Scandals of Corporate America

Cyber Age ND Batra: From The Statesman

The unceremonious firing of Carly Fiorina, the glamorous globetrotting CEO of Hewlett Packard, one of the few women who broke the proverbial glass ceiling – some would say by sheer guts and grits – has been an odd occurrence in the annals of corporate America. Boards of directors normally don’t act that brazenly; they sweeten the departure with friendly negotiations, mutual understandings and hefty severance packets, which sometimes seem so excessive that they evoke public repugnance. Fiorina too will get a full purse ($21 million or so) but she was fired because of her inability to beat the competition (Dell, IBM, for example) rather than any fraud she might have committed. Ultimately, fraud and incompetence are the two sides of the same coin; they hurt the market as well as the shareholders.
The functioning of corporate USA is based on authoritarianism, not on internal checks and balances. In contrast, the US political system is based on a healthy distrust of people in power. The tripartite system of a government of co-equals – the White House, Congress and the judiciary – and other built-in checks and balances along with a free press have kept politicians from abusing power by exposing them to the threat of public ridicule, impeachment or jail. Think of Nixon and Clinton, and the hosts of governors and legislators, who have been disgraced. The founding fathers didn’t leave the functioning of the political system to the innate goodness of the people in power. Nor did they leave the development of good political behaviour to any kind of special training in schools or colleges; or the culture of the sports arena, for that matter.
The temptation of power trumps everything else, so transparency and accountability are indispensable to a self-renewing democracy. That unfortunately isn’t the case with Wall Street where most Americans are vested through pension and other retirement accounts. Bush’s idea of an ownership society, if given a practical shape, would invest future social security funds into the stock market. Today we live in a world where corporate power overshadows most of our activities.
Corporate leaders rise to power on the promise of maximising profits, market values and economic health for their companies. There are no internal checks and balances in the form of a healthy opposition seeking accountability and presenting an alternative vision of the company. Shareholders are selfish and passive. Boards of directors are morally neutral; their interest is limited to dividends and capital gains. They worship executives who maximise their investments. So long an executive performs well and exceeds the expectations of Wall Street, he/she could get away with some excesses. Fiorina was fired for a style of management that despite its aggressiveness did not produce results to cheer the market. Fiorina lacked imagination; the power to do “superspeculation” about an alternative future for Hewlett Packard when under her leadership the merger with Compaq Computer did not work out as expected.
But other CEOs have done worse. One of the former chief executives on trial for security fraud is Bernard Ebbers of WorldCom (now MCI, Inc.), whose $11 billion fraud dumped the telecommunications company into bankruptcy. The former financial chief of the company, Scott Sullivan, who is cooperating with prosecutors after pleading guilty and is testifying against his former boss, told the jury that he had warned Ebbers that accounting adjustments, creative accounting or cooking books, whatever you call it, could not be justified. Ebbers told him nevertheless that the company had to “hit the numbers,” and meet the financial and revenue targets. Ebbers of course has blamed his underlings for the fraud, said to be the largest in US history, and if convicted he would go to jail for 30 years. At its peak in 1999, WoldCom had a market capitalisation of $180 billion, and Ebbers was a toast of Wall Street. That was the problem.
To maintain its market reputation WorldCom had to cook books and lie. When WorldCom real earnings could not meet the forecast, Ebbers asked the account department to “adjust the numbers”. Accounting departments are notorious for doping others until they are caught. Wall Street analysts and financial journalists who out of fear or favour work as paid employees of big corporations rather than watchdogs of public interests went along with the web of lies woven by the WorldCom team until the whole edifice began to collapse in 2000; and the share price sank to $15 from a high of $65. Ebbers’ personal fortune too was linked with WorldCom’s market share price and in order to keep it high, he raised the analysts’ expectations. But Wall Street is a hard and cruel taskmaster. One cannot get away with lies for too long. But sometimes the price a company, and eventually the public pays, is too high; and the damage irreparable.
But can we make corporate bosses honest? Can we instill ethics into their souls? Robert J Schiller, a Yale professor and author of Irrational Exuberance, faults the education that US business schools impart to budding executives. Writing in the New York Times, he said that instead of emphasising ethics and liberal arts, “Modern business education often encourages excessive respect for anything that can be considered a result of the free market.” Teach them ethics, he says.
The average age of a student in a US business school is 28. By that time, a person should be able to know what is and what is not ethical. Liberal arts and ethics education is not enough. Transparency and internal checks and balances must be embedded into the system. More importantly, if the media pays as much attention to the internal working of corporate America as it does to the scandals of political America, CEOs would behave better and our financial future would be secure.