Shadow Government, Shadow Management

Whither cable news and corporate America?

Vol. 4, Issue No. 63 | November 11, 2008 By Denny Hatch

multipage

Different kinds of shadow governments exist in the United States, where elections are held every four years and the incoming administration has 75 days to affect the transition. One shadow government is the aforementioned media.

With no presidential horse race to cover, cable news will morph into a kind of shadow government. While not in-waiting to take over government, the cable crowd will make sure that every major and minor development is talked to death—analyzed by "experts" who will give all kinds of advice to business and government on health care, the economy, foreign affairs, social issues, energy and the environment to the point where the public wonders who's really shaping policy and inspiring decisions.

Following the 9/11 attacks on the World Trade Center, no one knew where or when the next assault would come, if it were coming at all. President Bush wisely set up an official shadow government whereby senior civilian officials live and work outside of Washington, D.C. in order to ensure continuity in the event of another attack. As Barton Gellman and Susan Schmidt wrote in the March 1, 2002, edition of The Washington Post:

Deployed "on the fly" in the first hours of turmoil on Sept. 11, one participant said, the shadow government has evolved into an indefinite precaution. For that reason, the high-ranking officials representing their departments have begun rotating in and out of the assignment at one of two fortified locations along the East Coast. Rotation is among several changes made in late October or early November, sources said, to the standing directive Bush inherited from a line of presidents reaching back to Dwight D. Eisenhower.

The civilian cadre present in the bunkers usually numbers 70 to 150, and "fluctuates based on intelligence" about terrorist threats, according to a senior official involved in managing the program. It draws from every Cabinet department and some independent agencies. Its first mission, in the event of a disabling blow to Washington, would be to prevent collapse of essential government functions.

This system was codified on May 9, 2007, through Presidential Directives NSPD 51 and HSPD-20. (See hyperlinks below).

To me, this makes sense—people in bunkers with the authority to make command decisions and keep things going should Washington, D.C., be turned into a parking lot.

The equivalent in business is a company called SunGard, with computers directly tied into the data processing of its clients—primarily financial services. In the event of a catastrophe that knocks out a client's business, a switch can be flicked and the SunGard instantly takes over, enabling the affected company to continue operating without missing a beat.

The Shadow Government of Corporations or Industries
From Gretchen Morgenson's story in this past Sunday's New York Times titled, "How the Thundering Herd Faltered and Fell":

THERE were high-fives all around Merrill Lynch headquarters in Lower Manhattan as 2006 drew to a close. The firm's performance was breathtaking; revenue and earnings had soared, and its shares were up 40 percent for the year. And Merrill's decision to invest heavily in the mortgage industry was paying off handsomely. So handsomely, in fact, that on Dec. 30 that year, it essentially doubled down by paying $1.3 billion for First Franklin, a lender specializing in risky mortgages. It was a moment to savor for E. Stanley O'Neal, Merrill's autocratic leader, and a group of trusted lieutenants who had helped orchestrate the firm's profitable but belated mortgage push.

The key sentences in Morgenson's story:

Two indispensable members of Mr. O'Neal's clique were Osman Semerci, who, among other things, ran Merrill's bond unit, and Ahmass L. Fakahany, the firm's vice chairman and chief administrative officer. A native of Turkey who began his career trading stocks in Istanbul, Mr. Semerci, 41, oversaw Merrill's mortgage operation. He often played the role of tough guy, former executives say, silencing critics who warned about the risks the firm was taking.

Two years later, Merrill Lynch crashed, burned and was forced to merge with Bank of America. O'Neal, Semerci, Fakahany and hundreds of others are gone. Stockholders are screwed. "It was an ignominious end to America's most famous brokerage house," Morgenson wrote, "whose ubiquitous corporate logo was a hard-charging bull."

These guys weren't making cars. Nor were they making it possible for cars to be made, which is the business they were supposed to be in.

They were making bets.

I spent some years as a lowly marketer running book clubs. I dealt with bad debt, wrote and designed billing and dunning efforts, and was very careful to cut off members who failed to pay.

If one of these hotshot honchos said to me, "Hey, we're building a huge industry that's going to make us a lot of money based on irresistible offers to customers who won't be able to pay their bills! Do you want to get in on the action?" I would say, "You're all out of your [expletive deleted] minds!"

It's now my opinion that some kind of shadow government should be set up to oversee the operations of individual companies—and entire industries.

As it stands now, the only shadow government of a corporation is its board of directors.

In the case of Bear Stearns, Lehman, Goldman, Fannie and Freddie, AIG, and Merrill Lynch, the directors failed to give guidance based on business common sense. My bet is the directors didn't have a clue what was going on and were gulled into believing management's rosy scenarios.

The directors of Ford, Chrysler and GM allowed management to preside for years over a failed legacy business model that concentrated on gas-guzzlers rather than moving to hybrids. They spent more per car on health care than on steel. Why did the directors not act?

Congress is incapable of industry oversight with its members in thrall to the lobbyists that contribute millions to campaign coffers and party committees. Until now, the Fed, the SEC, Council of Economic Advisors and other federal agencies couldn't ride herd without being accused of government meddling.

A trillion dollars later, not only are taxpayers and stockholders screwed, the whole world's screwed.