Corruption Runs Deep on Main Street, Too
By HOWARD R. GOLD
Barron's Online
Another one bites the dust.
Tuesday's news that WorldCom, the parent company of the nation's second largest long-distance carrier, hid $3.8 billion in expenses and would be restating its financial statements for the last five quarters was more than just a body blow to another troubled company.
It means that what the pundits are calling a "crisis of confidence" in corporate America just got wider and deeper.
Few Americans had much to do with Enron, and fewer still could make head or tail of the abstruse accounting issues that brought it and Arthur Andersen LLP down.
Yet 20 million Americans are MCI customers. WorldCom's corporate pitchman was none other than Michael Jordan. And everybody knows what "cooking the books" means.
The WorldCom story broke after months of revelations about possible corporate malfeasance. Enron. Andersen. Global Crossing. Adelphia Communications. Tyco International CEO Dennis Kozlowski's yearning for the finer things in life.
But this crisis goes way beyond the misdeeds of a few potential corporate felons.
When New York State Attorney General Eliot Spitzer first released those damning e-mails in which Merrill Lynch analysts trashed the very Internet stocks they recommended to retail investors, I wrote here that corruption ran deep in Wall Street (see Fighting the Tape, April 11). Nothing I've seen since then has changed my mind.
Now, it looks as if corruption, defined as "impairment of integrity, virtue or moral principle," runs deep in corporate America, too.
I'm sure some people will take issue with this, reminding me of the thousands of fine, honest men and women who serve in the upper echelons of American business, blah, blah, blah.
But the problem is, the whole system of oversight, governance and disclosure -- once a point of pride for the U.S. economy -- has broken down.
Boards of directors rubber-stamp CEOs' decisions. CEOs' golf buddies approve their pay packages. Audit committees are often way out of their depth and won't ask the tough questions.
"The system is very skewed toward a concentration of power in the hands of the CEO," says Carol Bowie of the Investor Responsibility Research Center. "Your average board today is still under the thumb of the CEO."
Meanwhile, many auditors and attorneys long ago became CEOs' hired guns. Regulators are either overwhelmed or have been effectively neutered by years of aggressive lobbying from corporate interests and big accounting firms.
And the media, while often warning of the excesses of the 1990s, also bought in to the cult of the celebrity CEO, thus sometimes becoming part of the problem. .
As for Wall Street -- don't ask.
We all learned in school about the checks and balances in the U.S. Constitution. Through many crises, they've held firm, contributing mightily to the great success of the U.S. over the last 200 years.
But the checks and balances that are supposed to support today's financial system come not from our nation's founding document but from a regulatory agency born in the New Deal and various self-regulating organizations and various private interests that are all supposed to somehow protect investors' interests.
Trouble is, big institutions and mutual funds that have the clout to challenge underperforming CEOs have been largely quiescent. And the individual investor is powerless in this equation, while the rewards for pushing the envelope have been -- well, ungodly.
So, all the incentives for top executives are skewed toward bending the rules, or even breaking them.
"The incentive is to commit fraud," declares Sarah Teslick, executive director of the Council of Institutional Investors.
It's simple cost/benefit analysis, she explains: "You can commit fraud for $100-million upside or your employer gets fined." For certain people, that's an easy choice.
"I don't know a single [officer or director] who's paid a dime [in fines]," she says.
And ironically, the principal incentive behind this alleged fraud is stock options, which corporate governance types originally pushed to "align management's interests with shareholders.'" Talk about unintended consequences!
Teslick says options, which Bowie estimates comprise some 80% to 90% of the value of CEOs' gargantuan pay packages, "turn companies into Ponzi schemes."
"It is the only way for directors and officers to suck money out of a company before it crashes," she says. Employees of Enron and Global Crossing who walked away with nothing while the likes of Kenneth Lay, Jeffrey Skilling and Gary Winnick sold tens of millions of dollars' worth of company stock would certainly agree.
So, what's ahead? Next Monday to Wednesday, Barron's Online will focus exclusively on the current crisis and how it will affect companies, Wall Street and individual investors. And in future columns I'll look at some possible solutions to these problems.
Right now, the chickens have come home to roost. The dollar is sagging as foreigners appear to be yanking money out of U.S. markets. Individual investors are terrified to be in stocks, and they trust no one -- one reason our markets remain weak after a 27-month bear market..
Getting them back in will be a huge challenge, because once confidence is broken it's very hard to restore. And from my emails and conversations with investors, I can tell you the anger out there is intense and it won't subside quickly.
"There's no more populist issue than the inherent unfairness of this level of corporate excess," says Nell Minow, a longtime corporate governance activist and editor of The Corporate Library.
"Marie Antoinette would be embarrassed to get what these CEOs get."
And you all remember what happened to her.
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Howard R. Gold is editor of Barron's Online. Fighting the Tape appears twice a month. |
