U.S. Businesses Dim as Models for Foreigners
By EDMUND L. ANDREWS
FRANKFURT, June 26 — It was not just WorldCom that took a beating today. It was also the United
States itself, and the American gospel of how business should be done.
After years of pumping billions of dollars into the United States because it seemed the land of opportunity,
foreign investors are pulling back. And people around the world who for decades have looked to the United
States as the model for openness and accountability in business have been sorely disillusioned by the mounting
waves of scandal.
"This is the most pessimistic sentiment against the United States that I have ever experienced in my career,"
said Wolfram Gerdes, chief investment officer for global equities at Dresdner Investment Trust in Frankfurt.
"There is unanimous agreement that the U.S. is not the best place to invest anymore."
The immediate impact is discernible in the value of the dollar, which has been sliding since March. It fell today
to its lowest level against the euro in 28 months. The dollar has also fallen against the Japanese yen, and even
gold has been rising steadily in dollar terms.
The loss of foreign confidence in the United States is important in itself, because of the huge deficit the United
States runs in its trade with the world. To cover that deficit, America must attract a net inflow of $1.3 billion in
foreign money every day. Even a modest decline in the flow can weaken the dollar and drive up the prices of
imported goods.
But the fall from grace is broader than just a turn in the monetary tide. The more enduring impact of the
accounting and boardroom scandals may be the tarnish they spread on the "American model," a philosophy
that emphasizes bare-knuckle competition, aggressive deal making, a high level of public disclosure and
fantastic rewards for executives who deliver the goods.
Europe has had its own run of financial scandals, generally involving young technology and media companies,
that match the worst cases to surface during the dot-com bubble. But Guido Rossi, a former chairman of
Telecom Italia and now one of Italy's most outspoken advocates for modernizing the way companies are run in
Europe, said: "What is lacking in the U.S. is a culture of shame. No C.E.O. in the U.S. is considered a thief if
he does something wrong. It is a kind of moral cancer."
There is a groundswell among executives in Europe against the American system of corporate accounting —
the so-called generally accepted accounting principles — that was supposed to be the gold standard in
disclosure.
Before Enron, Global Crossing and WorldCom, America had been winning the argument on accounting
standards. But now, a growing number of Europeans are convinced that the American system is both too
complex and too easy to manipulate. "We always thought it was too good to be true in America, and this has
proved it," said Angela Knight, the chief executive of the Association of Private Client Investment Managers
and Stock Brokers in Britain.
To be sure, American corporate practices in general remain at least as open and accountable as those in any
other country, and they have raised the expectations that shareholders elsewhere have of their own companies.
And most experts agree that the main problem is not with the principles themselves but with people who are
determined to distort their companies' financial results.
European corporations like Vivendi Universal are reeling from shareholder wrath over their inscrutable finances
and unsupportable debt. Deutsche Telekom, Germany's biggest telephone company, is for the second time in
two years fighting off charges that it grossly overvalued billions of dollars worth of real estate before it went
public six years ago.
In Germany, Italy and elsewhere, many of the biggest companies remain shielded from takeovers by byzantine
cross-holdings and capital structures and by laws that arm entrenched management with a variety of defenses
against their own shareholders.
Nor are Enron-like problems unknown elsewhere, as shareholders in HIH, a major Australian insurer, and
Asia Pulp and Paper discovered last year when the companies plunged into default.
Indeed, advocates of improved corporate governance in countries like Japan say they only wish their
companies were as accountable as those in the United States. The problem now, they say, is that the scandals
in America will be used by opponents of openness and accountability to justify their intransigence.
"This has disappointed many people who tried to work to modernize themselves along the lines of the
American model," said Haruo Shimada, a professor of economics at Keio University in Tokyo, who has
pushed for freer markets in Japan and has been an adviser to Prime Minister Junichiro Koizumi.
In Russia, where corporate governance has all too frequently meant blatant theft and Machiavellian intrigue,
corporate executives say the scandals prove that Russia is not so different from the United States after all.
"At a certain point, Americans began thinking that they were the ideal," said Anatoly M. Karachinsky,
president of Information Business Systems, one of Russia's largest information-technology companies. "But
there are no ideal laws."
The American model has put down roots around the world that are too deep to be uprooted entirely by the
recent wave of scandals, especially in developing countries like India that have pushed hard to modernize in
recent years. Executives there said that a decade ago, an Enron or WorldCom collapse might have tipped the
policy argument against Westernization of the economy, but there is no turning back now.
What has happened instead, in India, Russia and elsewhere, is a painful loss of face for the consultants and
accountants representing American companies. "The scandal has been unhelpful, especially since we, as a
profession, operate on a reputation and the implicit trust that follows," said Gautam Dalal, chief executive of the
Indian arm of KPMG.
In Western Europe, corporations have been gravitating toward American management principles for much of
the last decade. They raise money on Wall Street, and a growing number now list their shares on the New
York Stock Exchange or Nasdaq, obliging them to report their results according to American rules.
But those rules have also met growing resistance. The New York Stock Exchange recently invited Porsche to
list its shares. Porsche will not make a decision until December, but its executives have openly balked at some
of the requirements that would go with such a listing. Porsche refuses to publish its financial results quarterly, as
American companies must, because executives worry about being held hostage to short-term pressures.
The American practice of executive enrichment is also coming under attack. Appalled at the tens of millions of
dollars that executives at Enron and many other companies received through stock options, the chairman of
Germany's biggest steel manufacturer cautioned his peers this week against following suit. "I warn people not
to simply take over rules from the United States without first reflecting on them critically," said Gerhard
Cromme of ThyssenKrupp.
German companies, led by Volkswagen, are adamantly fighting proposals by the European Commission that
would make hostile takeovers easier. Advocates of the new rules say they would force companies to become
more accountable to their shareholders, but German leaders say they would create an "unfair playing field."
European leaders are also pushing for greater acceptance of their auditing rules, known as the international
accounting standards, as an alternative to American rules. The great virtue of the international accounting
standards, which all European Union companies will have to adopt by 2005, is that it is a simple and fairly
compact list of basic principles. The American system, by contrast, is made up of volumes and volumes of
decisions reached over the years on the finest nuances and shadings of every issue.
European critics (and a growing number of Americans) say the American system permits companies to follow
the letter of the law while violating its spirit — to "tick boxes rather than use sound judgment," said Peter
Wyman, president of the Institute of Chartered Accountants in England and Wales.
Whether the international standard wins out over the American standard or not, global investors are clearly
anxious to see some kind of meaningful accounting reform before they plunge back into the United States. A
survey this month by UBS Warburg and the Gallup Organization found that only 32 percent of European
investors now rank the United States as the most attractive market in the world.
But investors do not have many other places to go. European economic growth is expected to remain slower
than American growth for the foreseeable future, Japan remains moribund and other markets are seen as
fraught with risks.
"The one major currency area that has been able to play the role of safe harbor is the American area," said
Jürgen Müller, a senior economist at DaimlerChrysler. "Everybody in the world is staring at the U.S. economy.
Everybody is waiting for the U.S. economy to boom again."
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