The Three C’s: Capitalism, Cronyism and Corruption

It’s a surprise to nobody but himself--Virginia’s GOP governor faces scrutiny over the three C’s.

Leo Gerard, United Steelworkers President

Who, me? Gov. McDonnell is feeling the heat. (Gage Skidmore/Flickr/Creative Commons)

The Washington Post and federal investigators are hounding Robert F. McDonnell, the Republican governor of Virginia, for taking more than $150,000 in cash and gifts from the CEO of Star Scientific, Jonnie R. Williams Sr.

Capitalist theory asserts that CEOs rise to the top based on merit and moxie and deserve million dollar pay packages. Turns out, though, capitalism doesn’t really work that way.

Gov. McDonnell, a former businessman himself, apparently just didn’t understand that politicians can’t self-deal the way CEOs do. A state’s chief executive can’t accept a $6,500 Rolex watch engraved 71st Governor of Virginia” from a CEO with a history of trouble with the law and a clear desire to get something in return. But between corporate executives, well, there’s few holds barred on such shady transactions.

Capitalist theory asserts that CEOs rise to the top based on merit and moxie and deserve million dollar pay packages. Turns out, though, capitalism doesn’t really work that way. Conniving Jonnies rule the business world. First they ditched the philosophy that corporations are equally responsible to America, shareholders, workers, customers and communities. Then they enshrined CEOs as corporations’ primary beneficiaries, thus golden parachutes awarded to failed and fired executives. In the real world, CEOs rise to the top based on cronyism and corruption.

This is documented in a new report by the Institute for Policy Studies (IPS) titled Executive Excess 2013: Bailed Out Booted Busted.” IPS looked at the performance of the CEOs who the Wall Street Journal deemed in each of the past 20 years to be the nation’s 25 best paid. The number of executives is 241 because some CEOs got the best big bucks several times.

IPS found that more than one in three — actually 38 percent — of these top-paid CEOs led firms that were bailed out or failed in the 2008 financial crisis; paid fraud-related settlements or fines, or got fired — landing softly in a sizeable pile of go-away cash.

Jonnie R. Williams Sr. never appears on that best big bucks list. But his pay from Star Scientific is hardly paltry despite the firm’s poor performance, and his relationship with Virginia’s governor provides an appalling example of the corrupt crony system.

Over 18 months in 2011 and 2012, Jonnie showered the governor and his family with presents, including five-figure wedding gift checks for the governor’s daughters, a $15,000 New York shopping spree for the governor’s wife and $7,000 in golf gear and outings for the governor, his sons and staff.

Paying for joint vacation trips gave Jonnie exclusive access to the governor to pitch Star Scientific’s new product — a dietary supplement. Star Scientific fronted many of the gifts, making Jonnie’s business intent fairly clear. Virginia’s first lady promoted the dietary supplement across the country and hosted a roll out luncheon at the governor’s mansion, paid for by the governor’s political action committee, to announce the product’s launch in 2011.

The governor has said he provided no more help to Star Scientific than he would any company and that he hung out with Jonnie because they were old friends. I admire people who are entrepreneurial,” the governor said of Jonnie.

Entrepreneurial. Right. This is a guy who was fined for fitting contact lenses without a license and whose optical business collapsed leaving tens of thousands of dollars in debts. This is a guy who paid $295,000 after the Securities and Exchange Commission accused another medical business he ran of falsifying claims.

His current business is the subject of a federal securities investigation and has lost money for 10 consecutive years. And the losses aren’t peanuts either: $22.9 million in 2012, $38 million in 2011 and $28.3 million in 2010.

Despite that, Jonnie took at least $1 million in pay each year. He got a million bucks to run a failing company. Now that’s capitalism!

That’s the failed entrepreneurialism the Institute for Policy Studies found repeatedly as it looked at the performance of the CEOs paid the best big bucks.

Among those CEOs, who should be the best and the brightest based on the capitalist measure of the fattest paychecks, 22 percent headed firms that got bailed out after the market crash in 2008 or whose firms disappeared completely.

Among them is Richard Fuld. The former CEO of Lehman Brothers, once the nation’s fourth-largest investment bank, appeared on the best big bucks list for eight consecutive years, including 2007 when he pulled down $40 million. The next year, Lehman went bankrupt, precipitating the Wall Street crash. Bad work rewarded with big bucks: that’s corruption.

Twenty-seven of the best big bucks CEOs got fired, were forced to retire, or lost their jobs when their companies went belly up. Twenty-three of them, including those whose firms were failing or were charged with financial fraud, floated merrily away on golden parachutes. The average value of those go-away packages was $48 million. More bad work rewarded with big bucks.

The IPS report notes, An alarming number of CEOs are not adding exceptional value to our economy. They are extracting vast sums from it.” No matter CEO performance, the report says the chief executives take increasing millions for themselves while high unemployment lingers and economic recovery slogs.

Coddling CEOs, especially incompetent ones, is not the function of corporations. Vanderbilt law professor Margaret Blair told the Washington Post the role is much larger: We build corporations to provide goods and services to a society and jobs for people.”

The IPS report suggests methods to control CEO pay, including actually enforcing provisions of the Dodd-Frank financial reform law. In addition, corporations must be required, as they did in the 1950s and 1960s, to serve the nation, customers, workers and communities as well as shareholders and CEOs.

And for capitalism to work, corruption and cronyism must be punished. That means you, Jonnie and Gov. McDonnell.

Leo Gerard is international president of the United Steelworkers Union, part of the AFL-CIO. The son of a union miner; Gerard started working at a nickel smelter in Sudbury, Ontario, at age 18, and rose through the union’s ranks to be appointed the seventh international president Feb. 28, 2001. For more information about Gerard, visit usw​.org.
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