Did Dick Cheney Sink Halliburton (And Will It Sink Him?)
His record as CEO of the Texas-based oil-field-services giant has been marred by a government investigation into allegations that he fudged the books. His critics say it's another case of corporate malfeasance. But the worst thing the vice president was guilty of was mediocrity.
Building the Astros' ballpark.
Photograph by David Wood
THE FRIENDLY, SINCERE MAN IN the video is saying what an excellent company Arthur Andersen is and how much he values its counsel. "I get good advice, if you will, from their people based upon how we're doing business and how we're operating, over and above just sort of the normal by-the-books auditing arrangement," he says. "They've got the traditional role to fill as our auditors . . . . They do that extraordinarily well."
The man in the video is Richard B. "Dick" Cheney, the vice president of the United States. The year was 1996, when Cheney was the chairman and CEO of Halliburton Company, a multibillion-dollar oil-field-services company now based in Houston and Arthur Andersen's third-largest client. The 35-second spot was part of a promotional video that was distributed to Arthur Andersen's partners only last year, after Cheney had become vice president and before Andersen was convicted of obstruction of justice in July in the investigation of Enron (its second-largest client)—an event that destroyed what was left of its worldwide accounting business. The video was unearthed in May by the Wall Street Journal.
Cheney's endorsement of Arthur Andersen is typical of the back-scratching that goes on in the business world. It was done long before Andersen became a corporate felon. But as the Bush administration moves to smite the miscreants from Enron, WorldCom, and other companies for perpetrating fraud upon the American people, Cheney's cameo has taken on a new and more ominous meaning. That's because the vice president and his former employer are now themselves subjects of a preliminary inquiry by the Securities and Exchange Commission for possible accounting improprieties sanctioned by Arthur Andersen. Its purpose is to see if Halliburton made an accounting change in order to fudge its revenues and then failed to disclose the change at the appropriate time.
But the SEC probe is just part of Cheney's Halliburton-related problems. Cheney left the company in August 2000 with a stunning stock payoff of some $30 million. A little over a year later, Halliburton's stock went into free fall, largely the result of asbestos liabilities that the company acquired when Cheney engineered a 1998 merger with Dresser Industries, a Dallas-based provider of oil-field services. Those liabilities detonated in a series of whopping jury verdicts in late 2001. The 63 percent drop in Halliburton's stock price that year devastated ordinary shareholders. Some of those shareholders later joined in class-action lawsuits against Halliburton, claiming that Cheney and others artificially inflated the company's stock price and misrepresented its business condition. A watchdog group called Judicial Watch filed suit for similar reasons. And of course a sitting vice president under such scrutiny draws reporters like sugar draws ants: A query on the Google search engine specifying "Cheney" and "SEC" yields 30,000 hits. Unable to shake this legal and political tar baby, or to answer reporters' questions, Cheney has been noticeably absent from the national debate about corporate fraud.
Cheney, who declined through a spokesperson to be interviewed for this story, has addressed the SEC investigation only once, in an appearance at San Francisco's Commonwealth Club in August. "I am, of necessity, restrained in terms of what I can say about that matter," he said, "because there are editorial writers all over America poised to put pen to paper and condemn me for exercising undue, improper influence if I say too much about it." Halliburton, on the other hand, has displayed no such reluctance, insisting that it and its former chairman had obeyed both the letter and the spirit of accounting laws. "The basic assertion is that somehow Halliburton manufactured revenues and receivables out of midair," says David J. Lesar, the chairman, president, and CEO of Halliburton. "That's just wrong. We changed the accounting because the character of our business changed. We believe that we disclosed it when it needed to be disclosed. We're very much working with the SEC, and ultimately it will be between us and them to decide whether this disclosure was appropriate." Lesar, an affable, low-key Midwesterner who was formerly Cheney's right-hand man at Halliburton, says that his company has been treated unfairly in the media. "Halliburton has become the political vehicle to get at the vice president," he says. "It's hard to attack him on foreign policy and the handling of the war but very easy to get at him as CEO of a big public company in Texas."
With all of this adverse news, the usual surfeit of TV pundits speculating on Cheney's fate, and Halliburton's forceful denials, it is hard to separate fact from fiction. Lost in the swirling polemics of the political controversy is the less glamorous but far more revealing management story that lies behind it. Why did Halliburton's accounting policies change under Cheney? In what business context did he make that determination and the decision to merge with Dresser? What did Cheney and Halliburton know about the asbestos time bomb? Did he push his $30 million eject button because of insider knowledge or is there some other explanation? How accurate are the press accounts of Cheney's actions that led to the SEC inquiry? How serious is the SEC's investigation, and what is it likely to uncover? Those answers are found only in a thorough parsing of Cheney's tenure at Halliburton—something that, for all the breathless reportage on the subject, has never been done before. While all of these issues have been reported in some degree, what follows is an attempt to look beyond the sheer volume of writing and talk-show gas and put everything together into a single coherent narrative of Cheney's five-year term as CEO.
For high-ranking corporate leaders, the nineties were all about three things: mergers and acquisitions, which were carried out at a level unprecedented in history; keeping profits up, which sometimes depended upon changes in the way companies booked revenue; and making scads of money in the stock market from the sale of shares and options. Cheney did all of these, and he did them on a titanic scale. But does that mean that he did something wrong?
TO ANSWER THAT QUESTION, AND to understand Cheney's legacy at Halliburton, you have to go back a decade, to 1991. One of the heroes of the U.S. victory in Operation Desert Storm was the preternaturally calm, confident, and ultracompetent fifty-year-old Secretary of Defense. Having won the war, Cheney now had to try to restore order. This meant rebuilding parts of Kuwait and putting out the oil-field fires. To do this, he hired one of the few companies in the world that could do both: Halliburton. Its Houston subsidiary, Brown and Root, a large-scale construction and engineering firm, had built its early success on a relationship between its founders and a young Texas congressman named Lyndon Johnson. It had long been a de facto arm of the U.S. military. During the Vietnam War the company built ports and airstrips and housing for American troops. In the wake of Desert Storm, Cheney hired Halliburton to put out 320 wellhead fires and engaged Brown and Root to rebuild courthouses, schools, utilities, police stations, and computer systems in Kuwait.
Yet even while he was making war on Iraq, Cheney was carrying out the largest peacetime military-force reduction in history. By the time he left office in 1993, he had cut America's armed forces by half a million men and women. Key to this massive downsizing was hiring out traditional military jobs to companies like Brown and Root. Under Cheney, the Pentagon paid Brown and Root $8.9 million in 1992 for two studies on how this might be done. Shortly after that, the company won an exclusive worldwide contract for military logistical support, everything from runways to toilets, hamburgers, and laundry service—the first such contract ever given to a civilian group. In Blackhawk Down-era Somalia in 1993, Brown and Root had such a large U.S. Army support contract that it briefly became the largest employer in Africa. In 1996 fully 13 percent of the $1.9 billion budgeted by the Pentagon for Bosnia went to Brown and Root.
But by then Cheney was no longer working for the government: He was running Brown and Root, having taken a job in October 1995 as chairman of the board and CEO of Halliburton, whose Brown and Root subsidiary accounted for about a third of its revenue. (He had tested the waters for a run at the 1996 Republican presidential nomination but managed to raise only $1 million of the $20 million he thought he would need to win.) On paper, Halliburton and Cheney were a perfect match. The company's hard-boiled, ultraconservative Texas-based culture had spread itself throughout a world in which Dick Cheney was well known, if not always revered: More than 40 percent of Halliburton's revenues came from overseas, much of it from Arab nations and nations of the old Soviet bloc. "He would be able to open doors around the world and to have access practically anywhere," says Thomas H. Cruikshank, the former chairman of Halliburton who hired Cheney. "There was a lot that he could bring in the way of customer relationships." Cheney had never run a business before. But that's not what Halliburton's overseers wanted. They wanted a rainmaker.
Halliburton's origins go back to 1919 in Burkburnett, when a Tennesseean named Erle P. Halliburton invented a new cementing process that held a steel pipe in an oil well and thereby kept water out, strengthened well walls, and reduced explosions. The company went public in 1948, moved to Dallas in 1961 (where it stayed until August 2002, when it moved to Houston), and bought Brown and Root in 1962. By then Halliburton had evolved into a global company that provided oil producers with technology and equipment to help them explore for oil, drill for it, and pump it out of the ground. Before the oil industry went into a long decline in 1982, Halliburton had reached a peak of $8.5 billion in revenues and a workforce of 115,000 in more than one hundred countries. When Cheney moved to Dallas in 1995, the company was still impressively global: It had $5.7 billion in revenues and 57,200 employees. Under Cruikshank in 1993, the company had undergone one of many downsizings and reorganizations. "In 1995 the company was struggling and drifting," says chairman Lesar. "Cheney brought a sense of identity. We were just off the Gulf War, and he was kind of a superstar at that point, especially in the oil patch. He brought a sense of pride. People could say, 'I work for Halliburton and, by the way, so does Dick Cheney, the ex-Secretary of Defense.'"
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