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White House in turmoil shows why Trump’s no CEO

Source:Flickr Gage Skidmore

Bert Spector, Northeastern University

Throughout the 2016 presidential campaign, Donald Trump made much of his business experience, claiming he’s been “creating jobs and rebuilding neighborhoods my entire adult life.”

The fact that he was from the business world rather than a career politician was something that appealed to many of his supporters.

It’s easy to understand the appeal of a president as CEO. The U.S. president is indisputably the chief executive of a massive, complex, global structure known as the federal government. And if the performance of our national economy is vital to the well-being of us all, why not believe that Trump’s experience running a large company equips him to effectively manage a nation?

Instead of a “fine-tuned machine,” however, the opening weeks of the Trump administration have revealed a White House that’s chaotic, disorganized and anything but efficient. Examples include rushed and poorly constructed executive orders, a dysfunctional national security team and unclear and even contradictory messages emanating from multiple administrative spokespeople, which frequently clash with the tweets of the president himself.

Senator John McCain succinctly summed up the growing sentiment even some Republicans are feeling: “Nobody knows who’s in charge.”

So why the seeming contradiction between his businessman credentials and chaotic governing style?

Well for one thing, Trump wasn’t a genuine CEO. That is, he didn’t run a major public corporation with shareholders and a board of directors that could hold him to account. Instead, he was the head of a family-owned, private web of enterprises. Regardless of the title he gave himself, the position arguably ill-equipped him for the demands of the presidency.

Public accountability

Several years ago, I explored the distinction between public and private companies in detail when the American Bar Association invited me to write about what young corporate lawyers needed to understand about how business works. Based on that research, I want to point to an important set of distinctions between public corporations and private businesses, and what it all means for President Trump.

Public corporations are companies that offer their stock to pretty much anyone via organized exchanges or by some over-the-counter mechanism. In order to protect investors, the government created the Securities and Exchange Commission (SEC), which imposes an obligation of transparency on public corporations that does not apply to private businesses like the Trump Organization.

The SEC, for example, requires the CEO of public corporations to make full and public disclosures of their financial position. Annual 10-K reports, quarterly 10-Q’s and occasional special 8-K’s require disclosure of operating expenses, significant partnerships, liabilities, strategies, risks and plans.

Additionally, an independent firm overseen by the Public Company Accounting Oversight Board conducts an audit of these financial statements to ensure thoroughness and accuracy.

Finally, the CEO, along with the chief financial officer, is criminally liable for falsification or manipulation of the company’s reports. Remember the 2001 Enron scandal? CEO Jeffrey Skilling was convicted of conspiracy, fraud and insider trading and initially sentenced to 24 years in prison.

Internal governance

Then there is the matter of internal governance.

The CEO of a public company is subject to an array of constraints and a varying but always substantial degree of oversight. There are boards of directors, of course, that review all major strategic decisions, among other duties. And there are separate committees that assess CEO performance and determine compensation, composed entirely of independent or outside directors without any ongoing involvement in running the business.

Whole categories of CEO decisions, including mergers and acquisitions, changes in the corporation’s charter and executive compensation packages, are subject to the opinion of shareholders and directors.

In addition, the 2010 Dodd-Frank Act requires – for now – regular nonbinding shareholder votes on the compensation packages of top executives.

And then there’s this critical fact: well-governed firms tend to outperform poorly governed ones, often dramatically. And that’s because of factors like a strong board of directors, more transparency, a responsiveness to shareholders, thorough and independent audits and so forth.

Trump’s business

None of the obligations listed above applied to Trump, who was owner, chairman and president of the Trump Organization, a family-owned limited liability company (LLC) that has owned and run hundreds of businesses involving real estate, hotels, golf courses, private jet rentals, beauty pageants and even bottled water.

LLCs are specifically designed to offer owners tax advantages, maximum flexibility and financial and legal protections without either the benefits (such as access to equity capital markets) or the many obligations of a public corporation.

For example, as I noted above, a corporate CEO is required by law to allow scrutiny of the financial consequences of his or her decisions by others. As such, CEOs know the value of having a strong executive team able to serve as a sounding board and participate in key strategic decisions.

Trump, by contrast, as the head of a family business was accountable to no one and reportedly ran his company that way. His executive team comprised his children and people who are loyal to him, and his decision-making authority was unconstrained by any internal governance mechanisms. Decisions concerning what businesses to start or exit, how much money to borrow and at what interest rates, how to market products and services, and how – or even whether – to pay suppliers or treat customers were made centrally and not subject to review.

Clearly, this poorly equips Trump to be president and accountable to lawmakers, the courts and ultimately the voters.

Another important aspect of the public corporation is the notion of transparency and the degree to which it enables accountability.

A lack of transparency and reluctance to engage in open disclosure characterized the formulation of Trump’s immigration ban that was quickly overturned in federal court. That same tendency toward secrecy was manifest throughout the campaign, such as when he refused to disclose much about his health (besides this cursory “note”) or release any of his tax returns.

While there’s no law that requires a candidate to divulge either health or tax status, that lack of transparency kept potentially vital information from U.S. voters. And Trump’s continuing lack of transparency as president has kept experts and advisers in the dark, leading to precisely the confusion, mixed messages and dysfunction that have characterized these early weeks. And, of course, this can quickly lead to a continuing erosion of public trust.

Trump, it should be noted, made one stab at a public company: Trump Hotels and Casino Resorts. That was an unmitigated disaster, leading to five separate declarations of bankruptcy before finally going under, all this while other casino companies thrived. Public investors ignored all the signs in favor of the showmanship and glitz of the Trump brand and, as a result, lost millions of dollars. Trump allotted himself a huge salary and bonuses, corporate perks and special merchandising deals.

What is especially telling about this experience is that, rather than speaking on behalf of fiduciary responsibilities for the best interests of the corporation, Trump noted, “I make great deals for myself.”

Multiplicity of voices

There is no need to be overly naive here.

Some CEOs also operate in a highly centralized manner, expecting obedience rather than participation from direct reports. All business executives expect a shared commitment from their employees to their corporate goals and value dependability, cooperation and loyalty from subordinates.

But the involvement of a multiplicity of voices with diverse perspectives and different backgrounds and fields of expertise improves the quality of resulting decisions. Impulsive decision-making by an individual or small, cloistered group of followers can and often will lead to disastrous results.

What lies ahead

Virtually every U.S. president, ranging from the great to the inconsequential and even the disastrous, have emerged from one of two groups: career politicians or generals. So why not a CEO president?

Without question, a background in politics does not guarantee an effective presidency. Abraham Lincoln, the consensus choice among historians for the best president ever, was a career politician, but so was his disastrous successor, Andrew Johnson.

Likewise, we can think of many traits of an effective corporate CEO that could serve a president well: transparency and accountability, responsiveness to internal governance and commitment to the interest of the overall corporation over and above self-enrichment.

Sadly, that is not Trump’s background. His experience overseeing an interconnected tangle of LLCs and his one disastrous term as CEO of a public corporation suggest a poor background to be chief executive of the United States. As such, “nobody knows who’s in charge” may be the mantra for years to come.

The Conversation

Bert Spector, Associate Professor of International Business and Strategy at the D’Amore-McKim School of Business, Northeastern University

This article was originally published on The Conversation. Read the original article.

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1 Comment on White House in turmoil shows why Trump’s no CEO

  1. Thank you for such an excellent article, one of the BEST I have read. What can we do to encourage more transparency
    with Trump and his administration? I would love to see an article about the best way to encourage his supporters to accept the truth about his actions. So many Republicans only listen to Fox and right news media. Please HELP us create a stage where change can take place. Our nation is sadly divided.

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