SYNOPSIS:

TINA BROWN, host: But first, CEOs under fire--boy, they are not happy campers. It's government oversight. It's shareholder revolts. It's media hostility which is really toxic. On the other hand, though, the imperial CEO has had his own way way too and look at what we got: Enron, Tyco, WorldCom, Martha Stewart even. We've got Sir Howard Stringer, CEO of Sony, former president of CBS. He is such an entertaining, civilizing, insightful guy. I can't wait to hear his take on what it's like to be a CEO in this climate. Then we have Paul Krugman, the very well-respected economist and OP-ED writer for The New York Times. He has very strong views on this. Then we have Sherron Watkins from the 'republic of Enron.' With her integrity that busted the whole scandal wide open, she was person of the year for her courage. She knows firsthand how bad those top dogs can be. Then we have Bill Holstein. He's the editor of Chief Executive magazine. He spends all his time with CEOs and he knows how frustrated they feel trying to do their job. They're not all crooks, you know? OK. So welcome, everybody. Sherron, you blew the whistle at Enron. How much do you lay the whole debacle really at the door of the--of the CEO Ken Lay?

Ms. SHERRON WATKINS (Author, "Power Failure"): Well, Ken--the tone is set at the top and Ken Lay set the wrong tone really by a number of factors. He--he made us all use his sister's travel agency and it was not a good travel agency. But in some perverse way...

BROWN: It's the small things that count.

Ms. WATKINS: ...in some perverse way, that tells Andy Fastow, 'When you get to the executive suite, it's OK to take a little bit for yourself.' They valued the number generations, and it didn't matter how you did it. So you could cut corners, you could manipulate the markets in California, whatever it took to generate those earnings.

BROWN: So, Paul, how do you think such a think can be stopped from happening?

Mr. PAUL KRUGMAN (Op-Ed Columnist, The New York Times): You need public pressure. You need congressmen who go after malefactors of great wealth on--on a regular basis. This is how we did it after the '30s, how things were cleaned up. It was a--the unions. You know, unions policing CEOs and it's the trouble--what I worry about is that we're going to have a couple of show trials and we'll have a few, you know, conspicuous victims, Martha Stewart and...

BROWN: Well, she was a conspicuous victim.

Mr. KRUGMAN: That's right. And then it'll all fade out and it'll be back to this chummy insider dealing. Yeah.

BROWN: Howard, what do you think--I mean, e--what's it like to operate in this climate of fear and loathing?

Sir HOWARD STRINGER (Chairman & CEO, Sony Corporation of America): Well, everything Paul says is true. The context of what's happening now was an unusual one. The bubble bursting and people getting really rich. In this society, for a while, everybody said, 'This is great.' America is about being rich even though peer--peer groups were making less money than other peer groups, and even though Enron was on a kind of tear-away vision from hell, I--I--I don't think that w--we're seeing--what we're seeing now is--is the aftermath. And I think this will ea--throttle back to a more sensible level. And--and as you--as you said, you used the victim in Martha Stewart, in--in a way, cause and effect, there will be a backlash that supports Martha somewhere down the road precisely because no one really believes that wrecking her company, ruining her and putting her as a felon--felon--convicted felon is really a--the case of Gilbert and Sullivan's punishment fitting the crime.

BROWN: Bill, you're with CEOs all the time.

Mr. BILL HOLSTEIN (Editor-In-Chief, Chief Executive Magazine): Right.

BROWN: I mean, do they feel the Sarbanes-Oxley legislation, for instance, the legislation that was put in, you know, for oversight.

Mr. HOLSTEIN: Right.

BROWN: Do they feel it's now getting them clearer alliance to work with and...

Mr. HOLSTEIN: No, they feel overwhelmed by layers of bureaucracy and regulation. The backlash has gone way too far. These excesses that we're talking about here happened years ago during a dramatically different climate, and the r--the--the climate inside boardrooms and inside the corner offices has changed dramatically. The excesses have been flushed out of the system. Andyet, there still is a--is--there is a--a--a bandwagon effect, a 'ha--hang the bastards' effect going on in the--in the--being whipped up by media, being whipped up by forces from academia and elsewhere. It's gone way too far.

BROWN: What do you think, Paul? Do you think it's gone too far or not far enough?

Mr. KRUGMAN: Well, you know, by the numbers, what do we know? We know that two th--there are two--two measures you can look at--that's where--without getting personal. One is just what the CEO compensation looked like. You know, Warren Buffett says that's the acid test, so...

BROWN: Well, we've--we've actually got a good graph on that.

Mr. KRUGMAN: OK.

BROWN: So let's have a look at that CEO compensation. OK. CEOs here in the US earned 531 times what hourly employees did. In Brazil, it was 57 times more. In Great Britain, 45 times more; Canada, 21 times more; and in Japan, CEOs make 10 times more than hourly workers. That's a pretty huge comparison.

Sir HOWARD: That's insane. That's insane.

BROWN: It's insane. Right.

Mr. KRUGMAN: And let's say that the United States up until about 1980, CEO pay looked like the British multiple.

Sir HOWARD: Absolutely.

Ms. WATKINS: Yes.

BROWN: Watch the terms.

Mr. KRUGMAN: So we've had this explosion and that's a--that's a pretty clear indicator. And until you see some really serious compression of that, we haven't--we haven't finished it.

Sir HOWARD: Well, it's ridiculous--it's ridiculous...

BROWN: So how do--how do you, Howard--I mean, obviously, you've served on many boards. What happens when these enormous fun--figures are batted around? I mean, do--do boar--are--are board members in your experience too passive, too asleep at the switch, too unwilling to offend the CEO?

Sir HOWARD: Well, I--I think it depends on the board. If a board ha--has a lot of rich people on it, they tend to agree. I mean, obviously in the case of the New York Stock Exchange, all the board members of that were--were used to seriously high profits and--and--and the New York Stock Exchange was very useful to them. So they presumably agreed to those pay packages. I mean, I sit on British boards, and they're very tough. And on the Japanese, I'm on the Sony board in Japan and it is, by American standards, laughable what Japanese senior executives are paid, and at no time since I've been at Sony have I ever heard a senior executive complain about his or her pay or acts--act astonished o--that--that--that the Hollywood executives, for instance, in our company make more money than they do or the music executives make more money than they do. It's be--we've become a creature of--of CEO fashion an--and--and we've perpetuated the assumption that a CEO has to be extremely well-compensated for his because his--he or she is a rare individual. And I'm not so sure that's really very true.

BROWN: What do you think, Paul? Do you think that's going to change at all in this climate because, I mean, just this week, the CEO of Humana got, like, a $4 million or $5 million pay hike.

Mr. KRUGMAN: That's right. The--there--it really hasn't changed, right? The imperial CEOs are walking a little more carefully now but they're--they're still imperial CEOs. We haven't seen a real major cultural change.

Mr. HOLSTEIN: And I think that that's fundamentally wrong, that the climate inside major companies has changed significantly. They are managing themselves entirely differently than they were five years ago, and, furthermore, the real debate is: Where are the jobs coming from? Why aren't American CEOs investing more--taking more risk? And the answer is that the climate of regulation and opinion has shifted so negatively that th--they are--they are scared to take risk...

BROWN: E...

Mr. HOLSTEIN: ...in this--in this market. They'd far rather invest in markets where they see people an--anxious to get jobs, anxious to work, see climates of pro-growth.

Ms. WATKINS: Current regulations aren't going to stifle growth.

Mr. HOLSTEIN: Absolutely are. Absolutely are.

Ms. WATKINS: No, I've--I've seen the most ethical CEOs say they're not spending any more money on Sarbanes-Oxley because they already had the right controls in place, the right transparency goals and financial reporting, and it is--maybe it's bad advice from consultants, but I do not see this hampering growth, because what Sarbanes-Oxley calls for is a culture change, one where employees strive to do things correctly and strive for financial transparency. And if you are looking for controls that are bulletproof, that's not what Sarbanes-Oxley is calling for. It's calling for, 'When you find unethical employees, fire them.'

Sir HOWARD: What Sarbanes-Oxley has done is create an entirely new branch of--of business core consultants again. So--so all the consultants that caused you such a problem at Enron, there are now more consultants and more auditors and more accountants on boards--I mean, I'm on two boards, and--and the CFOs and accountants on that board dazzle me with numbers. If they wanted to fool me, it would be relatively easy. In the end, a d--a great company--and the companies that went wrong, including the one that you were in, is because they didn't pay enough attention to you. And, B, they selected the wrong people for the job. If--if you want to cheat, people will cheat.

Ms. WATKINS: Right.

Sir HOWARD: And if you build a culture which allows cheating 'cause you haven't selected the right kind of executives, that will happen and it happened during this bizarre bubble, but--and I think that's sort of the...

BROWN: So you think in a--in a way, the pedigree of hiring is what's really important. I--the dishonest guy...

Sir HOWARD: It's astonishing.

BROWN: ...hires another dishonest guy who hires another dishonest guy. Is that how it plays out?

Sir HOWARD: Doesn't pay attention. Just doesn't pay attention.

BROWN: Oh, you don't think so, Paul? You think it's more about--about structure?

Mr. KRUGMAN: I--yeah, I mean, you know, we--we talk a lot about the bubble, but fo--a lot of these things--it--really, it's a 20-year process. You go back in as--when did--when did things--when did executive compensations start to skyrocket? When did self-dealing become the norm, and it--it was gradually over the course of--it really goes back to around 1980 or so that you can see this taking off. And, you know, we were having books like--I think Graef Crystal's "In Search of Excess," about executive compensation was--was 1989 or so, and he was saying, you know, 'My God, you know, these CEOs are being paid 120 times what their employees are being paid,' which was a huge increase then, but then it tripled again over the next decade.

BROWN: I guess what my--my concern, though, about shareholder activism is--I mean, how c--CEOs at the moment, they've got so much vision and so much oversight, so much kind of toxic press atmosphere and then, in a way, they're going to feel so threatened about making big, adventurous decisions. I mean...

Mr. HOLSTEIN: The heart of the issue is...

BROWN: ...could somebody like a--could someone like a Jack Welch made all the big, enormous, difficult decisions that he made at the beginning which really weren't...

Mr. HOLSTEIN: The heart of the issue is...

BROWN: ...popular?

Mr. HOLSTEIN: ...Who takes risks? Who--part of the way our capitalist system works is someone has to take risk. They have to risk money and have to build factories, they have to hire people. Those are risks. And a board of directors can't really make those decisions in the final analysis--analysis; nor can coalitions of shareholders. It really needs a management team of people who eat, live and breathe the issues on a day-to-day basis to make prudent risks.

BROWN: You mean, some--some of these characters who could take these kind of big risks, Paul, I mean, aren't they likely to be somewhat despotic? I mean, look at someone like a Ted Turner, you know? I mean, this is a guy...

Mr. KRUGMAN: But may--maybe I read too much history. I--it seems to me that we had--you know, we had roughly four decades after World War II when US corporations invented the computer, developed the jet aircraft, did a whole lot of very risky things in an environment in which, you know, there were ambitious CEOs and there were--maybe they were despotic a bit in saying, 'You know, this is what we're going to do,' but they didn't--they weren't despotic in a way that was lining their own pockets.

BROWN: Right.

Mr. KRUGMAN: And--and this is--I--you know, we've--we built up--you know, first came the--first came the gigantic salaries, then came the justification that this is necessary for risk-taking.

Sir HOWARD: I think the pendulum is swinging back appropriately to operators. If you--if you want somebody to operate a company ef--a company effectively, then they have to be--have a different level of intelligence. And if he--if you read "Barbarians at the Gate," it always stuck me that the entire book which is a brilliant book, at no time did the CEO in--involved discuss anything in terms of products or employees except for a smokeless cigarette and a--and an apple cookie. It was all about acquisition. It was all about getting rich. And I think that pendulum has swung to the point where people are beginning to understand that how you operate a company on behalf of not just shareholders but the employees and the products that you make are going to be a l--the long-term antidote.

BROWN: Should Michael Eisner stay as CEO of Disney?

Sir HOWARD: Oh, I thought you'd ask that. Yeah, I--I think there will be a backlash in favor of Michael Eisner because--because both Michael Eisner and--and Martha are--are examples that happen to be at the moment for shareholders to get angry at. Michael Eisner...

BROWN: So Michael's a good thing.

Sir HOWARD: ...Michael Eisner did at least take--took a dusty brand, brushed off the cobwebs and made it a global brand of--of rather epic proportions. If you give him that context, the question about whether he stayed too long in the CEO's chair is a separate issue from Ken Lay and--and--and some of the other...

BROWN: Exactly. Of course.

Sir HOWARD: ...corporate executives and--and I--I suspect that it's not easy to run that Disney enterprise. You see the names being bandied around. It's a very complicated company in the age of terrorism to run a company with theme parks. It's very hard to turn a network--a television network around in an age of fragmentation. And so I--I think that--that this is--this is--this is cause and effect where the effect is--is--is rather more detrimental than the cause would merit.

BROWN: Thank you so much, everybody. You've been great. Up next, Princess Diana didn't just pour her heart out for a biographer who scribbled in a notebook. She put her heartbreak on tape. Now those tapes have aired. What are they saying about her? Vanity Fair's Dominick Dunne talks to me about a princess we both knew.

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Originally broadcast, 3.14.04