The Future of Corporate Governance

THE OPEN MIND
Host: Richard D. Heffner
Guest: Lester Korn
Title: “The Future of Corporate Governance”
VTR: 10/13/83

I’m Richard Heffner, your host on THE OPEN MIND. Some time ago, I began one of our programs by noting that for most of us the trials and tribulations of America’s corporate boards of directors may seem of comparatively little concern. “Let them each cake”, one might even note. Except for the fact that in American life today, corporations do loom so large, and their governance, corporate governance, must therefore command our attention, our concern. So, here on THE OPN MIND, I discussed this subject with a man who is preeminently knowledgeable about decision making in the executive suite, Lester Korn, Chairman and chief Executive of Korn, Ferry, International, a key executive search firm in the United States. A member of the Board of Directors of three publicly-owned companies, he helped search out the members of a great many more. And just as Mr. Korn and I talked last time about how to choose those who govern American business, today I’ve asked him back to discuss some of those questions that seem to be so troubling in these days about how to govern American business, which after all, Calvin Coolidge called “The Business of America”.

Welcome back Lester Korn. Why do you think there is this incredible focus in our times upon the nature of American business, almost the comparative failure of the American business when contrasted perhaps with counterparts in Japan and other countries?

KORN: Well, I agree with the premise, Dick, and it’s, I‘m delighted to be back, and thank you for having me back again. There is a renewal and a refocusing on American business clear across the board. The youth, the workers, the executives, people are refocusing on what is good about business as well, as they have for sometime, what are some of the problems with business as a buzz-word. I think that what we are seeing today, and it’s a direct result of the recent recession and some of the labor problems that are going on with some of the airlines and some of the problems that have come trough the last two years, like for instance, the Chrysler problem, which was solved with Lee Iacocca and saving the company and saving the jobs, compared to an airline that went into bankruptcy with two –thirds of the employees being let go as a result of that. People are just becoming aware that we have to have business because we have to have jobs. Jobs are what people want. And what provides jobs are business, and business has to make profits or it won’t be in business. So I think that the pendulum has swung back to a much more even-handed viewpoint concerning what is good about business.

HEFFNER: You mean a pro-business viewpoint.

KORN: A pro-business bias. Correct.

HEFFNER: And yet there seems to be so much concern now about the ineptitudes of American business, so much emphasis upon what other people do, particularly the Japanese. How do we explain that?

KORN: Well, you know, that’s very interesting, and I think very badly misunderstood both in our country and perhaps even in Japan. As you know, I’ve been to Japan on a number of occasions, and we have a large office there. And last Friday night, as a matter of fact, I had the distinct pleasure of having dinner with the chairman of See Ito, which is one of the great companies of Japan. We talked about the same thing, talking about productivity. Now, productivity as we measure it and productivity as the Japanese measure it is quite the same thing. We’re both trying to make product or sell a product and get it out into the marketplace at a profit. The difference in styles in doing it are quite extensive, and we may want to come back to it. However, the United States’ productivity record in the newer industries, in the high technology, for instance, is still the best in the world. It’s in our older industries that we have lost the edge. Now, that’s a very sad fact, and perhaps potentially dangerous. We have lost the edge in steel. We may even have lost the edge in Detroit. I’m not quite sure about he motors yet. But we clearly have lost the leading edge in some of our basic industries. That is a distinctive problem for the United States. Japan has more and better machinery. They have more, better, and far more highly mechanized and technologically better methods of, for instance, producing steel than the United States does. We have a choice. We either have to catch up by modernizing our plant, or we have to recognize that that is an industry that we cannot be a leader in.

HEFFNER: But is it correct to assume that if the Japanese identified an industry that was not quite going belly up but was threatening to, that they would in a sense abandon it and adopt an industrial policy that would emphasize putting their best foot forward? We tend to rescue ailing industries. Is there a difference there in points of view?

KORN: Oh, yes. As a matter of fact, we tend to rescue ailing industries as a last resort. They tend to allocate industries to certain companies. I can remember back about four or five years ago when I was in Tokyo. They were trying to decide which one of the Japanese corporations were going to be in the computer business. They weren’t going to have dozens of companies competing in the computer business. The Japanese government was, according to its policy, allocating the computer business to certain corporations. Now, in the long run is that better than our free enterprise system? I don’t know. I like our free enterprise system. I like what it has done for this country. And you know that I believe that capitalism is best served by a free enterprise system. However, in the industrialized world it has been shown time and time again that cartels for a short period of time can be very, very effective. It’s very difficult to compete worldwide against an industry that isn’t a cartel or with a highly segmented and organized economy such as Japan has. It’s a terribly difficult thing to do. And I’m not suggesting…for instance, take our basic steel industries. We need our basic steel industries. In my judgment, we have to find ways to bolster, not through protecting it, not through setting up trade barriers, but perhaps by providing certain tax incentives. We have got to bolster our basic industries. This country cannot exist as a superpower without that. If you look at defense, if you look at our defense industries, if you look at our computer industry, if you look at so many of the areas where high technology, where job creation has come, if you look, take a service industry…take health care, where we are leaders and at the leading edge of technology, which all of those industries are creating new jobs, we have created those industries and we will remain the leaders. Our health care services are exported all over the world. Our pharmaceutical products are exported all over the world. There are some industries that over the years have become a problem in the United States.

HEFFNER: Aren’t they the industries that have been the largest employers?

KORN: Yes, absolutely…To name a couple of them…And let’s focus on that for a second, Dick, because that’s a very interesting question. Take the auto industry. Take the airline industry. I think that’s a better example. We’re not going to see all of the airlines go out of business. We’re going to see a more realistic approach by management to the problems that are facing the industries, determining what needs to be done to protect the profits, and as one of the leaders of the industry has recently tried to do, lower the costs of service of the workers. And the only way you can serve one of those industries is by workers understanding that they’ve got to get productivity up. That’s what’s missing in part of the American society. In, take Japan, productivity is a way of life, and efficiency is a way of life. In my judgment, you simply cannot pay what we are paying for 40 hours a week in many industries.

HEFFNER: Now, you identify raising the level of productivity as the major problem perhaps in this country, economic problem. How in the world does one accomplish that?

KORN: Well, increasing productivity has to start from the top. And the corporation of the organization has to understand that that is the problem, and they have to understand that before profits really deteriorate or disappear, the constant need to monitor profits and, which I think is good in this country, should lead you to an examination of which elements of your corporation or your operations are the most productive and the most useful. The ability to increase productivity in this country, in my mind, rests on two elements: motivating our work force, which we have not done very well with; and secondly, re-instilling perhaps the puritan ethic into all elements of the business world at all levels, including at the very top.

HEFFNER: What do you mean, “The puritan ethic”?

KORN: We simply don’t work hard enough in the United States. We don’t work as long or as hard, and we’re too preoccupied with leisure time. Now, I’m not sure your viewers are going to agree with me.

HEFFNER: Please, please.

KORN: And Lord knows I think we should be spending as much time on leisure as possible, but the fact of the matter is that the only way you can increase productivity and maintain jobs – because there’s another way to increase productivity, and that’s to eliminate jobs through technology – but the only way you can increase productivity and maintain the jobs is to get more from your worker and find the right incentive and the right motivation.

HEFFNER: But Lester, if one were to listen to your prescription, would that lead one to throw one’s hand up and say, “That’s fine, but it is not possible within the context of American life. It is possible within the context of Japanese life. It has always been so. But not here”.

KORN: Well, Dick, I think that the danger is in throwing up your hands and saying it can’t be done here. On the other hand, I think the way the workers responded at Chrysler and saved Chrysler, the way the people are responding at Eastern Airlines to some of the problems there, people don’t want to see their corporations in trouble; they just don’t understand what the problems are. I think that we have to find ways to reward our productive workers. Now, that’s what the Japanese leaders do. They have a system over there for retiring people commencing at 55. And they’re invited to remain on the work force after 55. And the basis for being invited to remain on is how productive are you. And that’s true all up and down the scale. We’re not going to start retiring people at 55. But I think that one of the things that has been lost in America the last few years is that we have to make better products more efficiently and that last longer.

HEFFNER: When you say one of the things that has been lost – and I don’t mean to play upon words or to pun – you don’t say it’s been misplaced. And I wonder whether it has not been lost, and whether we wouldn’t…I mean, you were commenting before almost as if the technological alternative, or unthinkable, the technological alternative of losing jobs and turning to technology were unthinkable. But maybe it is, in truth, the only thinkable approach to productivity problems.

KORN: I agree with you. In the long run, the only way we will increase productivity is, in fact, through technology. It doesn’t mean that that will eliminate jobs. However, we don’t have any programs in place for retraining. We don’t have….So it will mean unemployment, and perhaps hard-core unemployment, which will create social problems of some magnitude. And I’m not talking of double-digit unemployment caused by a recession. But I am talking about the people in the energy industry and in the steel industry and perhaps in the home-building industry who have traditionally done things in a certain way and may not be capable until they are retrained to go in another direction. We clearly have to bring more technology to the home-building industry. We clearly have to bring more technology to the automobile industry if we’re going to remain competitive. Those are the two largest employers in the United States, those two industries. Can you imagine what would happen if we went to a prefabricated housing as an accepted way of life as far as employment in the United States? And yet there’s no reason why it couldn’t happen tomorrow. I mean, the technology is here for prefabricated housing.

HEFFNER: But it’s so interesting that you mix, it seems to me, this hard-core reality or realism with an occasional statement, “Well, that can’t happen here”, but what you really mean is that it mustn’t happen here. You talked about unemployment. You said you don’t mean double-digit. But where is it written, quite seriously, that we won’t have permanently double-digit unemployment and will have to look at unemployment in a way different fro the way we’ve looked at it up to this point?

KORN: Well I don’t think it’s written anyplace. But my own view is that double-digit unemployment is politically unacceptable and perhaps will create social problems of enormous magnitude. And so I think that because of the politics of unemployment, what we’re going to have to focus in on is how we are going to retrain these people. But I do expect a hard-core unemployment to last, unfortunately, for probably the next ten or 15 years while we get over this period. Now, will new industries emerge as the computer industry emerged a few years back? Or as the other industries have emerged, will telecommunications now open up new vistas for jobs? Yes, I think they will. Will the defense industry provide new spin-off industries? Yes, I think they will. Will steel workers be able to service the needs of those industries? No, not unless…So we’re going to have to re-think what is socially acceptable. We may very well have to find a support system for what may be the hard-core unemployed due to technological advance. Because the one thing – and I don’t want to leave you with, and I don’t think I am, with the impression that I don’t think technology is coming – the one thing this country has that it must protect is its leading edge of technology. The one thing we have to be aware of is that the more highly technical we become, the fewer jobs there will be in basic industries, the more likely we will have more jobs in service industries, and the more likely that we have jobs in service industries, the lower the technical need. It’s almost the chicken and egg problem.

HEFFNER: Do you think that the decisions that will have to be made in terms of the problems, the questions that you are raising, will be made essentially in the executive suite, or in the White House and in the Congress?

KORN: I think today that businessmen are perhaps more active politically than at any time in the last 20 or 25 years. And I think that there are, there is a growing realization that they are going to be made in all three places. Obviously the legislative group has got to understand better than any businessmen can the need for the entitlements, because that’s how they get re-elected. Business has tog to understand that it’s got to make a profit. Now, the only way they are going to get through the retraining period and the unemployment period is by someone providing some guidance. I think the present administration is aware of this. There’s an organization that I helped found called the American Business Conference, made up of a hundred chief executive officers. We meet in Washington quarterly. It’s the 100 fastest growing companies in the United States, the CEOs. We are sought out by the leaders of the Congress to hear what our views are as to what is entrepreneurship. We are, in fact, helping to educate the Congress on what business is all about. But we’ve got to create jobs. Those of us who are in business must create jobs. And the good thing about the free enterprise system is that if we increase our profits generally we are creating new jobs.

HEFFNER: You use the phrase, “What is entrepreneurship”. And then you said if we increase our profits we will be creating new jobs. I’ve gathered that one of the criticisms of American business at this point in contrast, short contrast to Japanese business practices, has to do with the emphasis upon the immediate bottom line.

KORN: Oh, yes.

HEFFNER: What it’s going to do for me tonight, not where will we be as an industry, as a company, as an industry, as a nation ten years, 20 years from now. I mean, how do we deal with that problem?

KORN: Well, I’m not sure that it’s a problem, to be honest with you, Dick. The Japanese have told me, and some of the smartest people I’ve ever met are running some of the major Japanese corporations, that it would tend to take a ten-year cycle and our willing to accept a one-to-two-percent profit margin. Now you know that if an American CEO took that view he would last probably as long as it took him to enunciate that sentence, and then he’d be gone. So that someplace in the middle is the need to produce the profits. On the other hand, we’re not so far apart. The Japanese are not a threat in the sense of taking jobs away from Americans. I have to feel that one of the classic marketing mistakes of our lifetime was the failure of American motor manufacturers to understand that there was a desire for a small car. I have to believe that one of the great failures that we’re seeing today in the airline industry is the use, the wasteful use of people in that industry. When you go into an airport and you check in on an airline and you look at all the other terminals with the people standing around waiting for their crowd to come in, I mean, it’s ludicrous the way some of these industries are being run. We’re going to see a shake out of certain companies and certain industries. We’re going to see technology continue, and we’re going to see improved profitability.

HEFFNER: Is it fair to ask you whether we will see that within the context of an Adam Smith approach to free enterprise, or within the context of a national industrial policy?

KORN: I think it will. My own view is that it will have to be a national industrial policy. I do not think that the system will work so well in the short run to overcome what is, I think, a short run problem. It is my view that we have a serious problem with smokestack America. I’m sure you’ve done it as much as I have. All you have to do is be in Cleveland for one day, or Chicago, or Gary, Indiana. You realize that it is a very difficult situation. However, the national policy clearly is to support the creation of jobs. And I’m not talking about work programs; I’m talking about programs that give you tax benefits for research and development.

HEFFNER: Do you think, Lester, that we can make that kind of – I won’t characterize it as massive, because in a sense we’ve been building toward that industrial policy – can we make a fundamental enough switch without changing other fundamental aspects of our lives, things we want to hold on to, things we want to preserve?

KORN: The American way of life. I certainly hope so. You and I have worked very hard all our lives so that our children could enjoy the American dream. And it would be a tragedy for it to disappear. Yet, I think it will work. I think the awareness today of the American public of what was good about business and also, incidentally, what’s wrong with business, is at a higher level than at any time in the last two decades. And it is clear to me that the focus on finding answers, which is step number one, is excellent. And we are faced with robotics. Now, we cannot let the American dream go away because we’re going to have robotics. But we have got to create new jobs. We have to create new energy, and we have to retrain. That is perhaps the thing that bothers me the most.

HEFFNER: Of course, I feel sometimes as though I wonder where the new Luddites are. It’s time for the Luddites to make their appearance again. And that leads me to a question – we just have a few minutes left – sort of a switch on what we’ve been talking about. You do know Japan. Is there any indication that Japan will, as it develops, become so Americanized in its business procedures that it would begin to suffer as American business suffers? For instance, the bottom line, today’s bottom line, not next year’s or the next decades. Any movement?

KORN: No, I don’t think so, because the standard of living in Japan is very high other than in the housing area. And the government and the government controls and so forth are going to remain the way they are. I expect Japan to continue to be an enormously successful industrialized nation and a strong competitor. I think this country has proven time and time again through, that we will find new areas and we will find additional areas. The other thing, Dick, that I want to say, is that I also think that we have got to get the labor unions into the act. You cannot talk about the problems facing America and preserving the American dream and not get the cooperation. One of the best things that’s happened in Great Britain is Mrs. Thatcher’s ability to get the unions to realize that if they kept going on the path that they had previously been going on, they would have no jobs at all. They would have shut down the railways, etcetera, etcetera, etcetera, and the industries would be gone. So that I think that I don’t perceive Japan as a threat to the United States. I think that you’re going to see more joint ventures. I think you’re going to see more things being done jointly. And I think you’re going to see creation of jobs. I’m not pessimistic.

HEFFNER: I didn’t really see them as a threat so much as I thought that perhaps we might be a threat to them after the Second World War and there was a complaint in France that they had become “Coca-Colique”. And I wonder whether Japan is in danger of becoming Americanized.

KORN: Well, let me put it this way. I think that if the trade balance numbers were any different I might think so. But the trade deficits and the trade imbalance keeps growing and growing and growing. So, no, I don’t think they’re in danger of becoming Americanized. But I do think the twain will meet and we will both benefit.

HEFFNER: I’m glad that we end the program on such an optimistic note. Thanks so much for joining me today, Lester Korn.

KORN: It’s my pleasure, Dick. Thank you.

HEFFNER: And thanks, too, to you in the audience. I hope that you too will join us here again on THE OPEN MIND. In the meanwhile, as an old friend used to say, “Good night, and good luck”.