Business leadership is `taking a beating'
By Michelle Quinn
Mercury News
Posted on Sat, Jun. 29, 2002
The ethical casualties pile up: Enron. Global Crossing. Arthur Andersen. Tyco. Xerox. Rite Aid.
Each week, the court of public opinion finds one more high-flying corporation or captain of industry to be guilty, greedy, reckless or all of the above. This week's poster child for bad behavior: WorldCom.
What's going on here? In some cases, a handful of corporate chieftains have lost their moral bearings. But in others, longstanding, companywide abuses of power may force investors to conclude that the corporate game itself is rigged and the watchdogs are absent.
In the past few months, the reported lootings have become so frequent, so spectacular, that the term ``business ethics'' is starting to sound like a cruel oxymoron. The swashbuckling CEO, the archetypal corporate hero in prosperous times, is now vilified as a crook, gambling the retirement savings of hapless workers. And the scorn doesn't stop at the boardroom door. USA Today ran a cover story this week about executives who cheat at golf, leading Sun Microsystems CEO Scott McNealy to muse, ``Aren't CEOs getting picked on enough these days?''
Indeed, ``leadership is taking a beating,'' said Silicon Valley business ethicist Kirk Hanson. Even Martha Stewart, the domestic goddess-turned-media-powerhouse, has been accused of homegrown cheating by allegedly unloading stock thanks to an insider tip.
This week the psychic stock of corporate America fell to a new low when WorldCom, the long-distance giant, said it had lied about how it counted $3.85 billion over five quarters. The company is laying off 17,000, faces bankruptcy, criminal charges and congressional hearings.
And Xerox, which said it overstated earnings by about $3 billion, now will have to restate that restatement. Three billion? Try $6 billion.
Even some supporting actors are in hot water. Through the boom, some analysts publicly touted stocks while privately deriding the same investments as ``dogs.''
Blame game
Boom economies can obscure a lot of funny numbers. It's almost a given that as long as a company keeps growing, few investors care to look too closely at exactly why. It's in a down cycle that the sleight-of-hand becomes apparent and the placing of blame begins.
``What you can't predict ahead of time are the kinds of problems that will be revealed,'' said Nell Minow, editor of the Corporate Library (www.thecorporatelibrary.com). ``It's been a convenient fiction for a long time that we had checks and balances in place. When accountants say `we weren't here to find out fraud,' and analysts say `we weren't here to tell you what we really think' and the board of directors says `we weren't really here,' you have a problem on your hands.''
For corporate watchdogs such as Minow, it's often a single dubious disclosure that prompts a harder look at a troubled company. Take, for example, Bernard Ebbers, the former chief executive of WorldCom. Even before WorldCom's mea culpa this week, industry observers wondered if the company had lost its way. When Ebbers resigned in April, he admitted he owed the company $408 million for a loan the company made to him to cover his highly leveraged position in the company's stock.
The loan was a ``sign that people were getting away with completely inappropriate behavior,'' said Roger McNamee, a partner with Integral Capital Partners, a Silicon Valley investment firm.
Of course, greed is nothing new. Every era has its pirates. And their punishment often entails a re-examination of the rules governing business.
``In each case, there was outrage and shock,'' said Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University.
In most cases there was an attempt to legislate the problem away. At the turn of the 20th century, abuses of power by Andrew Carnegie and John Rockefeller led to antitrust laws. After the stock market crash of 1929, the government enacted market reforms that included the formation of the Securities and Exchange Commission to help protect investors.
And from 1975 to 1978, hundreds of companies were accused of bribery around the world. The scandal led to the creation of the 1978 Foreign Corrupt Practices Act. More important, perhaps, it spurred business schools to begin teaching ethics. That year, Hanson became one of the first business ethics professors in the country, teaching at Stanford University.
The present era's most notable train wrecks include five alleged accounting scandals (WorldCom, Enron, Adelphia, Dynegy, Qwest), one alleged insider trading (ImClone) and an alleged tax fraud (Tyco International).
In Tyco's case, the alleged actions of an individual invited scrutiny of the company, as well. L. Dennis Kozlowski, the former chief executive, is charged with failure to pay more than $1 million in sales taxes on artwork. And now Tyco is under investigation for hiding payments to executives.
But some of the bigger scandals are company-killers and raise questions about systemic problems that are far deeper than the misdeeds of a few. ``It's not like suddenly we're getting unethical individuals and you can explain it away as personalities,'' said Douglas Porpora, who teaches a class on wealth and power at Drexel University.
Trouble at Enron
Enron's scandal involves allegations of questionable outside partnerships that kept billions of dollars in losses off the energy company's books. It led to the conviction of Arthur Andersen, the company's accounting firm, for obstruction of justice and raised questions about whether the company's board -- and all corporate boards -- pay enough attention or just rubber stamp whatever the chief executive wants.
``Why is this happening?'' asked James Cramer, a markets commentator and founder of TheStreet.com. ``People hate to let people down. People think things will get better. Over the course of the last 20 years, things did get better if you just rode it out and hid things you got away with it.
``And it didn't get better this time.''
The long boom gave executives an inflated sense of competency and self-worth. Hypergrowth spawned an aura of invincibility, said the Rev. John H. Huntington, an Episcopal priest who ministers to Silicon Valley executives. ``There are people who are standing in line who want to flatter you and ask you questions because you are in leadership,'' said Huntington, who was CEO of an aerospace firm before entering the priesthood. ``To the hubris add greed. We have no built-in way of knowing that we have enough. And a trajectory of hubris and greed has led to the outright fraud against the investor.''
Is reform ahead?
So what to do with CEOs behaving badly? As in earlier eras, outrageous behavior is being greeted by calls for sweeping reform -- of everything from the accounting industry, to corporate governance to executive compensation. Boards are already under pressure to do more.
``It is greed unlimited,'' said Ralph Nader, the Green Party activist who ran for president in 2000. ``You have to have law and order. You have to have institutional restraints on greed.''
Cramer believes the present scandals are fundamentally different from those that came before and demand a fundamentally different response.
``WorldCom is like a rogue company,'' Cramer said. ``We never had rogue companies before. What was the penalty before now? A lot of golf?''
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Contact Michelle Quinn at mquinn@sjmercury.com or (408) 920-5749. |
