CORPORATE GOVERNANCE: Black day indeed for the Newspaper Baron

COMMENT: By Michael S. Olympios, Chief Consultant, Allied Business Consultants

 

The word kleptocracy – rule by thieves – once was used to describe corrupt leaders and dictators, was recently added to the vocabulary of corporate governance.

Former Hollinger International Chairman and CEO Conrad Black was convicted last week in Chicago on three counts of mail fraud and one count of obstruction of Justice, which gave prosecutors a victory on the most serious allegations against the onetime newspaper baron. Hollinger Inc. was a Canadian corporation that was publicly traded on the Toronto Stock Exchange, which owned and published newspapers around the world, including the Chicago Sun-Times, The Daily Telegraph in UK and others.

Through a separate company, Black held approximately 30% of International’s equity, but controlled a majority of its stock voting power through a Class B common stock that had a 10-1 voting preference over the Class A common shares held by International’s public shareholders.

 The law imposes a fiduciary duty of loyalty on controlling shareholders, officers and directors such as International that forbids them from using their position of trust and confidence to further their private interests.

Furthermore, this fiduciary duty forbids controlling shareholders, officers and directors from usurping corporate opportunities for their own personal benefit, or misleading or deceiving the corporation’s board of directors.

Controlling shareholders, officers and directors seeking to engage in related party transactions with a company under their control must disclose all material facts to the independent directors of the company and abide by the determination of those directors as to the fairness of the transaction. Such fiduciaries must ensure that these transactions are entirely fair, meaning that the transaction was both procedurally and substantively fair to the company.

Mr. Black, 62, was acquitted on nine other counts, including chargers of racketeering and wire fraud, some of which related to the alleged misuse of company funds to support a lavish, jet-setting lifestyle, wrote the WSJ. The charges on which the prosecution prevailed were that Mr. Black and three other former Hollinger executives skimmed millions from the company through a series of deals made without proper board approval or disclosure. Mr. Black is facing up to 35 years in jail, but according to the FT “prosecutors suggested that he could expect between 15 and 20 years in jail when he is sentenced on November 30”. The jury deliberated for 11 days before delivering their guilty verdict, sending a clear message to boards that fail to stand up to greedy CEOs. Lord Black’s arrogant management style was driven by a lavish lifestyle he enjoyed with his wife who once confided to Vogue she had an “extravagance” that knew no bounds. At one time Black told a group of potential investors with concerns about perks such as Hollinger International’s corporate jet that he could “have a 747 if [he] wanted”, his former head of investor relations testified in court.

In 2004 a special investigation committee was appointed headed by former SEC Chairman Richard Breeden revealed some disturbing evidence. The report describes “a myriad of schemes, fiduciary abuses and fraudulent acts that were used to transfer essentially the entire earnings output of Hollinger” into the pockets of the Black group.

Breeden’s 513-page report describes an array of methods by which Black and his associates appropriated vast sums of Hollinger corporate funds. The Breeden report is a rare example of an official document in which executive greed and corruption are described in blunt terms. Lord Black diverted money from shareholders into his own bank account in order to keep up with New York’s wealthiest socialites, but lost touch with basic principles of honesty. The report charged that “self dealing, misrepresentation and other abusive and unethical practices had become so ingrained in the corporate culture [of Hollinger] that they became commonplace.”

The report also shed light into the company’s poor corporate governance practices.

According to the report, Hollinger donated generously to organizations connected with or sponsored by [directors] Kravis, Perle, former US Secretary of State Henry Kissinger, Andreas and Strauss.

The Special Committee has not concluded that these contributions altered the directorial behavior of Kravis, Kissinger, Andreas and Strauss. Nevertheless, Black’s generous use of Hollinger’s money to directors’ pet charities without the restraint of sound corporate governance controls raises questions regarding the independence of those directors, particularly for Kravis and Kissinger, who were Black’s close friends.

The report went easy on Henry Kissinger, for obvious reasons, but came down hard on Richard Perle, the controversial former Pentagon official and prominent neoconservative. The Hollinger affair is littered with examples of how dominant CEOs can expropriate shareholder wealth. It is an invaluable case study for corporate governance, finance and management.

 

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