR's ownership and operation of the water system was so outlandish that citizens have taken it back in a $219 million buyout. In its brief, five-year stewardship, the corporation's chief efficiency was in getting rate increases from the Florida utility commission. Monthly bills shot up by an average of $9.44 in 1997; then the company went back to the trough a year later for another 12.5% rate hike. By instituting public control, residents of the Jacksonville area are expected to enjoy an average cut of 25 percent in their water and sewer bills.
While most media have gushed about the boundless promise of privatization, they have been practically mute about one of the most sweeping developments taking place in water management: deprivatization. As in Jacksonville, officials in many cities that have sipped the tainted waters of corporate control have been struggling mightily to regain public control. But it's not easy, for monopolization of a water market turns out to be a cash cow for corporations, and once they get it, they cling to it.
-- Chattanooga, Tennessee. American Water Works (now RWE) has owned Chattanooga's water for a long time, but Mayor Jim Kinsley led a 1998 move to buy the system, noting that public ownership could cut rates by 25 percent and save $100 million. There was also the matter of AWW gouging the city on fire-hydrant fees and a secret effort by corporate executives to export Chattanooga water to Atlanta. AWW refused to negotiate a sale, instead rushing to court, launching a massive multimillion-dollar PR campaign, and resorting to dirty tricks like hiring an agency to snoop on the mayor. Outspent, the city finally settled, allowing AWW to keep its ownership. But the corporation did agree to cut fire-hydrant fees from $300 a year per meter to $50, and to submit any water-exporting scheme to voters for approval.
-- Huber Heights, Ohio. In 1993, a Florida-based company decided to sell its water holdings, including the water system it owned in this suburb of Dayton. The city tried to buy it, but couldn't match the deep pockets of American Water Works. Local folks feared the worst -- and got it. As soon as AWW took control, it raised rates by a third. It also contracted to deliver two million gallons a day of Huber Heights' water to an industrial park outside the city. City officials initiated eminent-domain proceedings to buy back the system.
Once again, AWW ran to court and launched a massive PR campaign, but in a referendum voters overwhelmingly supported the effort to reclaim their water. Even after the 1995 buyback, however, AWW has kept the city tied up in legal knots, requiring that Huber Heights still keep piping its water to the industrial park.
-- Pekin, Illinois. When Citizens For Locally Owned Water (FLOW) began a buyout campaign here two years ago, our friends at American Water Works launched their usual PR blitz, spending a million bucks to assert that city officials don't have the expertise to run a water system. This was a bit ironic, since AWW had run the system into the ground, failing to keep up infrastructure, failing to maintain fire hydrants in working order, and providing slow service -- all while averaging rate hikes of more than 10 percent a year.
However, AWW's big-money PR hustle won in a narrow victory in a non-binding referendum, so the buyback is on hold. But FLOW is not going away, and it points out that at AWW's current rate of infrastructure upgrades, it'll take the company 268 years to replace Pekin's deteriorating water mains.
Water privatization doesn't work because its fundamental promises are lies. Far from bringing "market forces" to bear, these corporations are handed a monopoly and face no competition. Wielding monopoly power, they slash staff, lower wages, compromise service, cut corners on quality, skimp on long-term investment, raise rates -- and call this "efficiency." Any savings derived from these tactics are routed into extravagant executive-pay packages, luxurious corporate headquarters, bureaucracy for the parent conglomerate, lavish advertising and lobbying budgets, and profits. All of this is done behind closed doors, for these private empires are not subject to the open-access and disclosure rules of public agencies. Then, when the peasants rebel, the faraway CEO dispatches an army of PR flacks and lawyers, overwhelming the financial resources available to local citizens and governments.
Buying in bulk
Not content to control our water systems, corporate powers are now selling the water itself. Through court actions, lobbying, trade deals, and bribery (campaign contributions), the law is being perverted to turn public bodies of water into a tradable commodity, like pork bellies. Speculators and corporate hustlers are claiming a right to buy, sell, extract, and move massive amounts of fresh water:
-- Texas oilman and corporate raider T. Boone Pickens has just forced a state water district to authorize him to pump and sell up to 65 billion gallons of water a year from the Ogallala aquifer, sending it by pipeline to San Antonio, Dallas, or other water-short cities. The Ogallala, which underlies the Texas Panhandle and is the water source for the whole area, already is severely depleted and can't be replenished, but Pickens plans to poke holes into it, mine the water, and reap colossal profits by selling it to the highest bidder.
-- Keith Brackpool (I don't make up these names), a California corporate farmer and fat-cat contributor to Governor Gray Davis, also is trying to become a water baron. With the governor's backing, his Cadiz Inc. proposes to suck water out of the aquifer underlying federal land in the ecologically fragile Mojave Desert, then sell some 20 billion gallons of this public groundwater each year to Southern California cities, reaping up to a billion bucks for Cadiz.
-- Ric Davidge, an Alaskan water-preneur who previously was an aide to the infamous James Watt, has a deal for San Diego, which imports almost 100 percent of its water. Davidge wants to siphon some 65 billion gallons of fresh water a year out of two Northern California rivers, pipe it into inflatable bags bigger than three football fields, then tow these "bladders" by tugboat to thirsty San Diego. He says this will save fresh water that otherwise would "disappear" into the Pacific Ocean. (Hello, Ric -- river water running into the sea is an essential part of the ecological cycle.) Davidge admits that there are many questions he can't answer, but, he says, "We need new ideas." New, yes. Loopy, no.
I suppose it will not surprise you to learn that this global corporate rush for the "blue gold" of our public water resources is being ably aided and abetted by our own government.
Deep inside NAFTA, for example, is tucked a little nasty called Chapter 11, which water corporations already are using to force local governments to break the dam and turn loose their water for private exploitation. Also, with our government's blessing, the World Bank and IMF routinely pressure Third World nations to privatize their water systems.
Now, the White House and Congress are ratcheting up their privatization push here at home with a sneak attack called the Water Investment Act of 2002. Despite its boring title, S.1961 contains a stick of dynamite in Section 103(J)(1)(b). This proviso says that a local water project in your city cannot get federal financing unless the local government "has considered" privatizing your water system. Upgrading and expanding water systems is hugely expensive, and cities must have federal support to do the job -- but S.1961 would make this funding conditional on whether cities consider turning over their water to private corporations.
This boondoggle is pushed by a powerhouse lobbying outfit called the National Association of Water Companies, and it means that your local water board will have to spend your tax dollars offering your public water supply for sale -- knowing that Big Water corporations will sue the hell out of them if they don't get their way.
Substituting private interest for public interest has not exactly been serendipitous in the energy sector -- so why in hell should we give corporations (foreign-based ones, at that) our water? At least government entities are supposed to be legally and politically responsible to We the People. But corporations maintain (and the law agrees) that they are responsible solely to their big stockholders -- an elite group that invariably includes the CEO. In water, the stockholders' interests inevitably will conflict with the public's.
Plus, corporations are anti-democratic, used to making decisions in secret -- and, as Enron has taught us, hiding their financial shenanigans in a labyrinth of offshore accounts. Take the case of Azurix, a high-flying water privatizer that was not really a company but a convoluted consortium of more than 50 limited partnerships and interlocking subsidiaries created in the secretive tax haven of the Cayman Islands. Its creator was none other than Enron. Now it's owned by RWE.
Water is one of life's necessities, which is why we must treat it as part of our commons -- the wealth that we hold in trust so it will be there for all of us, not only for today, but for all of our tomorrows as well.