Conrad – longing for the 1800s

As each day progresses, the Conrad Black trial in Chicago becomes increasingly about the tension between the “rights of the nobility” and the “rights of the shareholder”. Had Black been born in the 1800s instead of the 1900s, none of this would be happening. And, perhaps, had he retired even a few years ago, nothing may ever have come of any of this. But, alas, it is 2007 and he’s decided this is going to be his Waterloo. Or Battle of Trafalgar; except in this situation, even if you win, you lose. The egg that is his life cannot now be unscrambled.

While the main case against Black might be about non-compete payments, the dead tree media invariably lead off each story with the parade of unspeakable highlights: $660,000 personal flight to Bora Bora, $24,000 in dinners with Dr. Kissinger, $50,000 birthday parties – paid for by the company, 8 household staff – paid for by the company, Rolls Royce – serviced by the company, etc. etc.

Black’s own emails suggest that, as it was his company after all, it was impossible to separate personal expenses from business entertainment and marketing. And he didn’t think he should have to, either. If you take the time to read Tom Bower’s powerful book (Black is suing him for libel), you are left with the impression that the alleged pilfering was about as graceful as a Starbucks’ cashier tipping the till into his/her pocket at the end of a shift.

The lesson of the Black story is simple. Despite the disclosure in the 2001 Hollinger Canadian Newspapers, Limited Partnership annual circular regarding the CanWest $80 million non-compete payment (hard for the Board to deny knowledge of the payments when it appears in a Circular that they would have had to approve), no alarm bells went off in either the local media nor with the lead Canadian regulator. And the chattering classes, at least in hindsight, would have you believe that they were perfectly aware of the morphing of Black’s corporate and personal pocketbook into a single spigot.

Let’s repeat the first point. This appeared in print on SEDAR on May 18, 2001, and was cleared by the primary regulator:

“Also, as required by CanWest as a condition to the transaction, Ravelston and Messrs. Black, Boultbee, Radler and Atkinson, entered into non-competition agreements with CanWest pursuant to which each agreed not to compete directly or indirectly in Canada with all of the Canadian businesses (which included substantial properties not owned by the Partnership) sold to CanWest for a five year period, subject to certain limited exceptions, for aggregate consideration received by them of $80 million paid by CanWest in addition to the purchase price referred to above.”

Whether or not CanWest required the payments to be made directly to the management team (Bower claims that Len Asper denies that it was at the direction of CanWest), it’s not like it was a secret. And least not this payment.

Nor was the existence of a corporate jet a secret; nor, likely, private use thereof. Madam’s hairstylist, for example, knew perfectly well how his client made her way from London to North America for a coif treatment.

But, in hindsight, all of this is criminal — at least in the eyes of a Chicago federal prosecutor. And, with the longstanding libel chill extinguished, the local media are justifiably piling on.

The theme doesn’t end with Black. At least if may not end with Black.

Fast forward two, three or five years from now. Picture an annual meeting being held by a dual-class voting structure public company. One that has a corporate jet, or seven. And a corporate apartment in an appealing city. Or a corporate yacht. Or a salmon fishing timeshare on the Miramichi River. Or a golf club. Or that might defray the tens of thousands of dollars of gardening expenses at the CEO’s home, obstensibly in light of all of the corporate entertaining that is done there each year. Or that provides four front row seats (at $3500 per evening) to a professional sporting event.

In advance of the AGM, a journalist is going to fax a list of questions to the CEO. Or maybe it’ll be a hedge fund manager, who purchased 100 shares to get standing at the meeting (but might also be short a whack as well). At the end of the annual meeting will come question time, and up the person will pop. TV cameras will pan. Necks may crane. And the speech will begin:

“Mr./Madam Chairman, last month I forwarded to you a list of questions that I wanted answered today regarding the use of our corporate jet (apartment or yacht, cabin, gardening supplement, etc.). Before I ask for the answers to my questions, let me repeat them for the benefit of my fellow shareholders:

1. What is our company’s policy regarding personal use of the corporate jet?
2. How many trips of that nature occurred during the last fiscal year? What is that as a percentage of their use of the aircraft? What about guests?
3. Was the cost of those trips included as a taxable benefit of the executive in question?
4. If not, why not?
5. How many so-called business trips involving the corporate jet involved the executive in question merely attending a cocktail/dinner party in a foreign city (or the Masters Tournament, or the Academy Awards, or an Art Gallery opening, or an Opera event, etc.) but didn’t involve any of our customers?
6. Was the corporate jet ever utilized for weekend business trips within 50 miles of the CEO’s summer vacation property/winter vacation property/child’s university/parent’s retirement home/etc.
7. Do we use corporate resources to help defray the cost of gardening at our CEOs home (country house, etc.)?
8. Do we provide a car service, or security, for the CEO’s minor age children to attend pre-school/JK/private school?

And the questions will go on and on and on. If the Chair of the company declines to answer any of them, then it’ll be the classic: “what do you have to hide”? “Aren’t these corporate resources?” “Does the CRA know? Is the boss paying their taxes for the personal benefit?” The Directors of the company in question will know full well the experience of Maire-Josee Kravis at Hollinger, for example, and will not want to repeat her nightmare:

– “Did you know about these expenditures?”
– “If you did, why didn’t you inquire about them?”
– “If you didn’t, wasn’t it was your responsibility to do so?”

Tim Horton’s for example, appears to have concluded that they don’t even want to have to bother with the sticky topic any longer, and are on the verge of banning personal use of corporate resources. And it appears they already had about as strict a policy as any public company.

As with eye-opening findings of the stock options-dating review across the United States, it just takes one or two people with some will, patience and intestinal fortitude. Same for Hollinger. One woman at Tweedy Browne knocked down that first domino; and there Black is, on the verge of a lifetime in prison (unless he chooses to take the more noble exit). The local mutual fund market timing scandal in 2005 investigation was different, in that it was sparked two months after market-timing practices were discovered involving several U.S. mutual fund companies and their favoured hedge fund clients.

But, in each case, it just takes a flashpoint – or a single individual – to begin the irreversable march.

As we’ve seen in Chicago, just because something happened 5 or 7 years ago is of no concern to the current crop of white collar prosecutors. There appears to be no statue of limitations on enjoying the so-called “rights of the nobility”. And, given the profile of most dual-class voting share structure companies, they’ll be the easiest to target: owner/operators in the Chief Executive role, no threat of a proxy battle or takeover bid, hand-picked board, etc. The dual-class structure, given the control it manifests, actually ensures that the “it is my company after all” dynamic has a chance of putting down roots at any number of firms. That’s why it’ll be so easy to start there, fair or not, looking for Hollinger II.

The only question that remains is who will pick up the gauntlet. Shareholders, regulators, bloggers or the dead tree media in quest of a NNA?

MRM