Tuesday, January 10, 2006

Taming corporate executives

Cyber age
Corporate America’s rotten apples
From The Statesman

Wal-Mart is in the news again. Its former vice-chairman Thomas Coughlin would plead guilty for misappropriating “$500,000 from Wal-Mart through fraudulent re-imbursements and improper use of gift cards,” according to The Wall Street Journal.

What goes through the thick skull of these otherwise brilliant people that they begin to think of themselves as invincible once they sit on the top floor is beyond my comprehension. Coughlin, who earned millions in compensation from the penny-pinching global retailer, was caught misusing gift cards amounting to a paltry sum of $ 5,100, the report said.

Why do powerful people throw away their reputation for a handful of silver or blonde hair? By the end of the month, the former chairman of the defunct global energy giant Enron would face trial for killing the goose he thought was laying golden eggs.

The functioning of corporate America 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 government of co-equals in power, 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 public ridicule, threatening to impeach them or put them in jail.

Think of Presidents, state governors and legislators who have been disgraced because of their abuse of power. The notorious lobbyists Jack Abramoff has agreed to name names and testify against members of Congress whom he bribed to buy favours for his business clients. Watch the unfolding American drama of political corruption. The founding fathers did not leave the functioning of the political system to the innate goodness of the people seeking power. Nor did they leave the development of good political behaviour to any kind of special education or training in ethics course work 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 is not the case with Wall Street where most Americans are vested through their pensions and other retirement accounts. Today we live in a world where corporate power overshadows most of our activities.

The classic Marxist-Leninist class struggle, workers versus capitalists, has been replaced by public interest civic groups versus corporate global. As someone said: The beat goes on.

Corporate leaders rise to power on the promise of maximising profit, market value and economic health of their companies. Shareholders are selfish and passive. Boards of directors are morally passive; their interest is limited to increasing shareholders’ value. They worship executives who maximise their investments.

So long as an executive performs well and exceeds the expectations of Wall Street, he could get away with some excesses.Last July, former chief executive Bernard Ebbers of WorldCom (now MCI, Inc), whose $11-billion fraud dumped the telecommunications company into bankruptcy was sentenced to serve 25 years in prison.

The former financial chief officer of the company, Scott Sullivan, who pleaded guilty and testified 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 blamed his underlings for the fraud, said to be the largest in US history.

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: a reputation built on sand.When WorldCom real earnings could not meet the forecast, Ebbers asked the account department to “adjust the numbers”. Corporate accounting departments are notorious for “slouching towards Gomorrah”.

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 to keep it high, he raised 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 pay is too high; and the damage to the reputation is irreparable. But what can be done? Can we make corporate bosses honest? Can we instil 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 corporate 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.

No, that’s not enough. Let them write case histories of former CEOs who have been disgraced and are serving prison terms. Better still; give the business school graduates experiential knowledge by putting them into jail with common criminals.
Let them see whether greed is good.

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