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Cypress CEO Responds to Nun's Urging a 'Politically Correct' Board Make-up

Last Updated: 05/24/2012

Cypress CEO Responds to Nun's Urging a 'Politically Correct' Board Make-up

T.J. Rodgers

Response of T.J. Rodgers, President & CEO of Cypress Semiconductor, to Doris Gormley, OSF, Director of Corporate Social Responsibility for The Sisters of St. Francis of Philadelphia

A recent letter from Cypress's president and CEO T.J. Rodgers to The Sisters of St. Francis of Philadelphia's Doris Gormley, OSF -- sent also to all Cypress shareholders -- has set the business community abuzz...so much so that, in its edition of July 15, 1996 The Wall St. Journal carried a long story on the "CEO who took on a nun in a crusade against 'political correctness'."

Because of the growing national interest in the exchange and the ideas represented by it, we present here the background to T.J. Rodgers' response plus his letter in its entirety.

On April 23, 1996, Cypress received a letter from the Sisters of St. Francis of Philadelphia. The latter is a religious congregation of approximately 1,000 women and was, at the time the letter was written, the beneficial owner of a number of Cypress shares. The letter was a form letter, and it carried the stamped signature of Doris Gormley, OSF.

In the letter, Sister Doris, speaking for the Sisters of St. Francis of Philadelphia as a Cypress shareholder, expressed the view that a company "is best represented by a Board of qualified Directors reflecting the equality of the sexes, races, and ethnic groups." The letter went on to say that it is the congregation's policy "to withhold authority to vote for nominees of a Board of Directors that does not include women and minorities."

Sister Doris's letter was written after she received proxy materials for the Cypress Annual Shareholders' Meeting, from which, she said, she deduced that "Cypress...has no women or minority Directors." Therefore, she said, her congregation "voted (its) proxy accordingly," and she closed her letter with the exhortation, "We urge you to enrich the Board by seeking qualified women and members of racial minorities as nominees."

T.J. Rodgers' response follows.

May 23, 1996

Doris Gormley, OSF
Director, Corporate Social Responsibility
The Sisters of St. Francis of Philadelphia
Our Lady of Angels Convent - Glen Riddle
Aston, PA 19014

Dear Sister Gormley:

Thank you for your letter criticizing the lack of racial and gender diversity of Cypress's Board of Directors. I received the same letter from you last year. I will reiterate the management arguments opposing your position. Then I will provide the philosophical basis behind our rejection of the operating principles espoused in your letter, which we believe to be not only unsound, but even immoral, by a definition of that term I will present.

The semiconductor business is a tough one with significant competition from the Japanese, Taiwanese, and Koreans. There have been more corporate casualties than survivors. For that reason, our Board of Directors is not a ceremonial watchdog, but a critical management function. The essential criteria for Cypress board membership are as follows:

  • Experience as a CEO of an important technology company.
  • Direct expertise in the semiconductor business based on education and management experience.
  • Direct experience in the management of a company that buys from the semiconductor industry.

A search based on these criteria usually yields a male who is 50-plus years old, has a Masters degree in an engineering science, and has moved up the managerial ladder to the top spot in one or more corporations. Unfortunately, there are currently few minorities and almost no women who chose to be engineering graduate students 30 years ago. (That picture will be dramatically different in 10 years, due to the greater diversification of graduate students in the '80s.) Bluntly stated, a "woman's view" on how to run our semiconductor company does not help us, unless that woman has an advanced technical degree and experience as a CEO. I do realize there are other industries in which the last statement does not hold true. We would quickly embrace the opportunity to include any woman or minority person who could help us as a director, because we pursue talent -- and we don't care in what package that talent comes.

I believe that placing arbitrary racial or gender quotas on corporate boards is fundamentally wrong. Therefore, not only does Cypress not meet your requirements for boardroom diversification, but we are unlikely to, because it is very difficult to find qualified directors, let alone directors that also meet investors' racial and gender preferences.

I infer that your concept of corporate "morality" contains in it the requirement to appoint a Board of Directors with, in your words, "equality of sexes, races, and ethnic groups." I am unaware of any Christian requirements for corporate boards; your views seem more accurately described as "politically correct," than "Christian."

My views aside, your requirements are -- in effect -- immoral. By "immoral," I mean "causing harm to people," a fundamental wrong. Here's why:

I presume you believe your organization does good work and that the people who spend their careers in its service deserve to retire with the necessities of life assured. If your investment in Cypress is intended for that purpose, I can tell you that each of the retired Sisters of St. Francis would suffer if I were forced to run Cypress on anything but a profit-making basis. The retirement plans of thousands of other people also depend on Cypress stock -- $1.2 billion worth of stock -- owned directly by investors or through mutual funds, pension funds, 401k programs, and insurance companies. Recently, a fellow 1970 Dartmouth classmate wrote to say that his son's college fund ("Dartmouth, Class of 2014," he writes) owns Cypress stock. Any choice I would make to jeopardize retirees and other investors from achieving their lifetime goals would be fundamentally wrong.

  • Consider charitable donations. When the U.S. economy shrinks, the dollars available to charity shrink faster, including those dollars earmarked for the Sisters of St. Francis. If all companies in the U.S. were forced to operate according to some arbitrary social agenda, rather than for profit, all American companies would operate at a disadvantage to their foreign competitors, all Americans would become less well off (some laid off), and charitable giving would decline precipitously. Making Americans poorer and reducing charitable giving in order to force companies to follow an arbitrary social agenda is fundamentally wrong.
  • A final point with which you will undoubtedly disagree: Electing people to corporate boards based on racial preferences is demeaning to the very board members placed under such conditions, and unfair to people who are qualified. A prominent friend of mine hired a partner who is a brilliant, black Ph.D. from Berkeley. The woman is constantly insulted by being asked if she got her job because of preferences; the system that creates that institutionalized insult is fundamentally wrong.

Finally, you ought to get down from your moral high horse. Your form letter signed with a stamped signature does not allow for the possibility that a CEO could run a company morally and disagree with your position. You have voted against me and the other directors of the company, which is your right as a shareholder. But here is a synopsis of what you voted against:

  • Employee ownership. Every employee of Cypress is a shareholder and every employee of Cypress -- including the lowest-paid -- receives new Cypress stock options every year, a policy that sets us apart even from other Silicon Valley companies.
  • Excellent pay. Our employees in San Jose averaged $78,741 in salary and benefits in 1995. (That figure excludes my salary and that of Cypress's vice presidents; it's what "the workers" really get.)
  • A significant boost to our economy. In 1995, our company paid out $150 million to its employees. That money did a lot of good: it bought a lot of houses, cars, movie tickets, eyeglasses, and college educations.
  • A flexible health-care program. A Cypress-paid health-care budget is granted to all employees to secure the health-care options they want, including medical, dental, and eye care, as well as different life insurance policies.
  • Personal computers. Cypress pays for half of home computers (up to $1,200) for all employees.
  • Employee education. We pay for our employees to go back to school, and we offer dozens of internal courses.
  • Paid time off. In addition to vacation and holidays, each Cypress employee can schedule paid time off for personal reasons.
  • Profit sharing. Cypress shares its profits with its employees. In 1995, profit sharing added up to $5,000 per employee, given in equal shares, regardless of rank or salary. That was a 22% bonus for an employee earning $22,932 per year, the taxable salary of our lowest-paid San Jose employee.
  • Charitable Work. Cypress supports Silicon Valley. We support the Second Harvest Food Bank (food for the poor), the largest food bank in the United States. I was chairman of the 1993 food drive, and Cypress has won the food-giving title three years running. (Last year, we were credited with 354,131 pounds of food, or 454 pounds per employee, a record.) We also give to the Valley Medical Center, our Santa Clara-based public hospital, which accepts all patients without a "VISA check."

Those are some of the policies of the Board of Directors you voted against. I believe you should support management teams that hold our values and have the courage to put them into practice.

So, that's my reply. Choosing a Board of Directors based on race and gender is a lousy way to run a company. Cypress will never do it. Furthermore, we will never be pressured into it, because bowing to well-meaning, special-interest groups is an immoral way to run a company, given all the people it would hurt. We simply cannot allow arbitrary rules to be forced on us by organizations that lack business expertise. I would rather be labeled as a person who is unkind to religious groups than as a coward who harms his employees and investors by mindlessly following high-sounding, but false, standards of right and wrong.

You may think this letter is too tough a response to a shareholder organization voting its conscience. But the political pressure to be what is euphemistically called a "responsible corporation" today is so great that it literally threatens the well being of every American. Let me explain why.

In addition to your focus on the racial and gender equality of board representation, other investors have their pet issues; for example, whether or not a company:

  • is "green," or environmentally conscious.
  • does or does not do business with certain countries or groups of people.
  • supplies the U.S. Armed Forces.
  • is "involved in the community" in appropriate ways.
  • pays its CEO too much compared with its lowest-paid employee.
  • pays its CEO too much as declared by self-appointed "industry watchdogs."
  • gives to certain charities.
  • is willing to consider layoffs when the company is losing money.
  • is willing to consider layoffs to streamline its organization (so-called downsizing).
  • has a retirement plan.
  • pays for all or part of a health-care plan.
  • budgets a certain minimum percentage of payroll costs for employee training.
  • places employees on its Board of Directors (you forgot this one).
  • shares its profits with employees.

We believe Cypress has an excellent record on these issues. But that's because it's the way we choose to run the business for ourselves and our shareholders -- not because we run the business according to the mandates of special-interest groups. Other companies, perhaps those in older industries just trying to hold on to jobs, might find the choices our company makes devastating to their businesses and, consequently, their employees. No one set of choices could be correct for all companies. Indeed, it would be impossible for any company to accede to all of the special interests, because they are often in conflict with one another. For example, Cypress won a San Jose Mayor's Environmental Award for water conservation. Our waste water from the Minnesota plant is so clean we are permitted to put it directly into a lake teeming with wildlife. (A game warden station is the next door neighbor to that plant.) Those facts might qualify us as a "green" company, but some investors would claim the opposite because we adamantly oppose wasteful, government-mandated, ride-sharing programs and believe that car-pool lanes waste the time of the finest minds in Silicon Valley by creating government-inflicted traffic jams -- while increasing pollution, not decreasing it, as claimed by some self-declared "environmentalists."

The May 13, 1996 issue of Fortune magazine analyzed the "ethical mutual funds" which invest with a social-issues agenda, and currently control $639 billion in investments. Those funds produced an 18.2% return in the last 12 months, while the S&P 500 returned 27.2%. The investors in those funds thus lost 9% of $639 billion, or $57.5 billion in one year, because they invested on a social-issues basis. Furthermore, their loss was not simply someone else's gain; the money literally vanished from our economy, making every American poorer. That's a lot of houses, food, and college educations that were lost to the "higher good" of various causes. What absurd logic would contend that Americans should be harmed by "good ethics?"

Despite our disagreement on the issues, The Sisters of St. Francis, the ethical funds, and their investors are merely making free choices on how to invest. What really worries me is the current election-year frenzy in Washington to institutionalize "good ethics" by making them law -- a move that would mandate widespread corporate mismanagement. The "corporate responsibility" concepts promoted by Labor Secretary Reich and Senator Kennedy make great TV sound bites, but if they were put into practice, it would be a disaster for American business that would dwarf the $57 billion lost by the inept investment strategy of the "ethical funds." And that disaster would translate into lost jobs and lost wages for all Americans, a fundamental wrong.

One Senate proposal for "responsible corporations," as outlined in the February 26 issue of Business Week, would grant a low federal tax rate of 11% to "responsible corporations," and saddle all other companies with an 18% rate. One seemingly innocuous requirement for a "responsible corporation," as proposed by Senators Bingaman and Daschle, would limit the pay of a "responsible" CEO to no more than 50 times the company's lowest-paid, full-time employee. To mandate that a "responsible corporation" would have to limit the pay of its CEO is the perfect, no-lose, election-year issue. The rule would be viewed as the right thing to do by voters who distrust and dislike free markets, and as a don't-care issue by the rest. But the following analysis of this proposal underscores the fact that the simplistic solutions fashioned by politicians to provoke fear and anger against America's businesses often sound reasonable -- while being fundamentally wrong.

Consider the folly of the CEO pay limit as it applies to Intel: the biggest semiconductor company in the world, the leader of America's return to market dominance in semiconductors, the good corporate citizen, the provider of 45,325 very high-quality jobs, the inventor of the random-access memory, the inventor of the microprocessor, and the manufacturer of the "brains" of 80% of the world's personal computers. Suppose that Intel's lowest-paid trainee earns $15,000 per year. The 50 to 1 CEO salary rule would mandate that the salary of Intel's co-founder and CEO, Andy Grove, could be no more than $750,000. Otherwise, Intel would face a federal tax rate of 18% rather than 11%. Last year, Andy Grove earned $2,756,700, well over that $750,000 limit, and Intel's pretax earnings were $5.6 billion. Seven percentage points on Intel's tax rate translates into a whopping $395 million tax penalty for Intel. Consequently, the practical meaning of this "responsible corporation" law to Intel would be this gun-to-the-head proposition: "Either cut the pay of your Chief Executive Officer by a factor of four from $2,756,700 to $750,000, or pay the federal government an extra $395 million in taxes."

The Bingaman-Daschle proposal would limit the pay of the CEO of the world's most important semiconductor company to less than that of a second-string quarterback in the NFL! That absurd result is not about "responsible corporations," but about two leftist senators, out of touch with reality, making political hay, causing harm, and labeling it "good." Their plan is particularly immoral in that it would cause the losses inherent in practicing their newly invented false moral standard to fall upon all investors in American companies, even though the government itself had not invested in those companies.

Meanwhile, my current salary multiple of 25 to 1 relative to our lowest-paid employee would qualify Cypress as a "responsible corporation," only because we are younger and not yet as successful as Intel -- a fact reflected by my lower pay. If Cypress had created as much wealth and as many jobs as Intel, and if my compensation were higher for that reason, then, according to the amazingly perverse logic of the "responsible corporation," Cypress would be moved from the "responsible" to the "irresponsible" category for having been more successful and for having created more jobs! A final point: Why should either Intel or Cypress, both companies making 30% pre-tax profit, be offered a special tax break by the very politicians who would move on to the next press conference to complain about "corporate welfare?"

How long will it be before Senators Kennedy, Bingaman, and Daschle hold hearings on the "irresponsible corporations" that pay tens of millions of dollars to professional athletes? Or are athletes a "protected group," leaving CEOs as their sole target? If not, which Senate Subcommittee will determine the "responsible" pay level for a good CEO with 30% pretax profit, as compared to a good pitcher with a 1.05 earned run average? These questions highlight the absurdity of trying to replace free market pricing with the responsible-corporation claptrap proposed by Bingaman, Daschle, Kennedy, and Reich.

In conclusion, please consider these two points: First, Cypress is run under a set of carefully considered moral principles, which rightly include making a profit as a primary objective. Second, there is a fundamental difference between your organization's right to vote its conscience and the use of coercion by the federal government to force arbitrary "corporate responsibilities" on America's businesses and shareholders.

Cypress stands for personal and economic freedom, for free minds and free markets, a position irrevocably in opposition to the immoral attempt by coercive utopians to mandate even more government control over America's economy. With regard to our shareholders who exercise their right to vote according to a social agenda, we suggest that they reconsider whether or not their strategy will do net good -- after all of the real costs are considered.

Sincerely,

T.J. Rodgers
President and CEO


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