What Is Corporate Kleptocracy?
Corporate kleptocracy is a phrase that describes the greed of corporate executives who use underhanded tactics to siphon off wealth at the expense of shareholders.
The phrase came into being as part of a report that accused ex-Hollinger CEO Conrad Black and his associates of allegedly embezzling hundreds of millions of dollars from the company from 1996 to 2003.
- Corporate kleptocracy refers to the misuse of company assets or management practices for personal gain, often by high-ranking executives.
- When CEOs or top managers use the company coffers as a personal bank account or to embezzle or commit fraud, investors and other stakeholders can bear the brunt of the fallout.
- Famous cases of corporate kleptocracy include scandals at Enron, Worldcom, Tyco, and RJR Nabisco.
Understanding Corporate Kleptocracy
Hollinger International was a Canadian-based media company that owned community papers across the United States and Canada as well as the Chicago Sun-Times, the Toronto-based National Post, The Daily Telegraph of London, and Israel's Jerusalem Post. Canadian Conrad Black was the company's largest shareholder and its CEO.
Hollinger International and Richard Breeden, former chairman of the U.S. Securities and Exchange Commission, led an inquiry that accused Mr. Black and longtime colleague and Chief Operating Officer David Radler of bleeding the company of nearly $400 million through shady management and non-compete fees.
In 1998, the company began a large sell-off of its community papers, and the companies that bought the papers paid millions of dollars in non-compete payments to Hollinger International. Mr. Black supposedly diverted millions of those dollars—95% of Hollinger’s adjusted net income between 1997 and 2003—to himself and a small group of colleagues.
The 513-page report was titled “A Corporate Kleptocracy.” The definition of kleptocracy is a government by those who seek chiefly status and personal gain at the expense of the governed. In this case, it was corporate executives who sought personal gain at the expense of shareholders.
The group was accused of using company funds for personal use of the company jet as well as clothing and gifts for Mr. Black’s wife. Mr. Black was convicted of three counts of mail fraud and one count of obstruction of justice but was acquitted of nine other counts including misuse of corporate perks. However, this case as well as others such as Enron, Tyco, and WorldCom set in motion a more aggressive strategy from the U.S. government to hold executives accountable for company actions.
Example of Corporate Kleptocracy: RJR Nabisco
One example of corporate kleptocracy can be seen in the case of food and tobacco conglomerate RJR Nabisco. In the 1980s, CEO J. Tylee Wilson of tobacco giant R.J. Reynolds sought a merger candidate as cigarettes were leading to costly litigation due to health-related lawsuits and changing public perception.
Around the same time, F. Ross Johnson had managed to become CEO of food company Nabisco Brands and in the process, increased management's compensation and perks.
In 1985, Wilson and Johnson met, and a merger followed creating RJR Nabisco, but the two CEOs clashed. Johnson was able to use the company's accounts for his own personal spending, secured by installing friendly allies to the board of directors. Johnson wrestled control, but his carefree spending led to high expenses and a declining stock price.
Leveraged buyout firm KKR subsequently acquired RJR Nabisco for $25 billion for one the largest leveraged buyouts in U.S. history and ousted Johnson as CEO after he had essentially drained the company coffers dry.