November 1990 - VOLUME 11 - NUMBER 11
C O R P O R A T E & P R O F I L E
The Stateless Corporationby Brian Ahlberg
When Alexei Chernov, deputy manager of the State Bank of the U.S.S.R., visited the United States last summer, he participated in a specialized program in banking at the Harvard Business School. During his stay Chernov made sure to meet and establish personal contacts with executives in large U.S. financial institutions. Undoubtedly with an eye toward attracting the hard consumer currency, carried in the fists of tourists and business travellers, Chernov paid special attention to charge-card and traveller's-check operations.
As a result, some of Chernov's most important contacts were with officials at American Express, a company which may have made a special effort with him since it is in the midst of global expansion. James D. Robinson III, American Express board chair and Chief Executive Officer (CEO), has made overseas expansion in credit cards, financial services and information management a high priority for the company. The American Express 1989 annual report adopted a "Passport to the 1990s" theme, featuring tales of heroic Chinese AmEx staffers bicycling "through side streets and past jittery soldiers" during the Tiananmen Square events to open the office so tourists could get money and leave the country, and of thousands of Pakistani pilgrims who apparently rely on American Express traveller's checks when making their annual hadj to Mecca.
The $24 billion in traveller's checks which AmEx issued in 1989 captured an estimated 39-50 percent of the global market, supporting Robinson's boast that his company's "brand names are known everywhere."
Growth in the AmEx empire
American Express emerged as a U.S. corporate superpower in the 1980s, as the delineations between banking, insurance, securities and other financial services became increasingly blurred. Its travel-related services base continued strong, with the company doubling its corporate business-travel sales over four years near the end of the decade. But by that time expansion and diversification had transformed AmEx into a veritable financial supermarket. In 1989, it earned $1.15 billion in profits on revenues of $25 billion. The empire now has over 100,000 employees in nearly 2,700 offices worldwide.
The growth began in 1981, when CEO Robinson oversaw purchase of the financial management company Shearson Loeb Rhoades, and continued with Shearson's acquisition of the investment banking firm Lehman Brothers in 1984. Then, in 1987, Shearson Lehman bought one of the country's largest retail brokerages, E.F. Hutton. Meanwhile, American Express bought the Minneapolis-based mass-market investment company Investors Diversified Services in 1984. Shearson Lehman Hutton chairman Peter Cohen quickly gained notoriety for the $25 million Beaver Creek corporate conference center he built adjacent to the ski slopes of Vail, Colorado, for his Gulfstream IV corporate jets with interiors designed by Ralph Lauren's Naomi Leff and for his lavish headquarters in New York's World Financial Center.
In the end, however, Peter Cohen's name was linked to a string of business debacles (including Shearson's botched attempt to broker a buyout at RJR Nabisco in 1988) that led to a steady earnings decline. Shearson money managers admitted in 1989 to cooking the books for their Boston Company, overstating 1988 earnings by $30 million. And Shearson Lehman was recently fined a record $500,000 for violating "Big Board" rules in connection with trading E.F. Hutton stock during 1986 takeover talks. When an attempt to raise cash through a public stock offering failed early in 1990, parent AmEx, which already owned 61 percent of struggling Shearson, had to swallow almost all of the rest of it. Cohen was replaced.
Shearson's drag contributed to a less than sterling year for AmEx in 1989. The company's earnings growth slowed to 11.4 percent from 13 percent in previous years. Its return on equity fell from a high of 27 percent in 1986 to 21.4 percent, and AmEx stock prices rose much less over than the Standard and Poor's index average. AmEx had its worst quarter ever in the beginning of 1990, posting $620 million in losses, according to the New York Times, but then came back, reporting $344 million in net income by the third quarter. Still, one analyst called these earnings "flattish."
Nonetheless, Institutional Investor magazine ranked AmEx, with $157 billion under management, the top U.S. money manager in 1989. Euromoney magazine rated AmEx, with a market value of $9.8 billion, the largest U.S. financial services company. (Twenty- one Japanese institutions are larger, according to Euromoney.) Computer World magazine rates AmEx number one in U.S. financial services computing. The company's purchase this year of McDonnell-Douglass Health Systems makes AmEx a major player in health care computing. And American Express is linking its credit-card business to other types of businesses, pioneering the purchase of insurance with credit cards and hooking up with MCI and US Sprint so that calls on those carriers can be charged to the AmEx card.
Robinson has been involved in a range of activities which support AmEx's international expansion. He currently serves as chairman of President Bush's Advisory Committee on Trade Policy and Negotiations, overseeing the U.S. role in the General Agreement on Tariffs and Trade (GATT) negotiations. Indicative of the company's farsightedness, Robinson even achieved acclaim as an early proponent of Third World debt relief, propounding the "Robinson Rollover" plan. The plan was called radical and interventionist at first, but has since become the common-sense position among bankers. Key to its fiscal clemency is the requirement that Third World governments expose their economies and populations to market discipline according to stringent restructuring formulas.
The British magazine Marketing UK called AmEx a "leader in the globalization of financial services." And Business Week, in a cover story devoted to "the stateless corporation" of the 1990s, cited American Express as one of a handful of U.S.-based service companies aiming to conduct at least half of their business abroad. Business Week called 1970s-type multinational corporations, centrally based in one country with only subsidiaries elsewhere, "obsolete." The new stateless corporations, the magazine editorialized, may raise difficult questions about sovereignty and national interest, but these pioneers of a borderless future, like American Express, will inevitably press for, and hopefully help create, the international climate in which they can prosper. That means, according to Business Week, "open markets, deregulation and unimpeded flow of capital."
Many business observers note that AmEx's businesses are the world's most lucrative emerging growth areas. Asked to pick his "dream team" merger of the 1990s, Jan Herring of the Futures Group proposed a marriage between American Express and Japan's Nippon Electric, based on the idea that the twenty-first century will be based on information services. A 1990 Lafferty Business Research report concluded that 14 financial services companies will rule the market of 350 million consumers in Europe, and that only two U.S. companies, one being AmEx, are in a position to compete in the entire range of services across the whole continent. The company's banking unit announced in August that it already has been granted a branch license by the government of Poland.
Of the 34 million AmEx cards currently in circulation, 9 million are held abroad. One million are carried by Canadians. Over 300,000 are yen-denominated--held mostly by Japanese professionals who, according to Business Week, are quickly becoming "hooked on plastic," despite the fact that Japan won't allow revolving credit, which means the accounts must be paid off monthly. A few thousand lucky Soviets will now receive the prestigious green-blue card. And, with heavy advertising and promotion, AmEx has even helped create what an Asian business magazine called a "plastic money boom" in Thailand.
In truth, however, the company's relentless effort at worldwide expansion represents a simple imperative as much as strategic foresight. The financial services giant, whose basic credit-card and traveller's-check businesses remain the core of its success, must find customers in many more countries if it is to grow. The credit card market in the United States is nearly saturated, and competition from cards offered by banks and even other service providers such as AT&T is forcing AmEx to search for new turf.
Propping up apartheid
AmEx's global reach has extended into South Africa, generating strong criticism from anti-apartheid activists. Shearson currently buys and sells instruments for investment in South African commodity conglomerates, for example. By making markets for American Depository Receipts (ADRs), in London, Shearson has helped to promote investment in and maintain the prices of shares in companies which have been the backbone of the apartheid economy, according to Donna Katzin, director of South Africa Programs for Interfaith Center on Corporate Responsibility. The U.S. and British anti-apartheid movements have tried to persuade financial institutions to withdraw such support for the South African gold and diamond industries, but Shearson has not been swayed by moral or economic arguments.
Trade talks and international financial services
The company's most far-reaching policy, and the policy which is most potentially damaging to the world's consumers, is its relentless pursuit of trade liberalization, the credo of the stateless corporation. AmEx identifies its interests as the national interest, but U.S. farm, labor and environmental organizations, as well as many major companies, say the trade liberalization championed by AmEx would seriously damage vital domestic interests.
In the current Uruguay Round of trade talks under the auspices of GATT, one question under consideration is whether to bring trade in services, including financial services, under GATT rules. AmEx has made sure that it is strategically positioned to influence the U.S. government position on GATT. James Robinson is not only President Bush's top private-sector adviser concerning the entire round, he is also one of 18 "corporate members" of the Multilateral Trade Negotiations (MTN) Coalition, the leading business pressure group on GATT. Robinson's name has become nearly synonymous with GATT in the business world. In addition, the executive director of the MTN Coalition is Harry Freeman, the former AmEx executive vice president who played the starring role in a bizarre scheme to discredit an AmEx competitor and who remains close to the company and to Robinson. American Express also belongs to the Coalition of Service Industries (CSI), which, as a group, is a "participating member" of the MTN Coalition. Joan Spero, AmEx treasurer and special vice president for international corporate affairs, chairs CSl's Financial Services Group.
AmEx has been through the trade-talks exercise before. Following completion of the U.S.-Canada Free Trade Agreement, AmEx was granted bank status in Canada, despite much opposition from Canadians. In criticizing the decision to allow AmEx to become a Canadian bank, as well as the deregulation of Canadian banking overall, Ottawa political economy professor Duncan Cameron argued that it is a mistake to treat money as a commodity like any other. "Finance is not just a mirror of market power," he wrote. "Money embodies human relationships. Bankers orchestrate social change."
Cameron and other Canadians are not eager to have their society shaped by a stateless corporation whose interest in Canada is the same as its interest in Poland, the Third World or other markets. As it turns out, AmEx's interest generally is in serving the most affluent sector of the countries in which it operates. In keeping with the traditional "snob appeal" of the company's somewhat exclusive charge cards, AmEx primarily has undertaken what U.S. Banker called "banking for the privileged" in its overseas operations. Institutional Investor said that AmEx could underprice large European financial service companies by targeting "profitable minorities," such as the rich, with focused service, and Asian Finance magazine noted that AmEx Bank would focus "solely on serving successful individuals" in that part of the world. One article charmingly profiled AmEx Hong Kong banker Hans Joerg Schneider's specialized talents as "friend, philosopher, financial guide."
The voice of power
When U.S. family farm organizations conclude that "free trade" in agriculture will enable multinational agribusiness companies to shift food production offshore to exploit low wages and lax environmental regulations, the farmers have trouble making their voices heard in the trade policy debate. The same is true of textile workers, who fear the end of their industry in the United States. And finally, when the United Nations Conference on Trade and Development concludes that liberalized trade in banking services would "spell dangers for the Third World," the fact does not become a consideration in whether the U.S. administration will favor such liberalization.
But when American Express Company, pursuing its fortune in a world without frontiers, favors what it calls free trade, especially in financial services, people listen. Its mobilization of lobbying and promotional resources helps in this cause. So, probably, does the fact that noted political figures Henry Kissinger, Vernon Jordan and Drew Lewis sit on the company's board of directors, with former President Gerald Ford serving as an outside advisor. Setting democratic policies in the public interest becomes increasingly difficult as the influence of stateless corporations over the national agenda increases.
Brian Ahlberg is a freelance writer in Washington, D.C.