Guest: Korn, Lester
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THE OPEN MIND
Host: Richard D. Heffner
Guest: Ambassador Lester Korn
Title: “The Business of America…And of the World”, Part I
I’m Richard Heffner, your host on THE OPEN MIND, and my guest today is a man particularly familiar with and to the world of corporate governance in America…and beyond our borders as well, now that ours is indeed a world economy, with economic interdependence, rather than independence, its hallmark.
Now when he first joined me here many years ago, I introduced today’s guest s the founder and Chief Executive of Korn/Ferry International, the world’s largest executive search firm. Today he is its Chairman Emeritus as well as the head of a privately-owned investment firm.
But Lester Korn is also Mr. Ambassador, having served as America’s Ambassador to the United Nations Economic and Social Council.
And so I’ve asked Ambassador Korn to THE OPEN MIND today to talk broadly about the business of America and the world at large.
Now we actually record this program weeks before America’s 1992 Presidential election, and I must say that at no time in my own long career as a quadrennial election watcher have I noted as much concern in America for matters economic and corporate as surfaces today.
So, first let me ask Ambassador Korn about some of those concerns and learn his own very tutored points of view ion them. Welcome, glad to have you back. And, you know, Ambassador Korn, I looked back last evening over transcripts of our programs over the last decade, and I find that we touched on a number if issues that are important to the election of 1992. This program won’t appear until after the election has been decided. But I wanted to go back to the corporation, economic, business questions that has surfaced…we’ve never really touched on it…the matter of corporate compensation, the matter of executive compensation. And I go back to, it could be the Wall Street Journal, if I dug into my folder. It is The New York Times here where Peter Passell has written, in mid-1992, “Those big executive salaries are a big problem”. And, I wonder what has happened in the decades since we first spoke on THE OPEN MIND in this area.
Korn: Well, first of all, Dick, it’s a pleasure to see you again. It’s always an honor to be on this program with you.
Heffner: Thank you.
Korn: And I think you for the invitation to return. Salaries are a compensation…has to be defined. It’s salaries, bonus and stock options. If you look at the first two components, the salary base of executives, they have roughly doubled…of senior executives. They have roughly doubled in the last ten years. The bonuses have become incentivized. In other words, you make your goals, you get a bonus. Where the real money that people have talked about and have read about and said, “I don’t understand how people can make that kind of money”, have come from stock options. Now when the money is made from stock options, Dick, the shareholders benefit because the only way you can make money as an executive from owning shares…options, or stock options, in your company, is by the option…but the stock going up, and you transferring them into shares and then holding them or selling them, whichever you prefer to do. The real question is: are we building a society that is so divisive that the compensation issue will become the symbol, which it could be, of that divisive society? I’m not one for formulas. I don’t believe it ought to be four-to-one, or seven-to-one, or eight-to-one, as, as it is in Japan or in Sweden, perhaps Germany nowadays. I think you, generally, in the United States must rely on the free capitalist society to provide the incentive and a Board of Directors who will act responsibly in giving awards to their senior executives.
Heffner: But once you’ve said that, “A Board of Directors that will act responsibly”, then you come to the question that many people have raised, that, that…have they really acted responsibly, have the really acted responsibly in terms of the image of the corporation in America when quite so many people are quite as upset as you, yourself, indicate?
Korn: Oh, the…I think the majority of Board members in most American corporations have tried to act responsibly. And I used the word “tried” carefully because there are a variety of ways…you compare within an industry to see if so-and-so is in the entertainment industry, is he making the most with the least, and how’s his studio doing? Or, of you’re in the automobile business, the same type of thing. It really doesn’t matter which business you are in, if they’re large corporations, and there’s a myriad of consultants out there who do studies that are done in three or four ways, and they usually come to the same conclusions. I think the real problem has been…has the motivation system worked in the giving of the options? And therein, I think, lies a very considerable and very interesting point of discussion for the next five years. Because it is clear that people are saying that I made more spendable ten years ago a t a certain level”, and it’s also clear that at the upper reaches, it’s clear that people are making a great deal more than they made ten years ago. So you have the middle class being polarized over the issue. And, in fact, the middle class in America, which I think we should define for our purposes, as a combined income of perhaps $150,000 maximum, have in fact felt the brunt of the polarization and the fact that the compensation systems may not be providing the incentives that they did in the early days.
Heffner: Well, let, let me, let me ask two questions here about top executive compensation. We know…we know from reading the press that…electronic and print alike…that when you see that Chief Executive, Chief Executive Officer, Chairman of the Board, whatever the categorization…a, b, c, or d…has taken home, “taken home” is a poor word…his income, or his reward for a certain year, has been $10 million, $20 million, $30 million, $40 million, $50 million and upwards…
Heffner: …we know that we’re creating a society that is angry about that. Now, is it corporate responsibility to say “Look, if you think about how much Coca Cola’s value has increased over the past decade and what we’re providing our, our Chieftain over this period is minor. Is indeed, his income has been worth it, because we’ve increased our value by billions and billions of dollars”. But is it responsible when there is so much anger in our society on the part of those who as you say, are being “hard pressed”, have been hard pressed in the past decade?
Korn: The, the…it, it’s not a simple problem because if you take the examples of the companies we’ve been talking about today, where some of these salaries have gone into the $50 million…or compensation has gone into the $50 million range, the shareholders have been equally rewarded. They have not done anything other than praise the executives who produced the results, and rarely has the Board been sued, or attacked…and I sit on five or six corporate Boards, and in many cases, I sit on the Compensation Committee…we try very hard to peg the compensation to results which are very hard to peg the compensation to, to competition. The question of fairness is a very current question. And I am very, very concerned about it. I’m concerned about it because I think that for most of my adult life, most of my life, we’ve been a classless society. We’ve been able to climb the ladder of success based on ability. You’ve been able to go to the school of your choice because if you didn’t have enough money there were scholarships. Things have changed. We don‘t have quite the financial clout we had five years ago, and certainly not the clout we had ten years ago, although I think we will get it back. And, I am very concerned that that minority populations who have been historically amalgamated, going back to the early 1900s and have risen in fact, many of the people came as emigrants in 1900…their children are running these corporations we’re talking about. That opportunity may not exist into the future. I am afraid that there is a polarization taking place, but it’s not limited strictly to compensation of executives. By and large I think most corporate executives are fairly paid, by and large in the mid-sized companies I think that they are entrepreneurial, they expect to take less cash and more in the way of stock, and some day go public, and perhaps make some sort of a fortune, however they define “fortune”. That has been the way it’s…or sell their company.
Heffner: Well, if one were to use a kind of proportional representation approach to this, I’m sure that yore quite correct…you, you do know the, the, the facts of the matter, that people generally are rewarded in proportion to their service to the stockholders…okay. Once you say that, when you get beyond a certain point, the question I’m asking you, isn’t there a, a violence done to the sensitivities of a society that is being dichotomized, as you suggest, that has now reflected more than ever before, a kind of…an absence of the classlessness…the beginnings of a, of a new division that make us all very uncomfortable. Is it responsible simply to claim the rewards that we provided on the part of the Board of Directors are proportional to the rewards that this Chief Executive has provided to our stockholders? Is there a point at which you have to say, “Okay, now we’re going to shift”, when you get beyond the $2 million, the $5 million range, don’t you have to begin to say that rewards that may be commensurate with the work done by the Chief Executive still, in real terms, or in the perception of the public are outrageous…don’t you have another kind of responsibility then, as a Director?
Korn: Let me answer the question slightly differently. About ten or 11 years ago, I wrote an Op Ed piece for the New York Times that said, “Yes, pay the $1 million dollars to the executive. He’s earned it”.
Heffner: How about the fifty?
Korn: About five, six years ago I wrote “Pay the $2 million…
Korn: …he’s earned it”. And, of course, as you know, the New York Times picks the headline, I simply wrote the Op Ed pieces. I would not write a piece today that says, “Yes, pat the fifty”, nor would I write a piece today that says “Pay the five”. I mean I do believe…nor would I write a piece that says that there should be some sort of formula because I think you will take the incentive out of the system. I do believe cash compensation in the United States has tended to get out of hand, and that the reward system has tended to go only upward, and not downward. You can have a spectacular year as a CEO of a company and get a great deal of money for that. You could then have a poor year, and simply have a flat compensation. So, it goes up…plateaus…tends to go up…plateaus. Now there are some corporations that are much closer to it in terms of trying to bring the incentive system together, trying to bring more people into the common poll of dividing up the rewards. It’s not quite the Japanese system where you do things by consensus, and you get paid according to a formula, but where you tend to stay locked into the position that you’re in for the rest of your life. But there is clearly a trend in some of the corporations that spend a great deal of time thinking about this to try and move the incentive system down so that people will feel that they, in fact, if they contribute to the profits, will, in fact, make something as a result of that. I was in Vermont this weekend and I, I have nothing to do with this company, absolutely nothing, I’ve never heard of it as a matter of fact before I went there. But there’s an ice cream company that was started in Stowe, Vermont, and they have a program where they went public by disposing of their stock to their employees, and a handful of whoever wanted to buy it at that time. And they were tiny. They’re now a nationwide chain, they are very proud, as they should be, of their success, and they make a great point of saying our Co-CEOs make seven times the lowest employee in the assembly line. Now what they don’t discuss is the value of the stock that they have for having conceived of this truly brilliant idea, and this wonderfully growing nationwide company. I would hate to see the incentive go out of the system. On the other hand, I think we are in for a decade of social change. Social and economic change of considerable substance. And I think that the perception, which is a word you’ve used two or three times today, is going to become extremely important, and it’s going to become extremely important as the demographics of our population change. Because if we do not bring the standard of living up in the inner cities, and if we do not bring the level of education up in most of our cities, then we are building in a problem for our children and my children that they will have to face that will be terrible, because then we will have an upper class and a lower class and that has always been the weaknesses of most industrialized countries, and the fact that we have not had it has been a great strength. Is this one of the problems? Absolutely.
Heffner: Lester, I’m interested in the way you formulate that because you’re saying it’s not too late. You’re not saying that this is what has happened, we have divided our society between those who “have” and those who, those who are “have nots”, both financially, economically and intellectually or educationally. I gather you’re not saying, “It’s happened, now we have to deal with this new kind of society”. Or am I mistaken? Would you say “It has happened, and we do have to deal with it?” Or are you just saying “We have to be wary of the possibilities that in another decade that will be the situation in America?”
Korn: I…first of all, I, I think we have to be aware of it. And I think it is happening. And as you know, and I think your listeners know that they’ve caught any of our earlier shows, I’m a rather conservative Republican, I served as Ambassador under Republican Administrations, so that the concerns are across the political lines. I mean we have a changing population. We have a growing portion of the population that doesn’t have the opportunities that you and I had when we were growing up. That will change the political spectrum of this country in ways that I don’t think we can even see today. And if we don’t get the education system up-graded, if we don’t get the inner city situations and the job opportunities and job training going, if we don’t do many of the things that both parties talk about then we are going to see a class society.
Heffner: And if you had to make a bet…now, just between us, forget about the people who are watching…seriously, if you had to make a bet, which way do you think it’s going to go? What are we going to do as a society? What will we accomplish or fail to accomplish?
Korn: Well, I’m an internationalist. I have served not only as an Ambassador to the UN, I have been an official State Department and White House representative to 13 countries overseas, most recently to Mexico on the Free Trade Pact Agreement. I think one of the things that is going to happen is a shift in the jobs. I think we will get the Free Trade Pact Agreement, just as I thought we would get the Canada one. I think we will get the Mexican one. I think it may be tougher to get then we think it is at the moment, but I think we will get it, and I also think that out of that will come a re-focusing of some of our best minds, like yours, as to what the education system should do, and how do we get the children…young and mid-age, to go and stay in school. I mean it’s not a playground, it’s not a substitute for care at home, it’s a place to learn. If we don’t get the education…and I think we will get the education system under control. I think we will put enough money into it because it all starts with education. You cannot go any place in this country, in my view, without education, and there are, of course, many, many exceptions. I mean, I could name a number of people who…and you can, too…who had…who dropped out of high school and have become multi-millionaires. But that’s not the point. The point is the upward mobility of Americans has always been based and predicated on education and job opportunity. So that as long as we keep the doors open, and keep our eyes open to the fact that we’re dealing with what is the talent of the person, not what is the nature of the religion or the creed or the color, but the talent of the person. And as long as we have been able to do something, which I think desperately needs to be done, with the education system then I think the next five to ten years could be quite optimistic.
Heffner: But, but, Mr. Ambassador, you, you talk about education and then job opportunity. Education alone, somehow or other getting our children to stay in school…
Korn: Oh, that won’t do it alone…that’s right…
Korn: The other side of the coin, too, is that we have spent most of your life and my life fighting the Cold War. We have now found in the last two years that ending the Cold War does not produce a boom which ending the “hot” wars did. So that the country has to turn inward. The country has to, and as I said, I’m an internationalist, but the country must look to its own first, because we can’t help other countries in any great magnitude if we don’t solve our own problems. And one of our greatest problems has been the fact that we have not dealt with the eco…economic social needs of a very large, growing group of people who have not been able to make it into the middle class. And until we solve that problem, which has to be solved, we can’t help, greatly…and I’m not calling for a withdrawal from humanitarian efforts or, or anything like that…I mean…I obviously support that sort of thing totally…but I think we have an opportunity now, assuming that we have a peaceful four or five years, which I think we will, to take some of the money that was quite properly spent on the defense…because we wouldn’t be sitting here talking about this if we hadn’t won the Cold War, and, and look inward. It’s time to…it’s time to fix America. And it’s time to say…and to fix it with less government interference, I might add…
Heffner: Adding that sort of prevents me from saying what I was going to say as we end this program…Mr. Ambassador, you’re beginning to sound, not like a Republican, but that’s not fair…and for that reason I’m going to ask you to stay where you are…and as we finish this program, we’ll go on and do another one.
Korn: Be delighted…
Heffner: And I’ll bring that question up.
Korn: Thank you.
Heffner: Thank you very much, Lester Korn.
Korn: Thank you.
Heffner: And thanks, too, to you in the audience. I hope you’ll join us again next time. And if you care to share your thoughts about today’s program, please write to THE OPEN MIND, P.O. Box 7977, FDR Station, New York, NY 10150. For transcripts send $2.00 in check or money order. Meanwhile, as an old friend used to say, “Good night and good luck”.
Continuing production of this series has generously been made possible by grants from: The Rosalind P. Walter Foundation; The M. Weiner Foundation of New Jersey; The Thomas and Theresa Mullarkey Foundation; The New York Times Company Foundation; and, from the corporate community, Mutual of America.