The TSC Streetside Chat: Ethics Expert Philip Cochran

The latest headlines serve as a daily reminder that chief executive officers can be more than just fallible. Just this week, Dennis Kozlowski resigned his post as CEO of Tyco International (TYC Quote) after the Manhattan District Attorney's office began investigating whether he avoided paying sales tax on art purchases.

So as the school year comes to an end and summer vacation approaches, we asked Philip Cochran, director of the G. Albert Shoemaker Program in Business Ethics at Penn State's Smeal College of Business, to grade Kozlowski's tenure as CEO along with four other embattled execs.

A professor of business at Smeal College, Cochran is used to giving out grades. In addition to his teaching duties, Cochran is an expert on business ethics, serving as the first president of the International Association for Business and Society.

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TheStreet.com: Considering the number of CEOs who have resigned in disgrace, been quietly fired or are currently under investigation, the executive suite faces a crisis of confidence unseen in many years. How did we get to a point where investors feel they can't trust CEOs?

Philip Cochran: I think the distrust of CEOs had been building even before the deflation of the [stock market] bubble. I think CEOs, in the past 10 years, have become akin to pop stars. We tend to think CEOs matter. They probably think they matter as well. And we focus a lot on individuals and personalities.

We've had waves of distrust in the past. I'm thinking back to the 19th century and the robber-baron era. But those were the owner/founder CEOs, and that's somewhat of a different situation than we're in today. None of the people we're talking about here are really founders. I think this really is different in that it's a lot more pervasive. You go back to previous periods where there was discontent with CEOs, and it focused on a handful of CEOs. Today, it seems to be painting a whole class.

TheStreet.com: This week, Dennis Kozlowski resigned as CEO of Tyco after being charged with sales-tax evasion by the Manhattan District Attorney's Office. He leaves a conglomerate with a battered stock price that has lost much credibility in investors' eyes. Yet, Tyco's stock rose 283% during the decade he headed the company. How would you grade his tenure overall?

Philip Cochran: Let's start with the stock price. I looked over the last five years, and it actually underperformed the Dow Jones Industrial Average, the Nasdaq and the S&P 500. And I think you really have to count the postresignation period as well.

Probably even more important is a comparison to General Electric (GE Quote) because in some ways, Kozlowski was trying to make a conglomerate on the model of GE. And Tyco underperformed GE over the last five years as well.

It's not clear to me that the strategy of conglomeration makes sense anymore. One thing that got Kozlowski a lot of attention was the early 1990s, when he was purchasing one new company a day for Tyco. I'm hard pressed to see how there's a strategic thrust there and they're not forming a conglomeration of unrelated firms. GE really is and was different.

From everything I've seen, Tyco didn't have that. I think the results, especially over the last year, indicate that's not a wise strategic decision. I give Kozlowski an F.

TheStreet.com: Adelphia Communications' shareholders were rocked by news that former CEO John Rigas and members of his family racked up a few billion in debt, used to fund personal loans, real estate purchases and to build a golf course. Is there any justification for accruing that kind of debt? And what grade would you give Rigas overall?

Philip Cochran: The real issue here is transparency. Adelphia is nominally a public company, and from what I saw, the family was treating it pretty much as a private company. Whether or not those loans sort of met the legal hurdle or accounting standards -- I don't know, I'm not an expert on those areas -- I think ethically, they really had to be much more transparent. They owed it to investors to disclose. Those loans were substantive. They were material.

If they were disclosed, investors would have seen a much different company and the stock price has been battered as a result of it. I'd give John Rigas a D.

The End of the Marking Period Professor Philip Cochran handed out a report card to six headline-grabbing corporate executives based on their performance
Executive	Title	Grade
Howard Schultz	CEO, Starbucks	A+
Gerald Levin	Former CEO, AOL Time Warner	B
Bernie Ebbers	Former CEO, WorldCom	C
John Rigas	Former CEO, Adelphia	D
Dennis Kozlowski	Former CEO, Tyco	F
Jean-Marie Messier	CEO, Vivendi Universal	F
Source: TSC Interview

TheStreet.com: Like the Rigas family, Bernie Ebbers, former CEO of WorldCom (WCOM Quote), also racked up his share of debt. He's on the hook for $366 million in debt to his former employer, which granted him discount rate loans so he wouldn't have to sell his stock. While this scandal casts a pall over Ebbers' tenure, some supporters would point out that he helped pioneer long-distance discount services after the AT&T (T Quote) breakup. What grade do you give Ebbers, considering his past leadership?

Philip Cochran: Over the last five to 10 years, WorldCom has underperformed the market as well -- again, taking into account the current stock price. But you're right. The fact that he helped pioneer this market is a big plus. I think, like a lot of these CEOs, he expected the stock price to keep rising and was betting on that, and that partly explains these large loans that he took from WorldCom.

Based on all he's done, I give him a C.

TheStreet.com: Two years ago, AOL's purchase of Time Warner was hailed for its potential synergies. Yet two years later, the merger is seen as a failure. Gerald Levin, who headed Time Warner before becoming AOL Time Warner's (AOL Quote) first CEO, has left the company. Considering that Levin weathered a recession, Sept. 11 and the pop of the dot-com bubble, what grade would you give him? Should he get a break?

Philip Cochran: Yeah, they ought to give him a break. I'd give Levin a B.

For most of his career, he was one of the most outstanding corporate leaders in this country. Unfortunately, his tenure was marred by this merger, which, as you suggest and most analysts point out, had few if any synergies. It's two radically different corporate cultures that are stapled together and the results are not panning out. What many of the skeptics were afraid of has actually happened.

Because of the merger, that's why I give him a B instead of an A. There was some risk. Certainly, knowing what people knew two years ago, it wasn't unreasonable to think that there would be certain synergies.

There are potential synergies still there, but it may take five years before they really start seeing the benefits of that. Conceivably, if you ask me the same question in five years, he might get an A because we look back and see that AOL Time Warner is a great, strong company because of this risky decision.

TheStreet.com: Last on our list is Jean-Marie Messier, CEO of Vivendi Universal (V Quote) -- the only CEO still at the helm of his company. This year he weathered a storm of criticism, namely that he overpaid for acquisitions, racked up too much debt and has no clear strategy going forward. Yet despite the fact that the media company posted the biggest loss ever last year, he received $4.8 million in pay. What grade does he get and is he worth the money?

Philip Cochran: I'd give him an F. I have real difficulty seeing what special skills or comparative advantage that a water utility -- a French water utility -- brings to an American media company. This purchase of Seagram's, which was the owner of Universal -- I didn't see any sense in it at the time and the market doesn't either. The performance of Vivendi has reflected that.

Is he worth the $4.8 million? You have to understand that the majority of that was a 250% bonus over his base pay. So he got a bonus much larger than his salary for meeting certain goals. We're giving someone a 250% bonus who is the CEO of a firm with the largest losses in French corporate history?

In this country we'd find it odd to give an NFL coach with an 0-16 record a 250% bonus. It just wouldn't happen. I can't see the justification. He met the narrow criteria, which was 30% EBIDTA growth ... but the overall performance of the firm was abysmal and no -- I don't think he's worth it.

TheStreet.com: There have got to be some good guys out there. Which CEO would get an A+ from you based on company performance, management style and business ethics?

Philip Cochran: Howard Schultz, the CEO of Starbucks (SBUX Quote). He basically created the specialty coffee industry.

The company continues to grow; I think projections are that it will double the number of outlets in the next three to four years. It ranks high on the list of socially responsible and ethical companies. They treat their employees well. They give back to the community. They have special fair-trade programs for their suppliers who have been really battered by the historically low coffee prices.

It's a good company to work for, they have above-average returns, and he created the market. And they're still growing. He's my A+.