2B RED: The Corporate World: The Good, the Bad and the Ugly
2B RED: The Corporate World: The Good, the Bad and the Ugly
Books offering insights into the corporate world
This edition suggests some books with interesting insights into the corporate world, mostly (but not all) from that so-called bastion of capitalism, the United States of America. But before you, dear reader, become totally depressed, pine for more regulation or want stricter anti-trust legislation, let us start with something positive before we plumb the depths with some page-turning whodunits; and so to the GOOD.
The Good
Software and philanthropy
Bill Gates, a Harvard dropout, must be one of the 20th Century’s standout business leaders. The success of Microsoft has benefited billions of consumers. And even more importantly, that success has resulted in Gates having a current net worth estimated at US$109bn. To date, through the Bill and Melinda Gates Foundation he has donated over US$50bn to a wide range of projects and organisations, many focusing on the disadvantaged. Some would argue he has done more for human health in Sub-Saharan Africa than has the World Health Organisation in its entire history.
Since stepping back from Microsoft, Gates has spent the last 15 years dedicated to philanthropic activities. More recently he has focused on climate change (authoring How to Avoid a Climate Disaster) and pandemics (authoring How to Prevent the Next Pandemic).
But hold on: the record even of this golden-haired corporate hero, successful and generous, is not wholly unblemished. Microsoft has been in court almost continuously since the late 1990s; it has paid US$337m in fines for price-fixing or anti-competitive practices, Foreign Corrupt Practices Act, consumer protection violation, wage and hour violation, and privacy violation. Perhaps the good news is there is no apparent evidence of financial fraud.
Frittering away a fortune
Cornelius Vanderbilt (1794-1877) started life by leaving school at age 11, and by age 16 borrowed $100 from his mother to buy a small two-masted sailing vessel for ferrying passengers and goods between Staten Island and Manhattan. By the end of his life, he had built an enormous business empire based on shipping and railroads. Apart from some legal tangles over alleged monopolistic actions (which the court ruled were not relevant under the protection of interstate commerce), and a nasty custody battle over Gloria Vanderbilt, the family’s reputation seems to be unblemished. And Cornelius gave generously to churches, built low-income tenement housing, and notably gave the foundation grant of $1m in 1873 to establish Vanderbilt University in Nashville, Tennessee.
But the descendants of Cornelius were content to live lavishly on their inheritances, invest little and build mansions; Biltmore House in Asheville, North Carolina, with its 250 rooms and 17,000m2 of floor space, remains today as the largest privately owned residence in the USA. As Arthur T. Vanderbilt (a descendant) writes in Fortune's Children: The Fall of the House of Vanderbilt (William Morrow Paperbacks, 2001), within 100 years, the family billions were whittled down to a few million here or there. No fraud, just high living (although Vanderbilt hospital was found guilty of fraudulent claims against Medicare).
Anderson Cooper is a key (and very highly paid) anchor on CNN. Did you know his mother was the same Gloria Vanderbilt? With Katherine Howe, he is the author of Vanderbilt: The Rise and Fall of an American Dynasty (Harper, 2021).
Monopoly’s upsides
Investigative journalism is not at all a recent phenomenon. First published in 1904, Ida M. Tarbell’s The History of the Standard Oil Company (CreateSpace Independent Publishing Platform, 2015) is still regarded today as a model of investigative reporting.
Tarbell traces the history of John D. Rockefeller (1839-1937). He was one of six children of an itinerant snake-oil salesman, father William Rockefeller. John dropped out of high school, took a single business course at a local college, and then established a commission business in agricultural commodities. But he soon realised the potential of oil, and in 1863 built what was to become, within two years, the single biggest refinery in Western Pennsylvania. The Standard Oil Company was founded in 1870 and after aggressively buying up competitors, it soon had monopoly control of the entire industry. It was able to negotiate favourable rail rates, and eventually owned production, railroads, refineries and terminal facilities, while expanding into overseas markets. Anti-trust legislation was used to split the company up in 1911.
Thomas Sowell, in a piece entitled Enough Money, (Jewish World Review, May 18, 2010) argued that the innovations Rockefeller made in the production, processing and transport of oil, lowered the price to consumers — a “benefit” not always recognised by those critical of the business practices of Standard Oil.
As with other super rich families, the Rockefellers were substantial philanthropists. The Rockefeller Foundation was established in 1913 and to date has awarded over US$3bn in grants for health, medical sciences, energy, global vaccination, education (e.g. The University of Chicago), and food and agriculture. Your correspondent spent a total of a nearly a decade in South America at an agricultural research institute founded by the Foundation, with significant ongoing support.
The Bad
€1.9 bn in “missing” cash
We’ll start the BAD with Wirecard, a German based payments processing start-up founded in 1999. Its initial business was based on processing payments for porn and gambling sites. It grew rapidly, establishing businesses in Singapore, India, Turkey, Australia, New Zealand, Brazil and South Africa, and was represented in the USA and China.
Starting in 2015, the Financial Times (FT) reported on dubious accounting practices, possible fraud and money laundering. This was followed up by FT journalist Dan McCrum, who spent years tracking the company and its directors and eventually wrote a recently published book: Money Men: A Hot Startup, A Billion Dollar Fraud, A Fight for the Truth (Transworld Digital, 2022). In 2020 the company filed for bankruptcy, announcing that €1.9 bn in cash was “missing”. Former CEO Markus Braun is on trial in Munich, charged with fraud, breach of trust, and accounting manipulation. In short, Wirecard was one of the world’s biggest-ever financial collapses. McCrum’s book reads like a thriller as he details the history of his persistence in uncovering the malfeasances of Wirecard.
Should viewing rather than reading be your cup of tea, see Skandal! Bringing Down Wirecard on Netflix.
Capturing the regulators
In 2021, the National Center for Health Statistics in the United States reported that from 1999 to 2020, nearly one million people died from overdoses of opioid. Behind this was the aggressive marketing of OxyContin, a prescription opioid pain medication, by a privately held, wholly-owned pharmaceutical company, Purdue Frederick Company, Inc. Purdue was founded by Arthur Sackler and subsequently run by his brothers Richard and Mortimer (and later by their offspring). The company was remarkably successful in generating eye-watering profits, and the Sacklers became one of the richest families on the planet. Through intense lobbying they convinced the FDA to grant approval to market the drug, a classic example of regulatory capture. They did share their wealth in an egomaniacal way, becoming major philanthropists endowing universities, schools of medicine and business, and art galleries – the latter at the Museum of Modern Art (New York), the Smithsonian (Washington DC), The Louvre (France), the Tate Gallery (London); but in every case insisting that each be emblazoned with the name The Sackler Gallery. It is estimated that the Sacklers gave some $15bn in gifts.
But all was not sweetness and light as it might have appeared. In 2007, a court in Virginia found Purdue guilty of misbranding OxyContin, with the intent to defraud, by failing to reveal the downsides and potential for addiction. The company was fined $600m, which was referred to by some as simply “an excessive licence fee to continue criminal activity,” and pretty much viewed as that by the directors. As a consequence, the Sackler empire went back to doing basically exactly what they had been doing.
But eventually it all came to a crashing end. After settling numerous individual cases across the country, finally the states combined and a major case was brought against Purdue. It was eventually settled through declaring Purdue bankrupt and paying the claimant states $6bn — in exchange for a lifetime legal shield that protects all the Sackler family members from any prosecution. This was achieved by arranging to have the bankruptcy case heard by a judge known to be favourable to such deals. In short, the Sackler family walked away holding at least $13bn they had drawn from the company, much of it in overseas accounts. Not a single member of the family was, and will never be, held accountable.
And what of all the Sackler Galleries, named Institutes and Faculty Buildings? The majority of the organisations refused to accept any further gifts and the Sackler name has been stripped from most of the places.
The Sackler case has not escaped the attention of economists. Two papers are worth noting: How The Reformulation Of Oxycontin Ignited The Heroin Epidemic1 and Origins of the Opioid Crisis and its Enduring Impacts2.
The first paper is based on the change in the formulation of OxyContin engineered by Purdue in an attempt to reduce inappropriate use and addiction. It consisted of a coating that did not permit the active ingredients to be extracted and used to give an instant response, in contrast to the slow twelve-hour release when taken orally. The authors find evidence that this did in fact reduce the extent of addiction and number of deaths; but users often switched to heroin so there was no net improvement from harmful drugs.
The second paper finds evidence that the aggressive marketing by Purdue was associated with greater use and misuse of OxyContin. They exploited a natural experiment based on the fact that five states had much stricter controls over prescriptions than other states, and were associated with much lower death rates.
For the reader wanting a gripping tale that traces the whole history of the Sacklers, one can’t go past Patrick Radden Keefe, Empire of Pain: The Secret History of the Sackler Dynasty (Picador, 2021). And finally, John Oliver, a TV host, created an entertaining satirical piece that exposes the Sackler family: Opioids III: The Sacklers: Last Week Tonight with John Oliver.
The technology never worked, the company folded, investors lost the lot…
If you only have time for one book, then this next one is it: a thrilling, can’t-put-it-down page turner: John Carreyrou’s Bad Blood: Secrets and Lies in a Silicon Valley Startup (Picador, 2018).
In 2004, a Stanford University second year undergraduate in chemical engineering dropped out and, using her tuition funds, founded a biotech startup, Real-Time Cures, that eventually became Theranos (an amalgam of of "therapy" and "diagnosis").
This ex-student, Elizabeth Holmes, was highly intelligent, attractive, charming and a visionary. She had a serious and well-intentioned plan to design, build and market a blood analyser. In contrast to taking intravenous samples, her system would be based on a few drops of blood from a finger prick. And the machine would carry out dozens of tests simultaneously and report the results via the internet to the patient and GP. In short it would be fast, efficient, and painless — and would supersede the existing systems of collection, analysis and reporting of blood tests.
Many experts in the field were sceptical about the technology. But Holmes managed to charm investors and raised US$1.3bn in venture capital. Credibility was established by convincing a number of very high-profile individuals to join what was called "the most illustrious board in U.S. corporate history." These included George Schultz and Henry Kissinger (both former United States Secretaries of State), William Perry (former United States Secretary of Defence), Jim Mattis (retired Marine Corps four-star general), Sam Nunn (a former U.S. senator), and Richard Kovacevich (former CEO of Wells Fargo); a board arguably long on political connections but short on biotechnology.
Without wishing to spoil a great read, the technology never worked, the company folded, investors lost the lot, and currently Elizabeth Holmes is awaiting sentencing having been convicted of massive fraud; she faces a maximum of 20 years in prison and a US$250,000 fine and restitution for each of multiple fraud charges. The whistle-blower was ex-employee Tyler Schultz, grandson of board member George Schultz. Sorry – no philanthropy here folks.
And the Ugly
Just steal the money
Our final entries definitely qualify for the UGLY category. Bernie Madoff did not have the entrepreneurial skills of the Sackler brothers, Rockefeller, Markus Braun or Elizabeth Holmes. Each of them built massive fortunes, albeit on dubious or illegal practices.
Madoff in contrast, simply stole the money, as told by Jim Campbell in Madoff Talks: Uncovering the Untold Story Behind the Most Notorious Ponzi Scheme in History (McGraw-Hill, 2021). And for a comprehensive coverage of fraud, with insights into the evolution of the regulatory and judicial contexts, see Fraud: An American History from Barnum to Madoff (Princeton University Press, 2017), a scholarly work by Edward J. Balleisen, a professor of history and public policy at Duke University.
Make a stack of cash by dubious means, but assuage your guilt by philanthropy
And a postscript for fraud junkies: you might want to follow the trials and tribulations of Gautam Adani, whose Adani Group is an Indian multinational conglomerate, headquartered in Ahmedabad.3 It is a massive organisation and has large investments in mining in Australia. But allegations of tax evasion, stock manipulation, fraud and accounting malpractice surround the company and its CEO founder. But by now a familiar pattern emerges: make a stack of cash by dubious means, but assuage your guilt by philanthropy. The Adani Foundation has supported the fight against Covid in India, and recently the family has pledged $7bn for social causes.
Dishonest, unethical and often illegal shenanigans
An overriding message from many of these books is the role played by first-class investigative journalists (writers for the Wall Street Journal, The New York Times, The Washington Post, Financial Times, The New Yorker etc). Their persistence in uncovering corporate wrongdoings, combined with supportive editors who adhere to the principle of a free and open media, must surely have some constraining effect on the dishonest, unethical, and often illegal shenanigans that seem to be a recurring feature of some with wealth and power. Sunlight is a powerful disinfectant.
By Grant Scobie
Evans, William N., Ethan Lieber & Patrick Power (2018). How The Reformulation Of Oxycontin Ignited The Heroin Epidemic. Working Paper 24475, National Bureau of Economic Research, Cambridge, Ma., April, 2018.
Alpert, Abby, William N. Evans, Ethan M.J. Lieber & David Powell (2022). Origins of the Opioid Crisis and its Enduring Impacts, Quarterly Journal of Economics, 137(2): 1139-1179.
For subscribers to The Economist, see Who is Gautam Adani? and Why Adani Group’s troubles will reverberate across India.