Before his Wharton Leadership talk, Harold [Terry] McGraw III, chairman, president and CEO of The McGraw-Hill Companies, talked with Knowledge at Wharton about such issues as executive compensation, the minimum wage, the problems facing print media and the post-election political landscape. Below is an edited transcript of that interview.
Knowledge at Wharton: This has been a big week.
McGraw: Yes, this has been a big week…. This was not the American people saying, “I want a far-left agenda.” They said, “Things aren’t working. I want change.” They spoke with such clarity. If ever you want to send a message as to what American democracy is really all about, this one [is it]. This is really tremendous.
We have worked with the administration [on a number of issues, including] trade matters. Before becoming chairman of the Business Roundtable, I headed up the Roundtable’s International Trade and Investment Committee. Dealing with Congress, in the House or the Senate, is just the worst. I have never seen such partisanship, and it’s personal…. They castigate each other [on trade issues] and nothing gets done.
Becky Quick on CNBC said to me this morning, “You know, Nancy Pelosi [the incoming House Speaker] is not a real admirer of trade.” I said, “Wait a minute. This isn’t a question of ‘Are you for trade or are you against trade?” It’s ‘Are you for economic growth or are you against economic growth?'” What we are talking about is opening and liberalizing markets to the benefit of all people.
There has to be common ground that [both sides] reach for. But it is not whether you are for or against trade. When did this become so partisan? We have to hope, beginning now, that this begins to change.
Knowledge at Wharton: Considering that the Business Roundtable is more associated with Republicans than Democrats, what steps can you take as head of it to stop Democrats from tuning you out?
McGraw: That’s a great question. It’s unfortunate when you get labeled [even though] sometimes you deserve it. The [Roundtable’s] Republican orientation has been because Republicans have been stronger on issues that Business Roundtable members feel are the more important ones, such as education reform.
The “No Child Left Behind” Act,whatever you think about funding it, is landmark legislation. For the first time, it gave us alignment between federal, state and local governments. It said that if we are really serious about this, there are going to have to be standards, very, very clear transparency, and accountability.
On trade issues, I fault Republican leadership because it had the votes on trade matters, [but their attitude was] “It’s our way or no way.” Where is the discussion? Why isn’t common ground taken into account? Would it be all right, maybe, to agree to two of the seven ILO [International Labour Organization] standards? Let me put it clearly: We work with both sides of the aisle on a number of issues.
If you are going to talk about entitlement reform, for the Democrats, and especially the more left-oriented ones, that’s radioactive. Those are called giveaways. [Entitlement programs] cost too much and they just keep going up. Along with interest on the debt, they represent 65% of the budget and we can’t even touch them …. No innovation, no new ideas [are allowed].
So you have these pockets of resistance and they are hard to break. But I really believe that this is based on partisanship and a lack of desire to do anything collegial. If this week starts a new dialog, that will be wonderful. Because you have such razor thin margins, you are not going to get anything unless you are working with both sides.
One of the things that has pleased me is that we saw, on the Democratic side in particular, a lot of moderates, and in some cases, some pretty conservative people. If the new majority is [composed of moderates from] both parties, I think a lot can get done.
Knowledge at Wharton: Let me ask you about some specific issues. For example, if you had to predict how the new Congress will rule on the minimum wage, what would you say?
McGraw: It’s done. You know that right now Speaker-elect Nancy Pelosi … has got to pay back her base. There has to be something [done] there right away. In the Clinton administration, it was the Family Leave Bill. So raising the minimum wage in my opinion is done.
Knowledge at Wharton: What about oil company profits? The Democrats seem intent on hitting oil companies with higher taxes. Is this a bad idea?
McGraw: I’m on the board at ConocoPhillips. I know these people and I know how we think on this one. [Higher taxes] is the last thing you want. You want oil companies to invest heavily, just like the R&D tax credit. You want to see some sort of investment credit. So that if you are going in the direction of alternatives — such as hydrogen, solar, wind, whatever — for good behavior you get a break. You want to see companies continue to invest.
ConocoPhillips makes about $1.5 billion a month in profits…. They are investing about $1.2 billion a month. The numbers are stunning in terms of what these projects cost. But if you do things to inhibit [oil companies] from making those investments — [such as] a windfall tax of any kind — it will make them less competitive.
By the way, BP has been significantly underinvesting and look at the problems it has been having. So no, you don’t want to [raise taxes]. You want to encourage investment, not discourage it.
Knowledge at Wharton: Whatabout Democrats’ push formore protectionism on the trade front?
McGraw: Oh boy, “the Lou Dobbs democrats.” You know I heard that phrase today for the first time. All of these labels drive you crazy. [Controversy over] outsourcing, for the most part, has gone away. People understand it a little better. But it’s still out there in certain areas and especially in areas where manufacturing companies have been particularly affected.
Knowledge at Wharton: There is a lot of concern that Bush won’t be able to get through trade accords that he has been trying to negotiate because the [partner] countries are afraid that the accords will be undone by the Democrats.
McGraw: The biggest problem has been the partisanship and lack of any desire to find a common ground. I’m hoping that we are going to be able to accelerate [trade accords]. The unfortunate part is that Washington is still so U.S.-centric. About 18% of Americans have passports; I think it has to be somewhere around that in Congress. And most of [the travel] is going north and south. There’s no thought about what our place is in this global environment. Yet we are the only superpower on the face of the earth. By 2035 it will be a quadra-polar world…. Increased competition from outside the United States is fierce.
Congress has to be riveted on an agenda that focuses on … helping America compete. When scandals like Enron and WorldCom occurred, Congress was upset. [They were accused of not] protecting the public. So they decided to legislate here and regulate there, including passage of Sarbanes-Oxley.
John Thain, when he first took over The New York Stock Exchange, [was focused on] outdoing government when it came to governance [and regulation]. Do you hear him saying that now? No. What he’s saying is, “Wait a minute. I’ve got 2,780 companies listed on the New York Stock Exchange worth $20 trillion total market cap; $7 trillion of that is in companies listed outside of the United States. These companies say, ‘Compliance costs are going up. Why do I have to be [in the U.S.]?'”
Knowledge at Wharton: So you would like to roll back some of Sarbanes-Oxley, delete some of its most stringent requirements?
McGraw: It’s not doable. I think it was bad legislation, but the comment I have always made is that business earned it…. Forget about [changing Sarbanes Oxley]; it isn’t going to happen. Nobody, in the end, is going to go out on a limb and push for that. Sarbanes-Oxley is there; it’s time to move on.
Knowledge at Wharton: Let me ask you about an industry that has had its share of troubles recently — pharmaceuticals. I know the Democrats would probably like to wring some lower prices out of the pharmaceutical companies as they negotiate with the federal government on its Medicare and Medicaid programs. Why does the pharmaceutical industry have a somewhat negative image these days and what can be done about that?
McGraw: …One thing we are seeing is that pharmaceutical companies have behaved in a very inward fashion. They have thousands and thousands of scientists, researchers and medical doctors who are doing all of this research work along with everything else. It’s too costly. They are now starting to come out of that and do some outsourcing. I was in India and met with Dr. Reddy of Dr. Reddy’s Laboratories. He’s doing work for GlaxoSmithKline, Pfizer, Eli Lilly, etc. These companies are farming some of that work out. You’ve got to lower some of the costs of research.
Knowledge at Wharton: Let me change the subject a bit. Is the web killing print media?
McGraw: No. The web is just like any other media. Radio is still here, television is here, cable is doing well, satellite, all of those things. The web enhances print. One of the phrases that I use with analysts is, “All roads go online and all roads go to Asia.” Online is going to be your core capability at some point, whether it’s education, whatever.
When you go to Asia, places like Korea and Japan, they are fully 3G [third-generation technology used in mobile phones]. I keep wondering, “Hey why don’t we have that? That’s pretty neat stuff.” I was just talking with Ed Zander, CEO of Motorola. He recently took a 10-day day trip around the world visiting the company’s research centers. And he said, “Holy cow, I had no idea that we were doing some of this stuff.” Getting people connected is a huge issue. The web is exciting.
Knowledge at Wharton: As you probably know, the Philadelphia Inquirer and Los Angeles Times recently let their editors go. Costs are being squeezed as the major newspapers’ circulation and advertising revenues drop.
McGraw: Yes, andlook at the people now who are talking about getting involved. Jack Welsh recently [expressed interest] in buying The Boston Globe…. All that is saying is that you’re going to have to find another way, or another business model, to be able to continue that kind of operation.
A pure advertising-related model doesn’t work because on the Internet, everything is 100% measurable. In the print world, it is not. We run your add, we do some sampling or whatever, and I can give you a chart that says your impressions went up because you are advertising with us. And then you can say, “Can you verify that? Did anybody do anything with it? Was there any action taken?” No, I can’t give you that.
Knowledge at Wharton: What is BusinessWeek’s biggest challenge?
McGraw: With BusinessWeek it’s the same thing. People can’t get to BusinessWeek.com fast enough. BusinessWeek.com now is about 12% of the aggregate revenues of BusinessWeek. I’ll give it to you this way, in terms of North American ad pages. Back in 1997 and 1998, in round numbers, we did 4,000 ad pages….In 1999 we did 5,000 ad pages. In 2000, we did 6,000 ad pages. Now remember, that’s when interest rates started going up and we were in a recession by the fourth quarter. So for three active quarters, we did 6,000 ad pages. By the end of this year, we’ll probably be at just under 3,000. Ever since 2001, it hasn’t recovered. We’re flat right now, slightly up, but flat year over year.
[Ad page numbers] are a little bit better in the second half right now, but BusinessWeek is about 3% of total sales. It’s very small. The brand value and all of that is huge. But we cancelled the European edition and the Asian edition. All of those are going online.
If I’m carrying 280 journalists and correspondents world-wide, what do I get from them when I travel? I’m hearing “Terry, I can’t get in the [magazine]. I’m writing all of this stuff. I’m submitting it and everything else, but I can’t get in. All of my stuff is here, in the online world.” So just keep on going. “Jerry Smith in Mexico City, write to your heart’s content.” This is because in the online world, I can put it all out there.
Knowledge at Wharton: What about executive pay? This is an area that Democrats are probably going to start pounding away at. What are your thoughts on executive compensation?
McGraw: It’s alightening rod.
Knowledge at Wharton: There are many who feel that this is really not an issue, that there are some egregious examples but that overall, executives are compensated fairly for the work that they do.
McGraw: First of all, to Democrats and especially on the left, entitlement reform is their lightening-rod, radioactive issue. In the business world, it’s executive pay. It strikes fear in the hearts of everybody. So much has taken place. At the Business Roundtable, we put out guideline principles and all sorts of things that people ought to [pay attention to]. But the bottom line is that you have to put pressure on boards of directors to be boards of directors.
They are there to represent the long-term strategic interest of the company and make sure that there is a management team in place that is well compensated and that practices are in line with performance. At Pfizer, the situation that CEO Henry McKinnell ran into was that his pay was going this way [up] and the stock was going this way [down] during his [five years as CEO].
Unfortunately, in order to [arrive at McKinnell’s total compensation figure], many things were lumped together. McKinnell had a lot of deferred pay and so there was some skewing [of the data]. If [the company] had gotten some better treatment in terms of smoothing it out, it would have been a little better, but still it was going the other way. You can have an anomaly in a year. But if you’re having five years of that kind of distortion, then there’s a problem.
[Companies] must have flexibility to compete. When I take a look at Wharton students, I need the very best talent there is. If there are a lot of people who want that talent, you … are going to have to pay up. [That’s all right as long as you] know what you are getting and you have good benchmarks and good incentive structures to measure that. But you need to have pay for performance. You have to have a compensation committee that is looking hard at that.
Wait until you see proxy season this year and the new charts that have been mandated by the SEC. I have seen my own. It’s three pages, and talks about where I go, what associations I have spoken at, data on corporate aircraft…. [Information is required] on directors as well. I think it is excessive now. But the transparency part is going to be there.
Knowledge at Wharton: Shouldshareholders be allowed to vote on executive compensation?
Knowledge at Wharton: Why not?
McGraw: I think, especially with union-led initiatives, that they are going to try to go there. But I think that the system works. You have a board of directors that is responsible for the oversight of management and the well-being of the company and they report to the shareholders.
When you start talking about shareholder proxy access and those kinds of issues, I think that you are potentially damaging a system that works. [One well-publicized case] of repricing stock options … set off alarm bells all over the place, as if this is common practice. The board [in this case] was a cozy board and did not live up to its full responsibility. So do you take 16,000 shareholder-based companies and hold them hostage and regulate them and all those kinds of things because you have some boards that didn’t live up to their responsibilities?
Then you have the Hewlett-Packard board, which is a totally dysfunctional one, with different personalities and different agendas…. I think that the most important thing a board must have is collegiality. You and I can agree and disagree, but we both have the same intention. We’re trying to make this the best possible company that takes care of all the interests of all its stakeholders, that performs well and all those kinds of things. You have to do that in a collegial environment, not a contentious one.
Knowledge at Wharton: Let me ask you one quick wrap-up question. You sound like you are optimistic in terms of the Democrats and Republicans being able to work together going forward.
McGraw: My opening comment this morning on CNBC was, “Okay, everybody is saying the right thing.” The President is saying, “I get it.” Nancy Pelosi is saying, “Hey, it’s all about bi-partisanship, common ground, courteousness and all these kinds of things.” So I say, “Okay good, let’s go to work.” We still have at least three weeks left in this congress. We’ve already negotiated a whole bunch of issues. Let’s get them done. Let’s use this new bi-partisan stuff. And you can demonstrate it right now, not in January. There’s got to be a little demonstration now of how everybody is going to move.
You’re not going to get big issues now. You’re not going to get major reforms on entitlements, Social Security and all those kinds of things. I don’t think that is going to happen. But in terms of the issues that are going to make the workforce more competitive and allow open markets that make the playing field more level, I think there are things that we can do. We have re-authorization of the “No Child Left Behind” Act, re-authorization of Trade Promotion Authority. You don’t want to spend your whole first term defending Trade Promotion Authority.
The Republicans in the 1990s nailed President Clinton; they denied him fast track authority. Why? Of all people, we are supposed to be pro-growth, pro-market. But Republicans didn’t like him; they didn’t like some of the things that he did, especially regarding gays in the military and family leave. So they said, “Okay, we’re going to take the fast track away. They did and we fought for six years on this and what happened? We fell behind.
Knowledge at Wharton: So, are you optimistic?
McGraw: Yes, very, because on a lot of the issues that we are talking about — education reform, trade policy, immigration, getting the H1B visas cap up, going after health care costs — Republicans and Democrats already agree. If this election has, in fact, changed the tone [of the debate], then we have a chance.