The market crumbled Monday when John Snow, the former head of railroad CSX Corp., was tapped to succeed the ousted Paul O'Neill as treasury secretary. It rallied Tuesday when Wall Street banker William Donaldson was named to succeed the disgraced Harvey Pitt at the helm of the Securities and Exchange Commission.
The street remembers its history. After all, Donaldson has a record of serving investors well, and Snow has a record of serving them poorly. In fact, the two former CEOs stand as mirror images of the Republican Party's long and evolving association with the business world.
Donaldson, the older at 71, is a blast from the past: an Ivy League, risk-taking entrepreneur who built a company from scratch, views investors as customers to be served, and embraced public service as a duty. He's a classic businessman of the old school. By contrast, Snow, 63, is an access capitalist par excellence—a bureaucrat-turned-corporate lobbyist who views investors primarily as providers of lavish salaries and perks and sees public service as a means of parachuting into a top corporate post. Bush says he's running his administration like a business. Sadly, he has stocked it with ex-CEOs who are more like Snow than Donaldson.
William Donaldson is the kind of official many hoped would typify Bush's MBA administration. A Yalie, Donaldson served in the Marines as a rifle platoon commander in Korea and then went to Wall Street. In his late 20s, he got together with two other partners, pooled a small amount of cash, and started a firm from scratch. Donaldson, Lufkin & Jenrette sold in-depth market research to big clients. Over time, that excellent research became the foundation for larger investment banking and brokerage business. In 1970, in another risky move, DLJ became the first member of the New York Stock Exchange to go public. DLJ made money for its customers, and it made money for its investors.
A classic Rockefeller Republican, Donaldson served brief stints in government: as an aide to Vice President Nelson Rockefeller and as undersecretary of state in the Ford adminstration. He also devoted his considerable entrepreneurial energy to the public sector. Donaldson helped create the Yale School of Management, and he became its first dean. After cashing out of DLJ, he started his own investment-banking company. In the 1990s, he served as chairman and chief executive officer of the New York Stock Exchange. Most recently, he came out of retirement temporarily to run troubled insurer Aetna, on whose board he had served. Donaldson's is a career reminiscent of old school Republicans like William Simon and Donald Regan—investment bankers who essentially volunteered for high government service.
Snow's record in business bears more resemblance to that of George W. Bush, marked by poor market performance and outsized compensation. In fact, like Vice President Dick Cheney, Defense Secretary Donald Rumsfeld, and OMB Director Mitch Daniels Jr., Snow is a skilled bureaucratic operator who sidled to the top level of a large company from government posts. As a rule, these access capitalists are prized not for their business acumen but for their ability to open doors in Washington and foreign capitals. They work primarily in highly regulated industries or in ones that depend largely on government contracts for their sustenance: defense, pharmaceuticals, oil, and, in Snow's case, railroads.
Snow worked as a Washington lawyer and then held legal posts in the Nixon and Ford administrations. His first corporate job was as a lobbyist for the Chessie Systems Inc., in 1977, which ultimately turned into CSX. It was good initial training for Snow, who rose through the ranks. For in this highly regulated business, the CEO's post is essentially that of a glorified (albeit higher paid) lobbyist. The primary means of warding off competition isn't providing better service at better prices: It's obtaining favorable rulings from regulatory agencies.
When Snow took charge of CSX, it owned a range of business unrelated to railroads. He divested most of them but held on to one seemingly noncore asset: the Greenbrier resort in West Virginia. Snow loves golf—he's ranked No. 40 on Golf Digest's list of duffer CEOs and was, until recently, a member at Augusta National. But that's not why he kept the Greenbrier. The resort, within easy driving distance of the Capitol, is the discreet retreat of choice for lobbyists and members of Congress. Snow became known, in part, for holding seminars—read: junkets—for Washington players. By doling out access to the greens and access to the green—CSX has made more than $1 million in political donations in each of the last four election cycles—Snow made CSX a Washington player.
As a businessman, however, Snow was mostly a bust. He successfully lobbied to have CSX gain a huge chunk of Conrail but then botched the execution of the merger. He also managed to have Washington block a merger of the Burlington Northern Santa Fe Corp. and Canadian National Railway Co. and forestalled efforts by freight customers to obtain better bargaining terms. But all that didn't translate into much for shareholders. In the past decade, CSX's stock is off 17 percent while the S&P 500 is up 111 percent. Snow is leaving the company with more debt than it has had at any time in the past seven years. Today CSX has difficulty generating sufficient cash to meet all its obligations. And this is the man President Bush has hired to manage the nation's debt? As Jesse Eisinger sharply notes in today's Wall Street Journal: "Mr. Snow is clearly a guy who understands deficit spending."
Snow was also a champ when it came to executive compensation. In 12 years, as CSX shareholders experienced minimal returns, Snow took home at least $50 million. In 1996, he borrowed $25 million in company funds to buy stock. But when shares fell sharply, the company undid the loan in 2000. (So much for risk-taking.) Last year, when CSX underperformed all its railroad peers, he was paid $10.1 million. And he's not done. As the company's most recent proxy reads: "Mr. Snow will be provided with certain employee benefits and perquisites including office space and secretarial support, maintenance of country club memberships, executive physicals, discounts at The Greenbrier, and use of private aircraft for the remainder of his life."
Snow may yet prove a brilliant treasury secretary. After all, the skills required are as much diplomatic and bureaucratic as they are managerial. But his elevation to the high-profile post, and the appointment of a stand-out like Donaldson to a second-tier position like the SEC, show the relative ascendancy of the access capitalists in the Bush administration and in the Republican Party generally. That may be why the markets regard the recent appointments as one step forward, two steps back.