She Is Also Hardly Self-Made, Hails from Elite: Carly’s Campaign Narrative of Herself Is Mostly False
Having examined Republican presidential candidate Carly Fiorina’s rise to the #3 spot in polls of Republican voters in the context of gender politics and the current state of the Republican Party, now it is time to look at Fiorina’s major premises of her campaign: that she is a self-made woman trailblazer as a secretary-to-CEO who became a global business leader with a record as a top executive that makes her the best option to run America from the White House. While there is no denying that she is articulate, intelligent, ambitious, and one of the first women in America to rise so high as a corporate executive, in this article it will be demonstrated that she was hardly self-made and hardly came up from the bottom; furthermore, it will be shown that her record as one of Lucent’s top executives in the 1990s—the highest position she held before becoming CEO of HP—was, upon close examination, a historic disaster of epic proportions.
Originally published on LinkedIn Pulse September 30, 2015
AMMAN — Even at the second main Republican presidential debate, most candidates, save for Donald Trump and Chris Christie, stayed away from attacking Carly Fiorina. That will likely change now that she poses more of a serious threat. And even after all the stage theatrics, her real vulnerability is about to be front and center, and is the main reason why her winning the nomination and especially the presidency is a longshot. I am talking, of course, about what is the main premise of her campaign and how Fiorina has defined herself for years: her narrative that she is an outsider trailblazing self-made secretary-to-CEO global business leader who could play hardball with the boys and lead major corporations to dazzling success.
The problem with this narrative is that one of its two pillars is blatantly false and the other is only partly true: she seems, by all reasonable metrics, to have been a terrible CEO and senior executive in her two big stints at that level, at AT&T/Lucent and Hewlett-Packard. See, campaigning that you can get to the top and win is demonstrating that you are good at self-promotion and advancing your own career; what really matters is what you do once you get to the top and how well you lead (King Robert Baratheon from Game of Thrones, anyone?) Between the two pillars, this is the much more important one and it may as well be the foundation, for without this pillar it is hard to see her candidacy as having a real shot; if this pillar crumbles, there is simply Carly the Self-Promoter, unfit to lead, and the whole foundation of her candidacy basically crumbles.
We will see that she was one of the top executives at Lucent when it embarked on a binge of major business deals that were some of the worst and ill-advised in business history, deals whose entire premises were nonsense and known by many to be so at the time, and this all the while the company took on more debt and engaged in accounting practices that were highly misleading and amoral but which would lead to hefty bonuses for Fiorina and her colleagues before crossing the into the realm of hard fraud just months after she left the company. She was complicit or active in all of these disasters, but made sure to jump ship just in time before Lucent had one of the most epic collapses in the history of business and just in time for her cash in on Lucent’s soon-to-be revealed house of cards of inflated numbers to bag the CEO spot at HP. In the wake of this destruction that was most certainly in large part a result of her leadership as one of the company’s leading executives, Fiorina managed to stay long enough at HP for her to explicitly and unequivocally be known as the main force in the ruining of HP, in contrast to her emerging relatively unscathed from Lucent.
But, as in any tale, to really understand all this we must go back to the beginning.
Becoming Carly: Rags to Riches Ambitious Daughter of Privilege Achieves Success
As for how much the other pillar of her campaign is true, Fiorina’s tale is no rags-to-riches phenomenon, and her attempt to describe her beginnings as humble are an inaccurate exaggeration; she is the daughter of a prominent federal judge, Judge Joseph T. Sneed III, who was also a U.S. Deputy Attorney General and also the Dean of Duke Law School, while her mother was an artist (hardly a struggling childhood there). She grew up living in and traveling around the world and America, and studied history and philosophy at Stanford University. Her father at this time was the Dean at Duke Law, which meant that Duke paid most of her tuition. Still, while at Stanford, she temped to cover her living expenses, and one of her temping gigs was at Hewlett-Packard. After Stanford, she went to UCLA Law School under pressure from her father, but dropped out after one semester after hating the experience. She then worked as a receptionist at a small real estate brokerage firm, where she was eventually given more serious responsibilities than secretarial ones. After a year, she married her college boyfriend (the marriage did not last) and moved to Italy with her husband to teach English. She then applied to business school at the University of Maryland, but missed the application deadline. Undeterred, she showed up at the school and insisted to the dean that she be given special treatment and an opportunity even though her application was late; he was impressed, and she was accepted.
After earning her MBA there, the dean recommended her to AT&T to be groomed for management, and she started there in 1980 in sales. Two years later, she had been promoted to a management position. She did well enough to be recommended by AT&T for one of the best management fellowships for mid-level executives in the world at MIT’s Sloan School of Management and AT&T covered all her related expenses. The experience was powerful for her and provided her with her second MBA, and when she returned to AT&T, she was assigned to a track for a senior management position.
Thus, she hardly entered AT&T as a secretary. When she worked as a secretary, she was temping while attending Stanford to pay for living expenses. Her other stint as a secretary after she gave up on law school was a short-term stepping-stone for someone who was intending to still go to graduate school. As a young Stanford graduate, she enjoyed a romantic adventure in Italy, then demanded special treatment when she failed to turn in her application to business school on time. The fact that she had such a powerful and prominent father would hardly have been ignored at the time, either. Thus, the idea of Fiorina as a self-made outsider woman is hardly an accurate story: she was a child or privilege, born into wealth and power and insider status, attended one of the great American universities, got special treatment to get into business school, and got recommended for a fast-track at AT&T by her school’s dean. Thus, she certainly had a lot of help and insider connections and certainly did not come from nobody and nowhere.
Lucent’s Loss, Fiorina’s Gain
As Fiorina continued to rise at AT&T, the company decided that it wanted to spin part of itself (its equipment division, including the famous Bell Labs) off into a new company. AT&T put Fiorina in charge of the process, picking her over the largely male executive pool. The company would be born as Lucent in 1996 and it had the biggest IPO in American history at the time ($3 billion), and Fiorina would eventually head its largest division over a period of time that would see Lucent, in many ways, become the Enron of the telecommunications industry.
One venture she oversaw was a joint project with Phillips that began in 1997; it was abandoned in 1998 after suffering $500 million in losses. She was also asked for her advice on a deal that went forward in January 1999 after a long buildup to buy Ascend Communications for somewhere between $20 to $24 billion—a significant portion of Lucent’s assets—that is one of the worst deals in business history; she carried a lot of weight at the time and failed to advise against this disaster. Within a year of the deal, most of Ascend’s “management and talent” had abandoned ship and left Lucent, creating difficulties for product designing and basically destroying the main rationale and premise for the entire deal. The Ascend people, used to a quick pace at a small company, found Lucent overly-procedural and stifling and not to their liking. This clash of cultures was being predicted even as the deal was being announced. But the deal was flawed in other ways, too; it was basically Lucent doubling down on Asynchronous Transfer Mode (ATM) telecommunications technology at a time when some analysts were already noting that it would soon be massively eclipsed by Internet Protocol (IP) technology (many computer users today are familiar at least vaguely with the acronym IP; with ATM, most people only think about cash machines and don’t know anything about Asynchronous Transfer Mode). Thus, the deal was questioned at the time as being too short-sighted as this was essentially Lucent backing what was soon to be an obsolete wrong horse. Even before the end of 1999, Lucent quickly realized that it had made a huge mistake in favoring and investing so heavily in ATM over IP and began moving to acquire more IP properties. In addition, one of Ascend’s specialties was in an area that Lucent has already spent over $1 billion acquiring a company that had that area covered. Overall, the massive deal turned out to be “virtually worthless.”
Fiorina herself took over the division at Lucent (the company’s largest) that would sell equipment to the booming and emerging service provider companies laying fiber-optic cables, wireless networks, and other infrastructure that would lead to the Internet as we know it today. Lucent’s sales along these lines went from $15.7 billion in 1997 to $19.1 billion in 1998 (when Fortune named her the most powerful woman in business) to $23.6 billion in 1999. But there was a big bubble happening here, and in the process Lucent even made loans to these companies so they could afford to buy even more equipment, far more equipment than they actually needed to create far more infrastructure than was needed. In what can only be described as a pretty crooked accounting scheme, money from the loans to these clients was counted as revenue for Lucent, the debt being actually categorized a firm asset. In its reports to the S.E.C., Lucent used the excuse “but everybody else was doing it.”
Fiorina personally orchestrated a deal for a client company named PathNet in which Lucent agreed to lend PathNet more money than the worth of the equipment it was buying from Lucent. That meant PathNet would not be putting any money down for the Lucent equipment up front and that PathNet would even get extra money from Lucent in the loan. Using “generous” accounting, PathNet had roughly $100 million in equity (stock holdings); it also owned $350 million in junk bonds that were supposed to pay out 12.25% interest. On top of this, Lucent was loaning it $440 million (expanding to as much as $2.1 billion [!] in the future). This gave it a leverage ratio—the ratio of debt to equity—of 8 / 1, or 8.0, and that was if Lucent did not loan PathNet any additional money; if general, if this number is higher than 2.0, the investment is considered risky. So, yeah, Lucent’s loan was creating a situation at PathNet where the company was a risk was four times greater than what was generally considered acceptable. The company also just had about 100 employees and only $1.6 million in yearly revenue…
Knowing all this, Fiorina went full speed ahead.
Such deals did not begin or end with PathNet. Just after Fiorina left Lucent in 1999, the company filed reports to the S.E.C. that stated it had guaranteed some $7 billion in loans to companies—many of them brand-new, with few assets, and structured financially in risky ways similar to PathNet—and had already given out $1.6 billion of that $7 billion. If any of this sounds familiar, these financial dealings are similar to the antics of the sub-prime mortgage loaning schemes that caused the 2008 Global Financial Crisis and the Great Recession. Soon, the bubble burst, the industry imploded, and PathNet filed for bankruptcy in 2001. Shortly after Fiorina left Lucent in July 1999, Lucent collapsed: by early in the fourth quarter of 2000, Lucent’s stock was already down 70% and its was CEO fired; its stock would tumble even further, to less than $1 a share; just in 2001 some 50,000 employees were laid off, and over 120,000 were laid offthroughout the collapse, which saw the company lose about 80% of its employees; it chose to settle with the S.E.C. in 2004 on charges that it committed over $1.1 billion in accounting fraud in 2000, when much of the direction of Lucent would still have been a product of Fiorina, who had chaired the company’s biggest division only months earlier, and though she was not tied directly to any of the fraud, some of the people who were fined were her close associates, promoted and supported by her and definitely raising serious issues about her judgment. At its peak, the company was valued at a quarter of a trillion dollars, and today Lucent’s value has just recently been valued at $10 billion and that after the merger with a larger company (Lucent merged into larger Alcatel in 2006, with Lucent becoming the second, not the first, name in a hyphenated pair as the junior partner, and Alcatel-Lucent is currently in the process of being acquired by Nokia for about $17 billion, incidentally, the biggest deal in the industry since Lucent’s ill-fated Ascend acquisition).
William Lazonick and Edward March
Several sources have her pushing aggressively for these client loaning deals and being very concerned about the press releases detailing them (some loyalists to her and Fiorina herself claim she tried to reign in the scale of these outsized deals, but that would still have her pushing for what would have been just slightly-less super-risky, super irresponsible moves). In any event, the press coverage and seeming miracles of the short-term numbers her company was putting up attracted the notice of tech giant Hewlett-Packard (HP), which gave her $65 million in restricted stock to partly compensate for some $85 million in Lucent stock she would leave behind to entice her to come on board; Fiorina likes to take credit taking $20 million less from HP than the value of her Lucent stocks, but value of her $85 million in Lucent holdings have been worth almost nothing not long after had she relinquished them.
At a generous best Fiorina was clueless and ignorant or unable to control or influence the people around her if we buy her and her defenders’ narrative; what seems more likely was that she was either actively engaging or complicit in obscenely irresponsible and unethical practices. This is the reality of Fiorina and her time at Lucent during its meteoric rise and just before its meteoric fall as she and Lucent failed to adjust to a dramatically but predictably changing landscape while all the while they engaged in wildly inappropriate and unethical accounting practices (the accounting practice used in the 1999 Ascend deal and other acquisitions was outlawed in 2001 by the Financial Accounting Standards Board). In fact, Lucent’s entire setup was a disaster that should have been obvious beforehand from the information anyone could see in its financial statements: in general, it is bad to have your inventory and your receivables (revenue from sales that a client does not pay out right away but promises to pay in the future) grow faster than your actual sales; for all of 1999, for example, Lucent had dramatically higher inventory and receivables growth than sales growth, with similar trends extending even further back. This meant that they were making/acquiring a lot of products that were sitting in warehouses, losing value, while the actual money they were bringing in was a lot less than amount included in promises made by companies—many of them unstable start-ups with few assets—saying they would pay in the future, promises that might not be (and in this case, often were not) kept. Thus, while these inventories and receivables were reported as assets and revenue, respectively, in reality, they might more accurately thought of as risky liabilities, as you cannot pay employees or invest with either. But the rewards for sales performance at Lucent—including for executives like Carly Fiorina—were based on numbers that included the promised receivables, further incentivizing the creation and scale of these poorly-structured, dishonestly reported deals. Too many people were making too much money off of these declared revenues, though, for people to be bothered to even look at the sales vs. inventory vs. receivables growth ratios, but all the information was right there in the public financial statements at the time. This was all also being done while the company was also taking on a massive amount of debt. In January 2000, only six months after Fiorina left, the company declared that its earnings would fall far short of expectations for the first quarter of 2000; it was a sign of much bigger problems to come.
Fiorina was in the middle of all of this, either on the wrong side or not advocating for the right side, and thus bears a significant amount of responsibility as one of the company’s top executives, even if she was not the top executive. However, if HP had known in 1999 what was known later—that much of the “success” of Lucent at that point had to do with borderline (and soon to be) fraudulent and creative accounting rather than Fiorina’s leadership of its largest division—it is unlikely that HP would have tapped her to be CEO.
The final part of this series, fittingly, then, will look at Fiorina’s record at HP, and will conclude with an overall assessment of her career as a top executive at Lucent and as CEO of HP and what it means for her candidacy for the presidency.
Part III coming soon!
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