Wednesday, May 12, 2010

Can California Be Governed Such As Meg Whitman Ruled EBay?

 In California, former EBay CEO Meg Whitman is using her family's estimated $1 billion fortune to buy her way into the governor's office, blanketing the nation's most populated state with millions of dollars in image-repairing television ads.

Those slick ads seem to be working. The latest Field Poll, the oldest and most accurate in the state, taken March 17 show Whitman leading her closest Republican rival Steve Poisner 63% to 14% while 23% were undecided or favored other candidates.

There are 23 candidates for governor on the June 8 Primary ballot which for the first time in years voters can cross party lines and vote for any candidate of their choice.

While other polls taken more recently showing Poisner, the state insurance commissioner, closing the gap, Whitman's campaign theme stresses her acumen as a business executive can restore the state to fiscal responsibility.

The state faces an $18 billion budget deficit to plug by July 1. Voters are angry. That is illustrated by a Field Poll also taken in March in which voters gave incumbent Republican Gov. Arnold Schwarzenegger a 23% approval rating and the Democratic controlled Legislature 13%.

If Whitman is elected in November's general election, she will learn quickly as movie megastar Schwarzennegger did, that popularity is fleeting and fighting the embedded Democratic Legislature is different than a pliable board of directors of large corporations. Besides, in California the state constitution requires a two-thirds majority to pass a budget no matter what a governor, or in Whitman's case, a CEO, demands.

Whitman's reputation for being ruthless in the private sector does not translate that much in government.

In her recently ghost-written autobiography, Whitman says she earned her bonafides by asking, "What is the right thing to do?" In the book she rails against Wall Street's greed and rejects the myth that successful executives must "step on people, stretch the truth ...and make heartless decisions based only on the bottom line."

But the Los Angeles Times challenges that premise by highlighting some questionable deals she made in her quest of making money for herself and her business associates. The Times summarizes:

A lucrative deal that Whitman cut for herself with investment banking giant Goldman Sachs was called "corrupt" by the U.S. House of Representatives Financial Services Committee. The partnership she forged between EBay and online rival Craigslist landed in court and is still there; Craigslist has accused EBay of stealing trade secrets and fraudulent advertising. At another company, her dismissal of a subordinate executive resulted in an age-discrimination lawsuit and a secret court settlement.

As an investor, she put millions of dollars into private equity firms with a reputation for callous business practices. Subsidiaries of one of the "distressed asset" firms in which she identifies herself as a limited partner foreclosed on dozens of victims of Hurricane Katrina.

In the Goldman Sachs deal, Whitman and other board members including Enron's Kenneth Lay doing business with Goldman were given advanced public offerings of stock for their personal portfolios. The head start on the rest of the market allowed her to sell shares for a profit of $1.78 million.

In a debate last week Poizner said Whitman "did not actually see a conflict of interest" in the deal. Whitman countered that "It was a completely separate account that had nothing to do with EBay's banking business. But the truth is leaders have to be above reproach."

As a result of the federal investigation and law suit filed by Goldman Sachs shareholders, Whitman paid back the $1.78 million in settlement agreements.

In her book, she said her decision at EBay to give $1,000 credits into the accounts of 1,000 customers in New Orleans after Hurricane Katrina  "was the best million dollars we ever spent."

But as the Times story points out, Whitman and her family placed at least $2 million in Fortress Investment Group, a private equity firm that foreclosed on 34 or more Katrina homeowner victims.

Tucker Bounds, Whitman's campaign spokesman, said "Meg has no control or influence over investment decisions."

According to the Times:

Whitman is a limited partner in more than two dozen other secretive hedge fund and venture capital investments, some of which have been accused by regulators, scholars and activists of questionable business strategies. The Whitman family
portfolio includes, for example, at least one fund that sought profits from the bankruptcies of American automakers and another that is partly owned by the government of Abu Dhabi, which has been cited for human rights abuses by U.S. officials and advocacy groups.

Whitman has said she is a passive investor in these businesses and cannot be held responsible for what they do with her money.

Of the myriad of law suits filed against Whitman over the years, many have been settled with secret agreements. Her spokesman, Tucker Bounds said:

"Suits of this nature filed against executives of major companies are commonplace today. Too often they are frivolous and in no way reflect the true performance of management."



If you read the Times story, one of the problems I had with it were the "scholars and activists" citing questionable ethics by Whitman in the course of her business career. That's nice, but I doubt they would apply under the transparency microscope shined on a governor of a state as large as California. Kindness and gentility, as she portrays herself in her ads, does not move entrenched state bureaucracies and special interests. Nor does sarcastic prodding of state Legislators as Arnold Schwarzenneger found out by calling the Democratic leaders a bunch of "girlie boys." California government is broken so badly that Meg Whitman nor any of the other 22 gubernatorial candidates can fix it. The state's constitution, third longest in the world, needs to be scraped and redone with a constitutional reform convention. Unfortunately, a group trying to place such a measure to state voters failed to raise enough money and abandoned the project in March. An example designed for dysfunction is Prop. 16 on the June 8 ballot. A majority vote for passage would require cities to acquire two-thirds majority approval by voters before purchasing electrical utility companies. In California, even a simple resolution honoring last Sunday as Mother's Day would be hard pressed to win two-thirds approval.

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