Conrad Black

by A Matter of Principle

  Unhappily, the spirit of the times was changing to one of increasing deference to institutional investors, an insistence on directors being complete strangers and preferably antagonists to the management, and the de-emphasis, if not ostracism, of controlling shareholders. I was from twin traditions that I never thought needed to be contradictory: the tradition of the proprietor-publisher with the authority and financial independence to defend his newspapers from economic and political interests and the tradition of the fair controlling shareholder who never engaged in unequal treatment of shareholding minorities.

  But I had a tin ear for the Zeitgeist. The trend to shareholder activism and rigorous imposition of ever more exacting corporate governance standards was not one whose force I correctly foresaw. “Corporate governance,” after all, by definition simply refers to the necessary rules, disclosures, and processes that a corporation follows. (Our corporate governance was carefully monitored at Hollinger Inc. by committees headed by corporate governance expert and director of many leading Canadian and U.S. companies Ralph M. Barford.) Like many words and phrases that newly enter the language, it has become a euphemism for a more ominous interpretation: today it is a blunt weapon with which to attack CEOs, especially those who are also controlling shareholders, and a useful mask for those who have more exceptionable designs on a company than improving its “corporate governance.” The proclaimers and enforcers of contemporary corporate governance are most often people who have never faced the complexities of actually running a company but want to make up more and more rules on how to do it. I had never imagined that a controlling shareholder could be vulnerable to recalcitrant minority shareholders – particularly greenmailers out for short-term gain. I never had much difficulty dealing with the complaints or questions of the advocates of corporate governance, even the most militant ones, and have never had much difficulty justifying our own behaviour or levels of compensation. Certainly, in the light of subsequent corporate controversies, we and the directors who approved payments to us look very conscientiously compliant and quite restrained and frugal. As the cultural problem arose between the corporate governance zealots and my associates and me, the stock price suffered. What I called a “capital strike” ensued, in which large shareholders (who would normally have wanted the stock price to go up) devoted themselves to keeping it down, recognizing that Hollinger Inc. would need to sell shares to reduce its debt and they could pick them up at a bargain price. What occurred was a chicken game in which we used disposable cash to buy in and cancel Hollinger International shares cheaply, and in which several of our leading shareholders were delighted if others were prepared to sell at undervalued levels. They added to their own holdings and did the necessary to keep the share price down, hoping that Hollinger Inc. would be forced to put the whole company up for sale, taking out everyone at a handsome profit.

  I never doubted that the triumph of the institutional investors would not only deglamorize but emasculate American corporate life. Management would turn into the equivalent of highly paid civil servants, concerned only with their pensions and pay packets and maintaining the status quo through safe choices. Not owning any significant part of the company they were running, they would be unwilling or unable to make difficult choices in the company’s long-term interest and would always have to put the short-term first to satisfy their masters – the analysts, the ratings agencies, the ever noisier and greedier activist shareholders, and the financial media.

  The icons of American business, instead of suggesting moderation or resisting the trend, rolled over like poodles. Warren Buffett and Bill Gates, two brilliant and ruthless businessmen, toured around university campuses in corduroy trousers, open-necked shirts, and tweed jackets decrying traditional corporate prerogatives in their dovish role as non-commercial philanthropists. Buffett eventually demanded that his taxes be raised to help the disadvantaged. He could have written the cheque himself, without waiting for the government to take his money (and waste most of it). After he lost more money than any individual in the world in the 2008–09 financial crisis, he became less vocal about the need for higher taxes.

  As I had been a lonely defender of the newspaper against the depredations of television and the Internet, so I became a lonely defender of the prerogatives of corporate management, and especially the controlling shareholders. It was a role in which I was to become a good deal lonelier. The huge scandals that were about to break, at Enron, WorldCom, Adelphi, Tyco, and elsewhere, where there were insolvencies or serious reductions of shareholder value and allegations of felonies, with some convictions, poisoned the atmosphere and put the advocates of traditional, capitalist, individualist chief executives such as me out in the cold in open and deadly season. The most trying time of my life was about to begin.

  THE 2002 ANNUAL MEETING of Hollinger International was a lively affair. There was little warning that shareholders were agitated; the opening atmosphere certainly was not tense. The chief activists, Christopher Browne and the aggressive and ineffable Laura Jereski, from Tweedy Browne, which held about 8 per cent of the stock, were much in evidence. Ms. Jereski left the Wall Street Journal. She was an abrasive and controversial figure. The visual effect created by Ms. Jereski, with her facial flinch, thick glasses, anti-glamorous tastes, and a child’s schoolbag strapped to her back, was bizarre, especially as a complement to the effete and often rather bitchy Browne. Their questions, though irritatingly formulated at times, were civilized and not particularly difficult. Lee Cooperman, another institutional investor incapable of resisting a trend to abuse a meeting chairman, had his rather ineffectual turn at bat.

  And then there arose a Mr. Ruffo, who claimed that Browne and Cooperman had accused the management of “theft.” I said that they had done nothing of the kind and that if that was what Ruffo thought, he should get out – by which it was clear I meant both from the room and out of any shares of ours he had. Christopher Browne graciously chimed in that he had not accused us of theft, and Ruffo hastily left the room. It did not enhance the credibility of the independent directors that none of them bothered to turn up for the meeting.

  I WAS UNDOUBTEDLY INSOUCIANT about the shareholder-relations issues, and not just because we controlled the company and were the largest public shareholders or because most of the rest of the shareholders supported us, and because our results, as acquirers, managers, and vendors, were consistently good. I was bemused by the fact that such shareholder-relations problems as there were were not caused by normal market forces, but by synchronized poor-mouthing by Jereski and kindred spirits, and by what amounted to (barely) licit but shabby wash-trading by investors trying to force a sale of the company, on a basis that I did not believe was possible, much less desirable, or within the rightful province of agitating minorities to effect. I had great difficulty taking seriously the complaints of people who were the causes of the problems they decried.

  I have never seen a corporate governance militant who was not by nature either a tedious and distracting fidget, like an annoying insect, to no good purpose, or a charlatan, attempting pretextual agitation for disguised and usually self-aggrandizing purposes. (This is what makes the “activism” of amiable and cunning buccaneers like Carl Icahn and Nelson Peltz so entertaining, and even gratifying.)

  I don’t doubt the sincerity of moderately engaged corporate governance advocates, but businessmen should obey the law and produce results, not elect hostile directors and collegialize and equivocate as the governance enthusiasts urge. This would require an extensive essay to treat in any depth, but I saw this focus on governance as an aspect of the mania for the superficiality of appearances and the evasion of responsibility. No manner of governance can long disguise the inexorable arithmetic of poor management, and no absence of the most zealous, cutting-edge pandering to the fad will, in itself, produce commercially relevant consequences. It always seemed to me to be part of the general trend to duck responsibility and substitute appearances for performance.

  I
was right and wrong, as the balance of this volume tells. I underestimated the strength of the movement, and was decisively defeated, and as a capitalist Darwinian, conceptually I have no great problem with that. And philosophically and as an historian, I believe such defeats, even being beaten as badly as I would (temporarily) be, if accepted constructively, can be quickly forged into the stuff of future success. Nothing is quite as educational, for the mind, the spirit, and the intuition, as being ground to powder, provided the chastisee survives it with redoubled determination (as I have).

  This was where my enemies went awry: by attacking my ethics and honesty, which had never been deficient, they attempted more than a coup, and escalated their assault to non-physical homicide (though the pressures they generated and applied have often led to mortal consequences with others in similar positions). There was no colour of right to this, and it incited a fierce and ultimately successful resistance. Honest error, if abetted by the pride that goeth before disaster, successfully eroded my position. I deserved to be punished, for a tactical, rather than substantive, mistake, but not to be morally exterminated.

  Recourse to the corporate assassins’ trade by my enemies produced counter-guerrilla war that finally ramified through the whole commercial culture of America and up the entire regulatory and legal systems to the highest courts in the United States and (at time of writing, probably) Canada. The roles of those who seemed to win and those who seemed to lose had not yet been determined, and many surprises were to come.

  THE CONCERNS OF THE corporate governance militants about Hollinger’s management fees and non-competition payments further perplexed the company’s bankers. Never courageous, busily cutting their loan portfolios in the contracting conditions that followed the terrorist attacks in the United States, the banks became further concerned that if flows of cash were cut to the group’s controlling shareholder, this would further imperil their loans (which were not, in fact, in the slightest danger).

  As soon as Barbara and I returned to Toronto from Europe in late July 2002, our legal vice president, Peter Atkinson, and I called on my old friends Peter Godsoe and David Wilson, chairman and vice chairman of BNS, respectively. They could not have been more pleasant and understanding. Peter Atkinson and I left satisfied that BNS would be easier to deal with henceforth. They were – for about three days.

  The Toronto-Dominion Bank maintained a more plausible pretense than the others of being a willing lender while they were pitching us a debt reorganization. As time went by, it became clear that the proposed refinancing would become an exercise in usury that could damage the entire group. The TD’s “flex” rates provided immense elasticity upward as the negotiations reached their climax; the terms would be a garrotte.

  I broke off these discussions in August and arranged a US$40 million bridge facility with Jack Cockwell, head of the Brascan group and one of Canada’s most talented businessmen. When TD learned of this development, they described it not as a bridge but an “exploding pier,” although it was at two points below what they were cranking up to offer and with much less restrictive terms. Our plan was to reduce the bank loans and, as this was done, transfer proportionate amounts of the collateral pledged to them to collateralize the Brascan bridge loan. In order to make our lives more difficult, the banks were very sluggish in cooperating with this plan and professed to believe that the collateral was being double pledged, which was not the case. BNS and TD spent most of the rest of 2002 grimly muttering “default,” like James Joyce penitents semi-audibly reciting their rosaries, moved from time to time by spikes of zeal to escalate their incantations to include “loan call.” It was very tiresome.

  We had had a few minor encounters with the Wachovia Bank, an oddly named result of a series of successful amalgamations headquartered in Charlotte, North Carolina, and using the name of a Moravian-American bank that had been one of the original units in the merger. We negotiated hopefully with them through the autumn, struggling every fortnight or so to prevent a loan call or official declaration of default whenever one of the ulcerous personalities at the derivative desk of the Bank of Nova Scotia in New York had a particularly difficult day (or night).

  At the beginning of December 2002, we were ready to start a punishing double road show with Wachovia to sell the complete refinancing. David Radler led one team in the western states, and Dan Colson and I toured institutions in New York, Boston, Philadelphia, Connecticut, and New Jersey.

  (Just before the tour began I went to the memorial service for my distinguished friend and publishing mentor Walter Annenberg, who had died aged ninety-four. He was another supporter in my life who could not be replicated: patiently and with wisdom and business experience that were invaluable, he had encouraged and boosted me. He was eulogized by the incoming governor of Pennsylvania, Ed Rendell, as “the greatest Philadelphian since Benjamin Franklin” and by the senior U.S. senator from the state, Arlen Spector, who said that in addition to his other attainments, “Walter was a good man to have a martini with.” Julie Nixon Eisenhower represented the Nixons and the Eisenhowers, Nancy Reagan represented the Reagans, Barbara Bush represented the Bushes. Gerald Ford, George Shultz, and Colin Powell all spoke with great eloquence, humour, and taste. It was a moving tribute to a generous and admirable man.)

  Our road show unfolded with the usual grind of going over the same prospectus with groups of underwriters for hours on end. The issue was hugely oversold, and ten days before Christmas, the money flooded in and we paid out all the banks and high-yield holders of Hollinger International. The problems of Hollinger Inc., though smaller in quantum, were more pressing and awaited resolution. However, the end of the swap,* with the cancellation of a total of 11 million shares at prices that would soon appear very advantageous, and the end of the high-yield debt in the face of the guerrilla warfare conducted by one of our lenders, gave us a brief respite.

  After we dismissed Toronto-Dominion, the London Daily Express published the story that we had been dumped by TD as a borrower because we had falsified our figures to that bank. This was too much, so I sued the rumbustious owner of the Express, Richard Desmond, for libel, adding in our financial pages what I called a Christmas greeting when the Wachovia deal closed. In it I referred to his company as a defamation and pornography operation directed by a group of reprobates and in free fall. He countersued me. A rather amusing lawsuit was eventually settled two-thirds in our favour: Desmond’s company contributed twice what we did to designated charities.

  Immediately after completing the Wachovia deal, in scrutinizing the new figures that reflected the refinancing, I realized that while technically the inter-company account between Hollinger International and Hollinger Inc. was fairly balanced, there was an imbalance in International’s favour of around $40 million in terms of what would be repayable in cash during the next year or so. There was nothing improper in this, but it created another obstacle that had to be addressed. The Wachovia deal had brought to my attention a fact that had been skillfully disguised from everyone by Jack Boultbee’s invocation of accounting technicalities – namely, that Hollinger Inc. owed Hollinger International Can$70 million (and much of this was quite correctly offset by historical accounts, most of which were notional, like transferred depreciation, and would not, in fact, have to be paid). Accounting rules allow for a good many of these things, and they can gradually distort accrued sums. To a company of Hollinger International’s size, this did not much matter, but to Hollinger Inc., it could be material. I cobbled together a repayment system based partially on cancellation of 2 million Hollinger International shares owned by Hollinger Inc. What complicated the usual competitive commercial pressures and the ambitions of some institutional shareholders was the very public zeal with which other media companies magnified or invented our problems. Had we manufactured widgets or rubber bands rather than non-left-wing newspapers, we would not have been so mercilessly put under the media spotlight, a spotlight that could inflame and affect the perception of our company
by susceptible shareholders and lenders. I apologize to non-commercial readers for these complexities, but they occur in business and this narrative would have large holes in it if the more important ones were not dealt with here.

  Perceptions are crucial in financial markets, where psychology is at least 50 per cent of the story. The perceptions of our company could be and were manipulated sometimes with no reference to truth or reality by ruthless competitors in the media or bandwagons of lazy journalists unwilling to do real research. This was the business I was in by choice and I couldn’t complain; I could only fight back as best I could. There were three distinct constituencies: the readers and advertisers wanted high-quality products that are expensive to produce; the shareholders wanted instant financial gratification and didn’t care what damage we did to the franchises producing it; and our long-term creditors wanted solid conservative financing. Spurred by another on-rushing bank deadline (at Hollinger Inc.), I worked through the holidays on a debt consolidation and refinancing for Hollinger Inc. The last thing I did before going with Barbara to a New Year’s Eve dinner with our flamboyant Palm Beach neighbour Donald Trump at his Mar-A-Lago resort was to discuss terms of a parent company deal with Wachovia.

  Our Wachovia refinancing of Hollinger International had been so successful that we were able to return to the same sources to complete the financing of Hollinger Inc., with a somewhat higher but still manageable rate of interest, provided Ravelston backed up Hollinger Inc. The independent directors of Hollinger Inc., concerned that Hollinger Inc. be assured a cash flow from Ravelston, insisted on a support agreement from Ravelston, the ultimate controlling shareholder and recipient of the Hollinger International management fees. The directors were being conscientious, and we had no reason or alternative but to agree. But the revelation in the bond indenture that Ravelston would transmit US$14 million per year to Hollinger Inc. proved a dangerous signal of vulnerability to the massing forces of corporate governance activism.