Tuesday, March 22, 2005

Building an ownership society

Building an ownership society
BY ND BATRA from The Statesman

Ownership society is a beautiful idea. Everyone should own some property. The only way to build an ownership society, about which George W Bush speaks with such gusto, is to build first a solid foundation of trust, most of all corporate trust. Growth and investment would follow. The cleaning up of corporate America one corrupt executive at a time is the way to save free market capitalism, the most remarkable engine of economic growth.

In fact, there seems to be a beeline of top corporate executives waiting for their turn to go to jail. Kenneth L Lay and Jeffrey K Skilling of Enron, Richard M Scrushy of HealthSouth and L Dennis Kozlowski of Tyco, for example, are facing criminal charges for various corporate crimes.

When at their best, some of these remarkable individuals had been bold, innovative and enterprising; and they raised their companies’ fortunes, but at some point greed blinded them and they became victims of the hubris. Even the most expensive white-collar crime defence attorneys might not save them. The founder of Adelphia Communications, John J Rigas, was convicted last year for raiding the treasury of his own company. Martha Stewart, the glamorous but false goddess of domesticity, completed her five-month prison term and has now been confined to her house until she has done her time. She was convicted for the inside trading of her stock in ImClone, a biotechnology company, albeit not for any fraud in her own media company, Martha Stewart Living Omnimedia. Unfortunately, the media treated her release from prison with such jubilation as if her conviction was justice gone wrong. No, she deserved the punishment, as do other high and mighty that commit crimes and betray the public trust.

Bernard J Ebbers, former chief executive of WorldCom, whose $11-billion fraud pushed the telecom company into bankruptcy, was convicted last week on all counts. The former financial chief officer of the company, Scott Sullivan, who turned into a crucial witness for the prosecution, after he himself had pleaded guilty, testified that he cooked books at the behest of Ebbers. The boss insisted that the company had to “hit the numbers,” and meet the financial and revenue targets. That was the only way to meet the market expectations. Ebbers, of course, blamed his underlings for the fraud, said to be the largest in the US history, and pleaded in his own defence that he did not know enough about accounting and financial matters.

But he should have known. Ignorance is no excuse for the CEO of a company. At its height in 1999, WoldCom had a market capitalisation of $180 billion, and Ebbers was a businessman’s businessman. Great pride and false expectations did him in. Accounting departments may not be known for their high ethical vigilance, but Wall Street analysts and financial journalists should not work as paid employees of big corporations. They should work only as watchdogs of public interest.

But they too went along with the web of illusion conjured by the WorldCom team until the whole edifice began to collapse in 2000, the year of the big bubble bust when millions of people lost their life savings; and the share prices hit the bottom.

Ebbers’ personal fortune too was locked up with WorldCom’s market share price; so to keep it high, he falsified and raised analysts’ expectations. But Wall Street is no body’s fool. One cannot get away with chicanery for too long, and the price a corporation, and ultimately the public pays, is exorbitant. The damage is not limited to one company. It spreads throughout the market.

Many wonder if anything can be done to save companies’ from the self-destructive behaviours of their CEOs. How can transparency and internal checks and balances be built into the system? If the news media keeps a constant watch on the daily working of corporate America, instead of playing up the scandals when they break out, CEOs would behave better and the financial future of millions of people would be safe. Keep in mind, when a business collapses, many more than its stakeholders get hurt.

Corporate America works on absolute leadership, one man at the top in all his or her imperial glory. The board of directors of the company seldom provides internal checks and balances. Some American CEOs are more powerful than even governors, who have to answer to so many constituencies. The temptations of misusing power are tempered by transparency and accountability in the case of politicians. That should be the case with corporate America where most Americans and even millions of foreigners are vested through their pensions and other retirement funds. We live in a world where corporate power overshadows most of our activities and must not be left unchecked. Good corporate leadership is essential, nonetheless. Corporate leaders rise to power on the promise of raising profits, market values and corporate growth but they should be watched where they are taking the company. Boards of directors need to play a bigger role in the running of the companies and their interests should go beyond maximising profits. No one should be allowed to get away with excesses.

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