Scott Herhold: Four myths that lead to corporate cheating
The Mercury News
Posted on Sat, Jun. 29, 2002
The easy way to explain the accounting scandals at WorldCom, Enron and Global Crossing is to condemn the executives who ran them as corporate thieves. There's some truth to that. But anyone searching for answers to our current financial mess ought to remember Danny Almonte.
Almonte, you may recall, was the pitcher for a Little League team, the Rolando Paulino All-Stars. He became the subject of a searing controversy a year ago because it turned out he was 14, not 12, when he played in the Little League World Series.
Everyone blamed the boy's family for forging a birth certificate. But the fault also lay with Little League's ESPN contract, the advertising sales, the demand for autographs and a visit from President Bush. All those things increased the incentive to cheat. If it were a sandlot game, few would bother to lie.
What's happening in corporate America now offers a parallel: Yes, there are bad guys running some companies. And yes, someone ought to go to jail in the WorldCom fiasco. But to condemn the executives without looking at the incentives and pressures to cheat misses the mark.
Let me suggest that one way to begin is to examine four myths that have fueled corporate cheating and eroded the ability of watchdogs -- boards, audit committees and auditors -- to do their job.
MYTH NO. 1: The stock price -- measured quarterly, or even weekly -- is the real arbiter of performance.
The reason this myth endures is that stock options have become a much bigger piece of standard compensation. Once options were reserved for top executives. At most tech companies now, everyone expects them. For a CEO, the difference between meeting and missing quarterly numbers is thus a question not just of salvaging personal net worth, but of rewarding and retaining employees. And the pressure from the board to boost the stock price adds a powerful incentive to cut corners.
``There's no question that stock options have a big role to play in this,'' says Brett Trueman, a professor of accounting at the University of California-Berkeley's Haas School of Business.
The truth: a rise in stock price follows financial performance. It doesn't define it. The market is fickle, and companies are best served not by the quarterly inquisition of Wall Street, but by their ability to plan three or four years ahead.
MYTH NO. 2: The CEO is a superhero.
This is a myth that the media have happily embraced, in part because the cult of personality makes it easier to tell a story. Enron was identified with Ken Lay, WorldCom with Bernie Ebbers and Global Crossing with Gary Winnick. As their stocks crested, they were heros creating a new world order.
The truth: The CEO is the chief salesman. Any company must depend on people in mid-management. When an executive is lionized, it makes it all the harder for him or her to confront failure. And it makes it harder for subordinates to deliver bad news or resist a questionable demand.
MYTH NO. 3: Growth is more important than culture.
At the height of the market, companies were driven by the notion of having to eat or be eaten. Tyco and WorldCom grew by acquisition, as did dozens of other companies. And everyone boasted about how quickly their shopping spree would add to earnings.
The truth: When a company grows too fast, its sense of ethical boundaries is frequently relaxed. It's no accident that some companies that grew by acquisition (think Network Associates or Legato) have endured major accounting problems. And companies with the strongest cultures -- Applied Materials or Intel -- have the straightest books.
MYTH NO. 4: Our private regulatory system can work without a club behind it.
In the era of distrust of big government, one of the most prevalent myths was that the private cadre of watchdogs could take care of regulating financial reporting. Investors bought the notion that auditors, analysts and boards would take care of executive cheating.
The truth: Most of the so-called watchdogs were in thrall to the companies. And no speeches or policy changes from the Securities and Exchange Commission can replace stern enforcement action. Cheating has flourished in part because there was no fear of the consequences. We need to make the threat of punishment real.
Scott Herhold's Stocks.comment appears every Monday and Thursday. Write him at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190; e-mail sherhold@sjmercury.com; phone (408) 920-5877. |
