Greed springs eternal in corporate meltdowns

HARDLY a day goes past without a new corporate scandal, each one bigger than the last. Last week we were just recovering from the news that Rite Aid had fraudelently overstated its earnings by $1.6 billion when we learned that WorldCom had performed the same trick to the tune of $3.8 billion. Even Martha Stewart, that goddess of the American hearth and home, stands accused of supping on a diet of corporate corruption.

Professions like accountancy that were once regarded as the very embodiments of solid professionalism are becoming synonyms for corner-cutting -- or worse. Companies that were once celebrated as pioneers of America sparkling new economy are becoming bywords for greed.

As one journalist wrote in her expose of a well-known energy company, its profits were the product of "fraud, deceit, special privilige, gross illegality, bribery, coercion, corruption, intidimidation, espionage or outright terror." Actually, that wasn't a description of Enron but Ida Tarbell's castigation of John D. Rockefeller's Standard Oil a century ago. Contrary to much of the current hand-wringing about "the crisis of American capitalism," there's nothing new about corporate misbehavior, nor about society's subsequent desire to reform capitalism. The two have followed each other throughout history: first the abuses, then the rules.

Corporate scandals have been with us ever since the first chartered joint-stock companies emerged in Tudor times. Looking for greedy executives? Try the "nabobs" of the East India Company, who built some of Britain's finest homes with money from Bengal. Looking for perfidy on Wall Street? Try the second half of the 19th century when rogues such as Daniel Drew manipulated the stock of railroads like the Erie. Looking for suspect accounts? In the last quarter of the 19th century more than 700 American railroad companies went bankrupt.

In some cases the echoes of the current crisis are uncanny. What, one wonders, would Kenneth Lay of Enron make of the career of Samuel Insull? Insull rose from poverty to become one of the most admired businessmen of the roaring 1920s, making Chicago Edison into the base of a gigantic pyramid of utility and transportation companies. At one point he held 65 chairmanships, 85 directorships and 11 presidencies. But the great crash of 1929 brought this pyramid tumbling down around his ears. Insull fled the country, roundly denounced as a symbol of corporate greed. He was hauled back to America for trial and, surprisingly, acquitted.

As we try to make sense of the current corporate meltdown, history suggests three important lessons. First, many of the previous scandals have, by most measures, been rather more serious than today's fuss. Second, the longer-term significance of the scandals isn't the wrongdoing of the villains but the remedy society applies. Third, the backlash against corporate malfeasance can sometimes do more damage than the malfeasance itself.

Is Enron a substantial scandal? In terms of its immediate damage, the answer must be no. The collapse of the energy company undoubtedly caused huge grief for the people who were bilked out of their life savings; it's also weakened the stock market and maybe even slowed the economy. But it hardly resembles the carnage after the collapses of London's South Sea Co. or Paris' Mississippi Co. in 1720. There's been no queue of banks announcing that they're closing their doors -- as there was after Black Thursday, Sept. 18, 1873, when the financial empire of Jay Cooke, one of Wall Street's greatest speculators, collapsed. The energy market hasn't ground to a halt -- as Wall Street did, for 10 days, after the demise of Cooke's company.

From this perspective, Enron's certainly an opportunity to instigate some long-overdue corporate reforms. It was always a recipe for disaster that accountants were allowed to do consulting. It was always a scandal that chief executives were allowed to design their own remuneration packages. Despite screams from the business lobby, new laws to restrict such abuses make sense. But there are practical reasons for caution. Many of the most heinous alleged crimes -- if accounts really were falsified or if brokers really did mislead their clients -- are covered by existing laws.

Above all, America shouldn't delude itself into thinking that it can set up a structure that abolishes greed or skullduggery from the business world. Enron wasn't the first corporate scandal the world has seen, and it certainly won't be the last.

Micklethwait is U.S. editor and Wooldridge is Washington correspondent for the Economist. They are the authors of The Company: A Short History of a Revolutionary Idea, to be published next year as a Modern Library Chronicle.

the article makes good points, but it neglects two facts that are pertinent.

First, American business colleges have been emphasizing the idea that each and every business decision be made strictly for the sake of maximizing profit and with no other consideration being taken whatsoever. Many students will take that to mean that lying and cheating in pursuit of profit are OK. This type of ethic has gone into the business world. Traditional ideas about what is 'right and wrong' are thrown out the door in favor of a telescope-type focus on profits. All is justified if it means money. Certainly, the universities must learn from this that they should reform what they teach.

Second, the television and hollywood entertainment industries have ever since 1970 portrayed businessmen as being dishonest and criminal in behavior consistently. In almost ever show where a businessman is a character he is also a liar and/or a criminal. American kids grow up watching that junk and it has an effect. People who want to be businessmen get the impression that this is the way they should behave.

American business colleges have been emphasizing the idea that each and every business decision be made strictly for the sake of maximizing profit and with no other consideration being taken whatsoever.

Yours and a couple other comments address the issue of 'ethics' being taught in business school. At least where I went, that was always a consideration, but I don't think it matters. My sense is that by the time someone is old enough to pursue a business degree, he or she is either a morally well-grounded person or not. I think that basic "don'tLie-don'tCheat-don'tSteal" ethics are learned at a very early age, or not at all. I believe that the breakdown of the two-parent family as the basic child-rearing paradigm is producing higher numbers of those who will engage in these behaviors, but there have always been enough of them around to cause trouble.

I think the accounting profession deserves a good whack to the head for some of what's been going on. Wall Street is not going to stop pressuring CEOs to deliver quarterly earnings increases, nor should it. Nor can we blame the CEOs for trying to maximize earnings; it is their job. And there are always going to be whiz kids like the CFO at Enron who figure out new and exciting ways to 'game' the FASB rules. Those Enron partnerships were beautifully designed to fall into that little crack between the legal profession and the accounting profession. Ask a lawyer if those were legal, and the lawyer would have to say 'yes.' Ask an accountant if those were arms-length transactions, and -- after conferring with the lawyer -- the accountant has to say 'yes.' Ask anyone who is neither a lawyer nor an accountant, and they will say "it's the same guys loaning money to themselves through a paper corporation."

The Enron CFO was able to pull that stunt because the accountants and the lawyers became obsessed with the arcana of their professions, and failed to step back and look at the goings-on with some basic common sense. They are not unlike the judge in San Francisco, who poring over his law books can conclude that the Pledge of Allegiance is unconstitutional. He may even be right, within the little world of lawyerdom. But no one outside the profession is buying it, just as no one outside the accounting profession can understand how a firm like Arthur Andersen could watch people loan money to themselves through shell corps, and instead of saying, "Hey! That's crap!" they pore through FASB 56 looking to see how to account for overseas transfers of factored liabilities because, on paper, it meets all the tests.

One can almost imagine a meeting at the Andersen offices where some recent grad assigned to the grunt work sees this and says, "Hey! This is crap!" But the senior partners explain about FASB 56 and Ruling 99 and before long the fresh-out has become another rule-bound drone with no common sense.

But the partners knew. They knew they were hiding behind arcane rules and legal mumbo-jumbo to justify their certification of books they knew were crap. We know that because the minute the spotlight went on, they ran to the shredders to cover up what they had done.

Something broke the day they did that, and it is going to take a long time to repair what they did.

We all knew there were schemers on Wall Street, and we all know that CEOs have been known to shave the truth about their companies' prospects. But the accounting profession had never been part of that. And now they are. Now we know that even at our most respected accounting firms, there are people who will shred documents to hide what they have done, because they will do things that need shredding if discovered.

From Thomas Jefferson to Abraham Lincoln to Bernard Cardinal Law to Arthur Andersen, we are finding out one by one that all our emperors are naked. How many more can the society stand?

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