Tart Corporate Boss Talks of Ethics
IN talking about the ``ethical slide'' in the United States in the last 10 years or so, Rand Araskog turns a neat phrase. ``Activities that were considered to be in the gutter are now up on the sidewalks in America,'' he states.
The chairman of ITT Corporation is taking a poke at sleaze in government and business. The Reagan administration, for example, faced charges of ethical misconduct by more than 110 officials.
And, he notes in a just-published book, ``Private greed is just as rampant, perhaps more so, although it is often passed off in the name of `business.' A number of aggressive businessmen have pursued dubious practices that skirt the edge of propriety, if not legality - price fixing, cronyism, golden parachutes. No amount of ethics courses at business schools will suffice for tomorrow's managers if they have no moral anchor when they arrive, and if `enrich thyself' is the chief motto of society.''
Mr. Araskog is particularly critical of the raiders and leveraged buyouts (LBOs) that have tormented the corporate establishment. Most of his book, ``The ITT Wars'' (Henry Holt, $19.95), is devoted to how his conglomerate company warded off raiders.
In an interview, Araskog said most people are honest and ethical. But some ``don't give a darn about anybody else. They will do anything for a dollar.''
The actions of such unethical businessmen ``reflect on all of us,'' he says. He cites activities from multimillion-dollar golden parachutes (special compensation when executives lose their job in a corporate buyout) to greenmail (in which a company buys back stock purchased by a corporate raider at a special high price) to the fat fees piled up by investment bankers arranging LBOs or takeovers. He calls these ``the rip-off of American corporations.''
Araskog spoke of Michael Milken, the Drexel Burnham Lambert Inc. executive who earned $550 million in one year, partly by financing takeovers with ``junk'' (high-yield, high-risk) bonds. He terms Mr. Milken's pay a ``serious distortion ... out of scale.'' He goes on: ``The greed that was involved! There was no sharing, even if what he was doing was OK. Of course, the government thinks it wasn't.'' Milken was indicted last week; the government laid claim to $1.2 billion of his assets.
Araskog complains that all too often companies subject to a takeover are ``disrupted, dismembered, downsized, and hollowed out.'' Both executives and rank-and-file employees suffer. Often headquarters' communities or plant towns are damaged.
Certainly as dangerous, says Araskog, is the buildup of debt involved. LBOs, in which a group of in-vestors has bought out the shareholders of a public corporation to make it a privately held company, may have a debt-to-equity ratio as high as 70 to 80 percent. Should a recession or a period of high-interest rates come along, he says, the burden of servicing that debt may become impossible to handle.
Araskog speaks from experience. When predecessor Harold Geneen built ITT into the ultimate conglomerate (through friendly corporate purchases, emphasizes Araskog) during the 1960s and 1970s, ITT also acquired a mountain of debt. Interest rates reached 20 percent in the early 1980s, and the interest on ITT's $4 billion in debt rose from around $240 million to $880 million.
``The corporation was ... heading for a waterfall,'' recalls Araskog.
In his efforts to reduce debt and avoid raiders, Araskog sold off some subsidiaries and cut dividends to shareholders.
Ethics, Araskog believes, are primarily learned in the family. They are taught by parents and teachers. But he welcomes indications that the Bush administration and its agencies may exercise more oversight of business, and move away from the excessive free-market emphasis of the Reagan years. ``I don't think Reagan knew what the free market meant,'' he says.
What's to be done about merger mania?
Araskog suggests that tax deductibility for corporate debt be removed when the debt-equity ratio exceeds 50 percent. ``That would stop those highly leveraged LBOs dead in their tracks,'' he says. He would like the law changed to discourage pension funds and other financial institutions from seeking short-term gains by backing corporate raiders.
He regards as nonsense the raiders' arguments that the corporate establishment generally needs shaking up. Corporate executives will introduce greater efficiency when forced to do so by competition, he argues. Raiders just produce ``hype'' and ``excess''; they don't provide even one more product or service. Unfortunately, the raiders may ``sit on their yachts'' while employees of raided companies are jobless.
The ITT executive doesn't mince words.