CEOs of Aramark, AIG Lament Today's Risk-averse ClimatePublished: September 10, 2003 in Knowledge@Wharton
CEOs of companies that never made headlines during the corporate scandals of the late 1990s expressed concern at a conference last week over what they see as a climate of government over-regulation in response to the business scandals of the last two years.
Joseph Neubauer, CEO of Aramark Worldwide, a Philadelphia-based provider of outsourcing services, and Maurice R. Greenberg, CEO of American International Group, the global insurance and financial services firm, both said new corporate governance standards, such as the Sarbanes-Oxley Act, discourage CEOs from taking risks necessary to spur new economic growth. Their comments were made during a conference at Wharton co-sponsored by Businessweek magazine. The conference’s theme was “Profiting from Uncertainty.”
“Too much time is being spent on corporate governance and accounting issues and not enough on strategies to build the business,” said Greenberg. “That’s not in the best interest of shareholders.”
Returning 250 Wallets
Last year in a cover story headlined “The Good CEO,” Neubauer was among six CEOs singled out by BusinessWeek for building companies without violating their ethical principles during an era that produced scandals at Enron, Tyco and WorldCom, among others.
Neubauer, who runs a company with $9 billion in sales and 200,000 workers in 18 countries, told the Wharton forum he found the story somewhat embarrassing. “There should be nothing special about being honest and straight-forward.”
Public trust is the foundation of the free enterprise system, said Neubauer, 61, who immigrated to the United States from Israel when he was 14. He began his career with Chase Manhattan Bank in 1965, then went to work for PepsiCo in 1971 and rose to become senior vice president of the company’s Wilson Sporting Goods division. In 1979 he joined what was then ARA Services as executive vice president for finance and development. He was named CEO in 1983.
“I grew up in the business world of the 1960s and 1970s,” he said. “I learned to play hard and to play to win … At the same time, we had some very basic rules of engagement. They were fair and they worked,” he said. “When we competed by the rules, everybody won.”
After nearly 40 years in the business world, Neubauer said his rules of conduct include making decisions based on facts, rewarding people for good work, taking calculated risks, controlling his own destiny and staying focused.
The excesses of the late 1990s, he added, were rooted in changes that came in the 1980s and early 1990s. “We brought a lot of uncertainty upon ourselves. People in the new economy wanted to create a new set of rules – an easy set of rules.” Executives abandoned old-fashioned goals such as satisfied customers, profits and cash flow, and turned their attention to vague business plans, initial public offerings, valuations and executive compensation.
“Like most companies, we at Aramark were presented with these opportunities in the 1990s but we stayed away for the simple reason that we didn’t understand them,” said Neubauer, adding, however, that the pendulum has now swung too far in the opposite direction leading to an overly cautious business climate. “The biggest danger now is the reluctance CEOs are beginning to have about taking risk.”
Government regulations and internal good-governance policies enacted after the scandals of the late 1990s are stifling executives, Neubauer suggested. Many business leaders are now more concerned with regulatory compliance than with building their companies and creating new jobs. On Labor Day Neubauer spent 3.5 hours filling out forms related to his role as director of several companies. “I’m not sure it was a good use of my time,” he said.
Neubauer maintains an entrepreneurial culture at Aramark despite a need for financial control of far-flung operations. Employee-managers own half the company stock. Employee trust and integrity is crucial in a company like Aramark where half the revenue stream is generated by small cash transactions such as purchases of hot dogs at ballparks and sodas in student cafeterias. According to Neubauer, Aramark employees who clean planes at JFK airport in New York have returned 250 wallets with $50,000 in cash over the last few years. “These are people who make $6 to $8 an hour,” he noted. “No one regulated that.”
Neubauer’s sense of integrity was tested in the 1980s during the junk-bond, leveraged-buyout fad when investment bankers at Drexel Burnham Lambert promised him a fortune if he would cede control of the firm to them. Neubauer balked and rallied his executives to take the company private. Many of the executives mortgaged their own homes to take on $20 million in debt – $1 billion with interest, he noted. “We could have gone along with the takeover culture to become well-off, but for us it was about controlling our own destiny and managing the uncertainty around us.”
The debt burden forced ARA to generate cash flow. “Focusing on fundamentals didn’t get us on the cover of BusinessWeek in the 1990s,” Neubauer said. “It wasn’t sexy, but it did help us build a great business.”
The Maotai Factor
Maurice R. “Hank” Greenberg, 78, is only the second CEO to run AIG, which was founded in Shanghai by its other CEO, Cornelius Vander Starr, in 1919. The company was formed to write insurance for expatriates working in China, but has since evolved into one of the world’s largest insurers. Last year AIG, with 80,000 employees in 130 countries, wrote $27.4 billion in policies.
Greenberg, who spoke by videoconference after bad weather forced him to cancel a planned helicopter trip to Wharton’s campus, also said the regulatory pendulum has swung too far post-Enron.
“I think Sarbanes-Oxley in many ways has put a chill on decision-making in companies. Yes, we had some wrong-doers in business in America. That’s not the first time. But you can’t legislate crime out of existence.”
Greenberg called on regulators to lighten up. “It’s important to have a balance and not these hunts looking under every rock and keeping everybody tied down with regulatory issues rather than running businesses. I’m worried about it.”
A lawyer by training, Greenberg went to work in the insurance business in New York after returning from the Korean War. In 1960 he joined AIG and was put in charge of its American Home personal and small business policies. He caught Starr’s eye when he restructured the business and eventually developed multiple insurance lines for major corporations.
Greenberg recalled his strong relationship with the firm’s founder. “Starr was a very entrepreneurial person. He was a risk-taker but a thoughtful risk-taker. He was good at motivating people to do the things he liked to be done.”
The firm has earned a reputation for developing novel lines of business, including terrorism insurance and policies to protect against losses in cyberspace. The company has also expanded globally. After China began to initiate free-market policies, AIG returned in 1979 with a joint venture to insure U.S. trade. Recently it became the first foreign company to get a license to operate in Beijing.
Winning that approval “was a long arduous task,” said Greenberg, referring to AIG’s campaign to convince Chinese officials that the company would help the nation’s embryonic insurance industry. It took many glasses of maotai, the Chinese liquor made from distilled sorghum, to seal the deal, he added.
Greenberg sees other opportunities for AIG in Asia, including India and Vietnam. The company is also doing well with two new companies in Russia, he said.
From Terrorism to Tort Reform
The prospect of increasing liability for terrorism does not concern Greenberg, although he agreed that the situation is tense in certain parts of the world such as Indonesia and other parts of Southeast Asia. “We have always written terrorist coverage in different” countries, he said. “We know our way around.”
Greenberg urged the U.S. government and Congress to follow the path taken by many other countries and develop policies that would create a reinsurance market for terrorism. Until that market exists, he said, insurers will not be able to adequately cover major corporations. “The insurance industry on its own, without reinsurance back-up, would not be able to fulfill the needs of corporate America. A dirty bomb or a nuclear device would exceed the capacity of the industry.”
According to Greenberg, his company is able to foster an entrepreneurial spirit by breaking financial responsibility into smaller pieces. “AIG is a very big company. But you run a big company like a series of small companies …Trying to manage it as a single company does not maintain the entrepreneurial environment you want. A series of small companies absolutely does.”
AIG management incentives are drawn from a separate pool of money set aside in two privately held companies created at the time AIG went public in 1969. “No part is charged to AIG so the shareholders get a freebie on that,” said Greenberg, who added that the company also offers standard stock options and charges them as an expense.
In addition, Greenberg encourages his managers to be open about problems. “Good news finds you fast enough; it’s the bad news you want to find out first. You have to find out the things that are going wrong before they can fester.”
Hiring the right employees is also a top priority for Greenberg. “You want people who want to win. You want people who are smart, people who are entrepreneurial and you want people who are self-starters.” Those qualities are especially important in a global company. “If you have an expat sitting in whatever country, he or she has to be self-reliant and resolve problems day-to-day. They can’t pick up a phone and say, ‘What should I do?’”
At the moment, he said, insurance rates are adequate. As always, he is concerned that other companies will head into the market offering rates at a loss, thereby setting off another round in the industry’s notorious cycles.
As for new products, Greenberg said AIG is looking at computer virus and identity theft as potential markets. “We’ve been tiptoeing in that line.” He also noted that the company has written some policies and developed reinsurance mechanisms for cyberspace. “As we learn more we’ll expand it more … So far we’re pleased with what we’re doing.”
Greenberg defended derivatives as a valuable risk-management tool. “I don’t think this complex economy could survive without derivatives.”
Another perennial insurance company interest – tort reform – is gaining momentum, he said, particularly class action reforms at the federal level. “It’s an ongoing battle. It will continue for some time. We’re making progress, but it’s been a long war.”
AIG recently completed a project with the U.S. Chamber of Commerce evaluating the legal structures of all 50 states in the same way it evaluates the legal environment in foreign countries before deciding to enter a market. Greenberg said investors should use the data to stay out of states with legal systems that are hostile to corporations.
He also urged the transfer of insurance regulation from the states to the federal government which he said would result in substantial savings for companies and consumers. “I think [this idea] is gaining momentum. The state system is very complex. It’s out of keeping with any place else in the world.”
But the plain-speaking Greenberg refused to provide any more details about the company’s succession plans, a continual topic of interest to investors. He has previously said his successor is known to AIG’s board and to the individual. “This obsession with succession is getting to be almost a joke,” he said. “Obviously we have a succession plan. We’ll decide when it will take place.”