Clueless in Crawford
The New York Times
August 13, 2002
By PAUL KRUGMAN
Today, in its Waco economic forum, the Bush administration will try to
convince the country that everything is under
control - that the economy is mending, that "shady" business
practices are no longer a problem. To that end a carefully
chosen audience will listen to speeches by administration officials
and selected models of corporate probity. Among the speakers announced
last week was John T. Chambers, C.E.O. of Cisco Systems.
They really don't get it, do they? One could hardly have picked a better
example of what's wrong with the administration's
whole approach.
Two years ago Cisco was the world's most valuable company,
with a market capitalization of more than $500 billion. Mr.
Chambers was among the world's best-paid executives, receiving
$157 million in 2000. Cisco was perceived as a company that
combined new-economy glitz with old-fashioned solidity, that was on the cutting
edge but made real products and earned real
profits.
In short, people thought about Cisco the same way they thought about Enron.
That's not a strained comparison. Even when Cisco was riding high,
an analysis in Barron's dubbed it the "New Economy
Creative Accounting Exemplar." The company's specialty was using its
own overvalued stock as currency - paying its
employees with stock options, acquiring other companies by issuing
more stock. Thanks to loopholes in the accounting rules -
loopholes defended with intense lobbying - these transactions allowed executives
to progressively dilute the stake of their
original shareholders, without ever declaring this dilution as a business cost.
The resulting illusion of profitability sustained the stock price, making more
questionable deals possible. Some analysts flatly
called Cisco a pyramid scheme.
When Enron's financial house of cards collapsed, $80 billion of market value vanished.
Cisco hasn't collapsed, but its market
capitalization has fallen by more than $400 billion.
Nobody from Cisco management - ranked No. 13 in Fortune's "greedy
bunch" - has been arrested. But then neither has anyone from Enron.
Some cynics attribute the continuing absence of Enron indictments to
the Bush family's loyalty code. But the alternative
explanation is both innocent and chilling: Enron executives
may have deluded and defrauded their shareholders without
actually breaking the law. What Cisco did was definitely legal.
Since Enron collapsed, administration officials have insisted that no new
laws are needed to reform corporate America, only
enforcement of existing laws. The administration endorsed a bill imposing
modest reforms in accounting only after doing
everything it could to block it. And as soon as the bill was passed, the administration
began issuing "guidance" to federal
prosecutors that will undermine the law's intent on whistle-blower protection,
document shredding and more. Officials clearly
still think the old law was good enough.
But the Cisco story, like the absence of Enron indictments, demonstrates just
how much self-enrichment corporate insiders
can get away with while staying within the letter of the law. The handful
of executives who have been arrested aren't
masterminds - on the contrary, given the legal ways other executives
got rich while their stockholders lost billions, the
perp-walkers should be featured on a special corporate
edition of "America's Dumbest Criminals."
Now the administration is sounding the all clear - we've passed a bill,
we've arrested five people, it's all over. But the work of
reconstructing corporate America has barely begun.
The next step, surely, is dealing with stock options. It's not just that companies
overstate their profits by failing to count
options as an expense. Huge grants of options
also give executives an incentive to do whatever it takes to produce a short-term
bump in the stock price - if one year of illusory success can net you $157
million, who cares what happens later?
Byron Wien of Morgan Stanley recently told a group of security
analysts that "stock options malevolence" is at the root of
corporate scandal, and that "anyone who says that stock
options aren't an expense destroys his credibility on all other issues."
Well, Mr. Chambers's company still refuses to count stock options as an expense.
The administration has said that it opposes rules that would require
Cisco to change its accounting, and the choice of Mr. Chambers as a speaker seems to be a
reaffirmation of that position.
As I said, they just don't get it.
nytimes.com
Copyright 2002 The New York Times Company |
