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Preface to the English Edition

by Stéphane Guérin

This book is not a dark detective story or a theoretical case about what can be done to destroy the largest French industrial Group. It is based on carefully verified facts and figures. Even though the story is difficult to believe, the author takes us through an unimaginable story. The worst is that the Group’s destruction keeps on going—as the title says, “with complete impunity.”

The book comprises two parts. The first deals with the Kafkaesque trap in which an honest and competent man was caught. A media-judicial plot ended in a decision by an investigating judge which prohibited that man from exercising his functions as CEO of the Group which he worked so hard to make into one of the world leaders. This was followed by years of tax and judicial persecutions. Successive dismissals of the cases, of course unnoticed or not mentioned by the media, put an end to this ordeal. Yes, this story takes place in France.

The second part of the book describes with a subdued tone, even though emotion surfaces at times, the destruction of Compagnie Générale d’Electricité, renamed Alcatel Alsthom, which was the equivalent in France of GENERAL ELECTRIC in the U.S., GEC in England and SIEMENS in Germany. This part of the book is also difficult to believe, even for those who are familiar with the almost surrealistic side of the business world. Many decisions are not always rational or taken in the interest of the company. Intelligence, when distorted by personality flaws or a personal agenda, can produce surprising results. But this stubbornness in pursuing the wrong strategy, this passivity of the Board of Directors, this complicity of the economic and financial press is hard to understand. Certain experiences must be lived to be believable, but this book makes us live them and leaves the reader appalled.

How could such mistakes, blunders and misjudgments keep on going for so long without anyone ringing the alarm bell, while the same management remained in charge during a long succession of profit warnings for catastrophic quarters? This book presents an objective description of events that will cause the reader to ask that question.

The judicial dimension which primed the devastating machinery will surprise the reader less after having witnessed a succession of scandals in France caused by the abuses of investigating judges, the latest (the Outreau affaire) having caused the suicide or destroyed the reputations of many innocent people.

It is especially irritating when you hear people still argue about the alleged independence of the judiciary in France. What is the meaning of this principle when there is a lack of resources and of qualified personnel, combined with low pay and a recruiting and training policy dependent mainly or totally on the Government?

As a consequence, a number of important positions have been filled with judges whose education and qualifications are not sufficient to cope with the complexity of the issues and problems faced by a modern society. The lack of financial resources also prevents them from hiring independent and competent experts.

In the end a country has the judicial system that it is willing to pay for. Therefore, no one should be surprised by its lack of quality in France. Many cases are now submitted to the highest court—the Cour de Cassation—while in the past a tiny minority of cases reached that level. This Court, which was not designed to correct the flood of mistakes of lower courts, is now submerged, causing long delays. When justice cannot be rendered within a reasonable period of time, it is denied. France has not reached the extreme of India, where certain cases can exceed thirty years before resolution. However, it is unfortunate that so many plaintiffs cannot obtain justice unless they have access to the ultimate jurisdictions, such as the Cour de Cassation, or the European Court of Human Rights, knowing the long delays it entails.

But fortunately, as the author found, there are in France impressive judges of the highest ethical and intellectual status, of great professionalism, competence and integrity. However, their presence is not sufficient to correct the inherent defects of the current system. There is hope that better candidates, improved selection and better training by the specialized school Ecole Nationale de Magistrature will ensure a better judiciary in the future. But it will take time before certain judges of the present generation reach the age of retirement.

It is difficult to avoid making a comparison with England, where the best lawyers become judges and the best judges Lords. As a symbolic recognition of this difference, the Lord Justice’s remuneration is higher than that of the Prime Minister. Justice is expensive but its quality is considered very good. Legal financial assistance is provided to those who cannot afford it, restoring somewhat the equality among plaintiffs.

France has seen the appearance of a new type of investigating judge, an example of which can be found in this book, which was not contemplated in the Penal Code. The legal community calls him “le juge d’instruction à charge,” which can be approximately translated by “the judge looking for indictments.” This judge does not look for facts, for what can naively be called the truth, unless the facts support his opinion of the case, his conviction that the indicted person is guilty. He is not investigating, since he has already judged and wishes to support his views. These judges can go as far as eliminating or hiding evidence that would contradict their opinion.

At times these judges substitute themselves for the role of the police, using their own methods, which are often inspired by the need to attract media attention. In addition, some of them, under the pretense of the requirements of the inquiry, play the role of the sentencing judge, having at their disposal a wide array of coercive measures such as jail or prohibition to work, as explained in the book, even though the concerned individual has never appeared in front of a court. The case may eventually be dismissed, but the damage is done. A reputation, a career, sometimes a broken family, a life can be destroyed. This cannot be compensated later by a somewhat symbolic indemnity.

The accusations that led the author of this book to being prohibited from exercising his responsibilities as CEO of a large industrial Group and that sent to jail the President of its subsidiary were found, thirteen years later, to be without basis by the Cour de Cassation. The investigating judge, who based his decision on the alleged violation of the Government Contracting Rules, had written evidence that those rules were not applicable. He nevertheless used them as a pretense. He was never sanctioned.

It is clear that France needs to clean up a lot of regulations from its authoritarian past that are no longer legal or applicable. Until this is done its citizens will continue to have to go to court to have them declared invalid.

Legal issues are complex and we sometimes struggle to deal with, and understand, them. However, the book’s description of the steps that led to the destruction of a large industrial Group is even more difficult to comprehend. It would be tempting to propose this book to business schools so they can study this case, which this time is a real one, based on facts and figures, and with a heavy human cost.

It is not necessary to have an MBA to understand why an international Group like Alcatel Alsthom supplying infrastructure equipment would benefit from having product lines subject to different economic cycles. For example, when the Telecom business was booming for Alcatel Alsthom, its nuclear industry was frozen. Today the opposite is true. The nuclear industry is booming, while Telecom equipment suppliers are in deep trouble. Compagnie Générale d’Electricité, renamed Alcatel Alsthom, then Alcatel, and now Alcatel-Lucent, had lasted for more than a hundred years by maintaining a balance between several business activities. Its “core business,” to use the current jargon, was never, as misrepresented later, Telecom, but infrastructure equipment for Governments, State companies, and large private or privatized Groups. GEC in England and SIEMENS in Germany keep on striving like that.

How can one have such a deep misunderstanding of what was the strength of this Group? It is still a mystery. How can one persist with a faulty strategy, and for so long?

Several factors may shed some light.

Socio-economic evolution in England, which France emulated with some delay, in terms of industrialization, adoption of the welfare state and decolonization, may help one understand the French situation.

During the sixties and early seventies England was faced with a severe crisis. In his collective book “Suicide of a Nation?” Arthur Koestler described it. The diagnosis was unanimous: Sclerosis of the elite and the unbalanced power of the labor unions. Economic power—public and private, and bureaucratic power—was monopolized by what was called with derision the “good old boys” from Oxbridge. The oligarchy was closed. Knowledge of Greek and Latin taught at Oxford and Cambridge would qualify one for any position in public administration, finance, and industry, since belonging to the higher cast would constitute sufficient credentials in all noble areas.

Mutatis mutandis, the analysis of pre-Thatcher society could very well apply to contemporary France. A multitude of articles and books lay the blame on a population tempted by the mermaids’ songs of populism, which does not vote wisely, as it should. However, it would be more tempting to focus on the French oligarchy, which though selective to enter, becomes, once you are admitted, impervious to merit and competence.

A tiny minority, irrespective of qualifications, experience or competence, coming from the public sector and the political world, has taken over most of the public sector in France. The members of the cast are inter-changeable. They are allegedly competent in all areas of activity. More difficult to understand for a foreign observer, they belong to networks of influence, providing protection to one another, even for the most obviously incompetent, as if these networks had created a safety net.

Of course there are brilliant exceptions—CEOs who understand market demands and customers’ needs, who listen to a qualified staff and try to understand the way the outside world changes. They have a strategic vision for their companies. However, when you look at the largest French companies—except for a tiny number of brilliant entrepreneurs, family owned companies, and companies sticking to the values of their founders, away from political meddling and the dictatorship of the financial analysts—the private sector is dominated by transferees from the public sector backed up by complex networks of influence. They are rarely appointed based on professional merit, and a catastrophe is needed for their Boards of Directors to dismiss them, and even then only reluctantly. A golden parachute (until the recent public outcry removed the gold) allows them to wait comfortably and shamelessly for their next position. Some of them hire public relations firms and lobbyists because they consider that their failure is a misperception, just a problem of communication.

Therefore, one should not be overly surprised by what happened to Alcatel Alsthom. The successor of Pierre Suard had neither the training nor the experience to be CEO of that Group, as courageous, intelligent and gifted in communication as he might have been. His competence was in an entirely different industry.

The lack of industrial vision, the narrow financial focus of the new management team, and the multiplicity of complex activities may explain the temptation for the new management of Alcatel Alsthom to focus only on the Telecom sector, which at the time was healthy. Furthermore, this strategy was lauded by the economic press and the financial analysts.

However two observations in this book are especially troublesome. The first concerns the management style. The Group moved constantly from one type of reorganization to the other, all involving matrix management, which is unavoidable for a large industrial group divided into Product Groups, geography, and cross border customers. Matrix management works, provided that at its center there is a referee or an arbitrator who keeps the machinery going so that the continuous conflicts between competing profit centers within the same Group does not paralyze it. This is, needless to say, the role of the CEO, who should understand the business, foresee its predictable evolution in a changing world, and foresee when technology and markets can meet, by being constantly responsive to the markets’ requirements. Organization is one thing, but it is not enough. Respected leadership, team spirit, consensus over the strategy and a shared vision can overcome the inherent conflicts. This was the way Alcatel Alsthom was built.

But the members of the oligarchy did not adapt to the necessities of the global economy. Their attitude and qualifications were appropriate in a protected economy, largely State controlled, somewhat protectionist, but not for our changing world whose balance is tilting towards Asia.

The book describes the consequences of this unfortunate situation. It seems that certain members of the oligarchy share the same personality flaws, as if they had lost the willingness to understand outside the scope of their narrow world. Do they think they know everything and that they have nothing to learn? Do they lose the ability to evaluate the strong and weak points of their executives, instead transforming them into subservient agents of their will? Do they reach the point where they can hardly tolerate differing views?

The second troubling remark is that most, if not all, of the businesses sold during the dismemberment of the Group became very successful once they left it—with the initial exception of Alsthom for reasons attributable to huge errors made before it became an independent company. Alsthom, now Alstom, is doing well. Telecom, the only activity which was not sold, is in deep trouble, the last straw being its merger with equally troubled LUCENT, while SIEMENS was divesting the control of its Telecom division to NOKIA.

A large industrial group can be compared to a political society. Shareholders play the role of the electorate, the Board of Directors the role of Parliament, and management the role of the Executive branch. When Parliament stops exercising its functions, the Government no longer has any form of control or counterweight. The same happens in the corporate world. One remains flabbergasted by the passivity of the Board of Directors of Alcatel Alsthom, as noted in this book, and by its blindness, especially when one of its preeminent members was president of a commission making recommendations to improve governance in French publicly traded companies, confirming the saying that it is easier to make recommendations than to follow them. One of the most striking vices of French corporate practice is that Board members sit on the Boards of each other’s companies.

The Board of Alcatel knew and approved the dismantling strategy which led to the company’s near collapse. The Board is more responsible than any party and keeps on being responsible while value destruction continues.

While Lady Thatcher is remembered for putting England back to work while reducing the role of labor unions and the Government, it is often forgotten that she had reintroduced meritocracy into the system.

Since France is worried about its economic situation, the step-by-step disappearance of its industries and its difficulties in adapting to a changing world, the country now seems to wish to rebound. So there is still hope. May the new generation now in charge understand that performance must be judged on results, first at the top of the pyramid but also below. The brilliant young people who leave the country to go to places like England during the “brain drain” do not leave for Silicon Valley or for Asia for tax reasons or better pay. They want to work in a more open environment, with less hierarchy and bureaucracy, where employees are given a chance to show their abilities and are rewarded on the basis of their results.

There is much more food for thought in this book. Overall it will help to understand the necessity for, and the urgency of, reforms that our country likes so much to debate about, but fiercely resists.

Stephan Guerin
Management Consultant
London, Shanghai.

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