My Email From United’s CEO

At 1:37:54 a.m. this morning, I got an email from United Airlines CEO Oscar Munoz.  1:37 a.m.?  Geez, Mr. Munoz is one hardworking dude!

Mr. Munoz sent me the email to apologize for the disturbing recent incident in which a ticketed passenger was dragged from a United flight leaving O’Hare in order to allow a United employee to take his seat.  Mr. Munoz says the treatment of the passenger broke United’s promise to not only “make sure you reach your destination safely and on time, but also that you will be treated with the highest level of service and the deepest sense of dignity and respect.”  That’s a bit of an understatement, Mr. Munoz!  Something that doesn’t square with the “deepest sense of dignity and respect” would be, say, getting wedged into a seat next to a smelly, morbidly obese guy wearing a tank top who intrudes into your personal space.  Being left bloodied and semiconscious as you’re dragged from your seat doesn’t even square with the lowest level of service or the shallowest sense of dignity and respect.

But let’s not quibble about words.  Mr. Munoz thinks the incident happened because United’s “corporate policies were placed ahead of our shared values” and “[o]ur procedures got in the way of our employees doing what they know is right.”  He wants the incident to be a turning point for the company, so he’s changing United’s policies.  So now, United will “no longer ask law enforcement to remove customers from a flight and customers will not be required to give up their seat once on board – except in matters of safety or security.”   That seems like a pretty basic, but certainly appropriate, step.  United also will offer up to $10,000 to entice passengers to voluntarily rebook, and will implement a “new ‘no-questions-asked’ $1,500 reimbursement policy” for “permanently lost bags.”

Finally, Mr. Munoz wants me to know that United Airlines intends to live up to “higher expectations in the way we embody social responsibility and civic leadership everywhere we operate.”  The goal, he says, “should be nothing less than to make you truly proud to say, ‘I fly United.'”

I’m not sure I’ve ever said that I was “proud” to fly any airline — or for that matter to own any particular brand of car, or to engage in any commercial transaction with a large company.  I found the United incident unsettling, but it wasn’t going to keep me from flying United.  Let’s face it, we’ve all seen weird incidents in which overzealous people have overreacted and made really bad choices, and when the United incident occurred I figured that United employees would, if anything, overcompensate in the opposite direction and do everything they could to try to fix the company’s PR nightmare.

Mr. Munoz’s early morning email suggests that that effort is still underway.

Redefining The CEO

The Marketplace radio program recently carried an interesting interview with the CEO of PepsiCo, Indra Nooyi, about redefining the role of the CEO.  She believes that a “maniacal focus on the shareholders” led to the financial crisis, and that now CEOs should focus on the “stakeholder” rather than the shareholder.  The “stakeholder” concept is a bit ill-defined; it is “multifaceted, has different interests, represents different constituencies.”  Nooyi also contends that corporations should redefine their profit and loss performance to reflect “revenue, less costs of good sold, less costs to society — and that’s your real profit.”  At one point in the interview, Nooyi said “a lot of the CEOs I interface with have real desire to do good for society, have a real desire to make change that’s positive, want to help governments address issues.”

I’m a bit skeptical of the “stakeholder” approach.  For starters, I disagree with the notion that a “maniacal focus on shareholders” caused the financial crisis.  Instead, I think the breakdown occurred, at least in part, because Boards of Directors weren’t really paying attention and approved compensation packages that gave CEOs economic incentives to favor exceptionally risky, but in the short term lucrative, transactions over long-term investment and sustainable growth.  I therefore question a model where CEOs are given some vaguely defined charter to try to do good for society.  Who knows what they might decide, and why should corporate money be used for anything other than developing and marketing better products, increasing market share, and increasing profits to the benefit of shareholders?  If American companies don’t focus on their business they are going to get their clocks cleaned by foreign competitors who are ruthlessly focused on the bottom line.  I also think that people who are upset with the Supreme Court’s recent campaign finance decision would be uncomfortable with Nooyi’s formulation.  If corporations are expected to advance social causes as part of their charter, they will have even more incentive to participate in political campaigns. Why should we encourage such behavior?

I think the better course is to adhere to the “maximizing shareholder value” model, which at least provides a measurable basis for evaluating CEO performance.  That model, however, also requires Boards of Directors to actually play a significant role in supervising the activities of the corporation, to insist that management focus on business issues, and to develop CEO compensation packages that assess value after an extended period — say three to five years — so as to discourage short-term conduct that causes long-term problems.