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 1997 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. It owned community papers across the United States and Canada, as well as the Chicago Sun-Times, the Daily Telegraph, the National Post, and the Jerusalem Post. Conrad Black, a Canadian citizen, was the chief executive officer and the company's largest shareholder.
In 2004, Hollinger and Richard Breeden, former chairman of the Securities and Exchange Commission, led an inquiry into financial mismanagement at the company. The report accused Black and the company's chief operating officer, David Radler, of bleeding $400 million from Hollinger over a seven-year period via shady management and non-compete fees. The sum represented 95% of Hollinger’s adjusted net income between 1997 and 2003.
The 513-page report was subtitled "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 executives were accused of using company funds for personal use of the company jet as well as clothing and gifts for Black's wife.
Black was convicted of mail fraud and obstruction of justice, and was sentenced to 42 months in prison and fined $125,000. President Donald Trump pardoned Black in 2019. However, this case—as well as others such as Enron, Tyco, and WorldCom—set in motion a more aggressive strategy from the federal government to hold executives accountable for company actions.
Example of Corporate Kleptocracy: RJR Nabisco
Food and tobacco conglomerate RJR Nabisco offers another example of a corporate kleptocracy. In the 1980s, J. Tylee Wilson, chief executive of tobacco giant R.J. Reynolds, sought a merger to diversify away from cigarettes and head off costly litigation due to health-related lawsuits and changing public perception.
Around the same time, F. Ross Johnson had managed to become CEO of Nabisco Brands and in the process, increased management's compensation and perks.
In 1985, the two companies merged to form RJR Nabisco, but Wilson and Johnson 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, in one the largest leveraged buyouts in U.S. history, and ousted Johnson as CEO after he had essentially drained the company coffers dry.