If there were an aggregate market measure of ethical reputations in American business (think of it as the Dow Jones Integrity Average), its index would be even deeper in the tank than stock prices these days. Regulatory agencies report that business fraud and corruption investigations and prosecutions are way up. According to the SEC, lawsuits for securities fraud and other financial transgressions have more than doubled in the last five years. But you don’t need SEC statistics to figure this out; just glance at the business ethics pages (we used to call them the business pages) of any major newspaper.
Amble, if you will, through the business section on a single day—last Thursday’s New York Times, for example. Above the fold, business front: a piece on how compliance departments at Wall Street brokerage firms—the people who are supposed to raise red flags and examine the red flags raised by others—are unwilling and/or unable to intervene when gross conflicts of interest surface. Also above the fold: Major computer chip makers are subpoenaed by the Justice Department in an unfolding industry-wide antitrust probe. Below the fold: possible fraud charges against drug developer ImClone, whose former chief executive has already been arrested for insider trading. Off to the right: closing arguments in a hearing on Microsoft’s liability for its antitrust violations. Flip a few pages to read more on the computer chip story, and you stumble on news of a criminal investigation into whether the pharmaceutical firm Schering-Plough is mixing chemical ingredients not approved for use in the U.S. into its products. (The firm recently agreed to a $500 million federal settlement over other manufacturing problems at four factories.)
Elsewhere: Martha Stewart’s possible role in insider trading of her ImClone shares; a story about Adelphia’s impending bankruptcy in the wake of allegations of improper use of corporate funds by its management; and a piece about accounting firm Ernst & Young cultivating a brisk market in tax-avoidance schemes for wealthy clients designed to hide income from IRS auditors.
All this (and more) in a single day’s paper—and without even touching on the auditing troubles at Arthur Andersen (on Enron), Deloitte & Touche (on Adelphia), Ernst & Young (on PeopleSoft) and KPMG (on Xerox); accusations of hidden loans and losses at Enron, Kmart, Tyco and WorldCom; or allegations of inflated revenues at Computer Associates, Dynegy, Global Crossing, Edison Schools, Halliburton (the Veep’s former employer), Network Associates, Rite Aid, Qwest and Computer Associates, to name a few.
What’s going on here? A new millennial epidemic of business venality? Or just new interest by politicians, regulators and journalists in the same old everyday corporate mischief? One might suppose that economic decline tempts desperate measures that tilt toward malfeasance, but one would be largely wrong—the upswing in corporate indiscretion clearly predates the market nosedive of the last few years. It is also hard to credit newly vigorous enforcement, given who’s running the Justice Department these days.
But on that last point there’s a paradox: the Bush administration, relentlessly loyal to business interests and hostile to regulatory oversight, finds it politically expedient to come down hard on corporate misbehavior as a law-and-order problem. And so its officials frame the current epidemic of management corruption as the regrettable actions of a few bad apples rather than as a consequence of systemic flaws in corporate governance. With this tack, Bush and the GOP can talk tough on “crime in the suites” (to borrow Ralph Nader’s prognostic phrase) and invite vigorous prosecution of individual “evil doers” (to borrow George Bush’s cockamamie phrase), but minimize the risk that any meaningful change in the regulatory climate will darken the boardroom doors of their corporate masters.
Congress is certainly interested, having held dozens of hearings this year on corporate ethics and accountability, with occasionally dramatic testimony from sociopathic corporate scoundrels and scrupulous corporate whistle blowers. Many possible modifications to the rules for financial reporting, audits and board governance have been floated, but little will come of it. CEOs have dialed up their rhetoric on the importance of business integrity, yes, but their lobbyists are working the halls of Congress just as energetically to make sure the rules don’t really change. And with exquisite timing, the Federal Election Commission just completed its interpretation of the new federal campaign finance law by issuing rules opening loopholes for precisely the kind of large corporate soft-money donations the law was designed to eliminate.
So if serious regulatory remedies are unlikely, will big business reform itself in the wake of current scandals? Perhaps shareholder lawsuits and bad publicity will shame boards into more independence and top executives into more accountability, but it’s difficult to be overly optimistic. Since 1985, by one estimate, the compensation for chief executives at major firms has grown over 850 percent, while stock prices have jumped about 440 percent, and the pay of nonsupervisory workers has risen a mere 63 percent.
If the astonishing greed that jumps out of these numbers hasn’t shamed our system of corporate governance over the better part of two decades, it’s nothing less than a stretch to believe that a few months of congressional hand-wringing will have much of an effect.
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